Back To School Quiz #2

1.

If you pay a premium of 37 cents per bushel for a $4.00 December corn put, what is the most money you can lose?

A.

$4.00 per bushel
B.

37 cents per bushel
C.

Your potential loss is unlimited

Correct Answer
B. 37 cents per bushel

Explanation
One of the main advantages to the purchase of options is that your potential losses are limited and measurable. If you pay 37 cents for a December 400 corn put – the right to sell December futures at $4 – the most money you can lose is the premium paid, or 37 cents per bushel.

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2.

What does the term "backwardation" mean?

A.

Corn prices are higher than wheat prices
B.

The spot price of a commodity is higher than the price for future delivery
C.

You live in a remote area with no internet access

Correct Answer
B. The spot price of a commodity is higher than the price for future delivery

Explanation
Backwardation is a condition in the market where the spot (or nearby) price of a commodity is higher than the price for future delivery. It is an old term for an inverted market or negative carrying charges. In late June 2009, the soybean market is in a condition of backwardation– the nearby Jul’09 contract trades at a sharp premium to all deferred contracts.

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3.

Acres planted to corn have increased over the past 10 years. In 1999, there were 77 million acres planted to corn. The June acreage report indicated 2009 plantings closer to 87 million acres. Which state had the largest increase in corn acres between 1999 and 2009?

A.

Iowa
B.

Illinois
C.

North Dakota
D.

South Dakota

Correct Answer
A. Iowa

Explanation
All four of the states listed here increased corn acres by more than one million acres since 1999. Iowa had the largest increase with 1.6 million acres, but in terms of a percentage increase, North Dakota easily wins with almost 140% more acres this year vs. 1999. The next state in line with the greatest increase in corn acres was Kansas. Think about the large increase in corn acres in the Dakotas and Kansas, and you can picture the cornbelt creeping west into traditional wheat territory.

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4.

Just four commodities – corn, soybeans, wheat and hay – take up nearly 90% of acres planted to “principal crops.” As is true this year, corn is typically our most widely planted crop. This year USDA estimates nearly 50% more corn acres than wheat (87 vs 59 ma). Wow! What was the last year when total acres planted to wheat in the U.S. was higher than corn?

A.

1946
B.

1972
C.

1983
D.

1990

Correct Answer
D. 1990

Explanation
In 1990, U.S. farmers planted 77 million acres of wheat vs. 74 million acres of corn. I can find only 5 years in the past century when wheat acres topped corn acres and except for 1990, they all occurred in the 80’s.

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5.

Let’s say you pay 115 cents for a $10 November soybean put when the underlying futures price was $9.80 per bushel. Is this option…

A.

In-the-money
B.

Out-of-the-money
C.

At-the-money

Correct Answer
A. In-the-money

Explanation
This option is 20 cents “in-the-money.” Put options are in-the-money when the strike price is higher than the underlying futures price. In this case, the put has a $10 strike price while the futures price is trading 20 cents lower, at $9.80.

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6.

If you sell (or write) a $12 November soybean call option and receive a premium of 30 cents per bushel, what’s the most money you can lose?

A.

$12 per bushel
B.

30 cents per bushel
C.

Your potential loss is unlimited

Correct Answer
C. Your potential loss is unlimited

Explanation
Buying options is appealing because your risk is limited to the premium paid. But in this case you’re an option seller. Option sellers have a limited gain – limited to the size of the premium (30 cents per bushel in this example) – but their potential loss is unlimited.

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