Back To School Exam #3
Welcome to the third exam in the "Back to School with Ed Usset" series! Thereare 9 questions to be answered and the answers and explanations will begiven to you at the very end. You have exactly one hour to completethis exam. You may not use any other material besides your memory toanswer these questions! No internet, no books, just what you learnedfrom what Ed Usset taught you in his previous lectures and quizes. Thisexam will be avaliable for one week before it is archived. At thattime, a new set of lectures and quizes will be available from Ed Usset!
Good luck! Read more:)
- 1.
When a call option is exercised, the buyer of the call...
- A.
Is long the underlying futures contract
- B.
Is short the underlying futures contract
- C.
Pays the premium
- D.
Is long a put
Correct Answer
A. Is long the underlying futures contractExplanation
When exercised, the buyer of a call option is long the underlying futures contract. The buyer of a call option has bought the right to buy futures. If the buyer exercises the right to buy, the oldest seller of the call option will take the other side - the short side - of the futures contract.Rate this question:
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- 2.
What is the purpose of “open outcry” in futures trading?
- A.
To look good for the nightly business report
- B.
To offer all traders an equal chance to respond to bids and offer
- C.
To confuse onlookers and obscure the pricing process
Correct Answer
B. To offer all traders an equal chance to respond to bids and offerExplanation
Open outcry in a multi-level trading pit offers every trader in the pit an equal opportunity to respond to all bids and offers. Orders are filled on a first come first serve basis. Despite the fairness inherent in pit trading, the pits are giving way to electronic trading, which now account for more than 90% of all grain futures transactions.Rate this question:
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- 3.
Regulation and oversight of the futures industry occurs at three different levels; the CFTC (Commodity Futures Trading Commission), NFA (National Futures Association), and the futures exchanges. Which of these organizations is responsible for designing and offering new contracts?
- A.
CFTC
- B.
NFA
- C.
The individual futures exchanges
Correct Answer
C. The individual futures exchangesExplanation
The exchanges take the lead in designing new contracts for trading. Several years ago, a new ethanol contract started trading. The contracted was proposed and written by the CBOT – the CFTC approves all new contracts.Rate this question:
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- 4.
The United States exports about 40% of soybeans produced. Which country or trading bloc is the largest buyer of U.S. soybeans?
- A.
China
- B.
European Union
- C.
Mexico
- D.
Japan
Correct Answer
A. ChinaExplanation
China is by far our single most important destination for U.S. soybeans. In the 2007/2008 crop year, they bought over 500 million bushels, more than the European Union, Mexico and Japan combined.Rate this question:
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- 5.
What do you call an options trading strategy involving the simultaneous purchase of out-of-the-money puts and calls in the same commodity?
- A.
Short straddle
- B.
Bull spread
- C.
Long strangle
- D.
Call ratio backspread
Correct Answer
C. Long strangleExplanation
A trading strategy that involves the simultaneous purchase out-of-the-money puts and calls is called a long strangle. A straddle would involve at-the-money puts and calls. A long strangle strategy works for the trader who is certain that market prices are about to breakout, but is not certain as to the direction of the breakout.Rate this question:
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- 6.
What is the lowest closing price level attained by a November soybean futures contract since 1980?
- A.
$4.63¼
- B.
$4.38
- C.
$4.05¼
- D.
$3.95
Correct Answer
C. $4.05¼Explanation
The November 1999 contract traded at a low of $4.05¼ on July 7, 1999. Three years in particular - 1999, 2000 and 2001 - were bad years for soybean prices. Cash prices traded, at times, below $4 per bushel.Rate this question:
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- 7.
To simultaneously buy corn futures and sell soybean futures is an example of a (an)...
- A.
Intercommodity spread
- B.
Bear spread
- C.
Interdelivery or intramarket spread
- D.
Cross-hedge
Correct Answer
A. Intercommodity spreadExplanation
Buying corn futures and selling soybean futures is an example of an intercommodity spread. Spread trading is a very popular form of trading in commodity markets. Traders like them because they offer numerous trading possibilities, are generally less risky than flat price trades and have favorable margin requirements.Rate this question:
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- 8.
What do you call a futures trading strategy involving the simultaneous sale of a nearby futures contract and purchase of a deferred contract in the same commodity?
- A.
Short straddle
- B.
Bear spread
- C.
Bull spread
- D.
Intercommodity spread
Correct Answer
B. Bear spreadExplanation
To sell nearby and buy deferred is a bear spread. The bear spread gets it’s name from the tendency for carrying charges to widen in a bear market. Let me offer a recent example. From mid-June to mid-July of 2009, the Nov’09 soybean contract declined nearly $2 per bushel (from about $10.80 to under $9 per bushel). Over that same period of time, the Nov’09 contract went from a 20 cent inverse to a 20 cent discount, relative to the July’10 soybean contract.Rate this question:
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- 9.
What is the highest closing price level ever attained by a December (i.e., new crop) corn futures contract?
- A.
$6.89
- B.
$7.32
- C.
$7.68
- D.
$7.96
Correct Answer
D. $7.96Explanation
On June 27, 2008 the December’08 corn contract reached $7.96, just 4 cents shy of the $8 mark. The Dec’09 contract reached it’s high of $7 per bushel days later – this same contract is trading closer to the $3 mark as the 2009 harvest is about to begin.Rate this question:
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Mar 21, 2022Quiz Edited by
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Dec 23, 2009Quiz Created by
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