cmegroup.com/agriculture
66
ANSWER GUIDE
Quiz 1
1. (b) Futures contracts are standardized as to quantity,
quality, delivery time and place. Price is the only
variable. In contrast, the terms of a forward contract
are privately negotiated.
2. (a) All futures prices are discovered through competition
between buyers and sellers of a given commodity.
Neither the Exchange nor CME Clearing participates
in the process of price discovery.
3. (e) CME Clearing performs both of these functions. CME
Clearing ensures the integrity of futures and options
contracts traded at the CME Group and clears every
trade made at the CME Group.
4. (b) At the end of each trading session, CME Clearing
determines net gains or losses for each member
firm, and each member firm does the same with its
customers’ accounts.
5. (e) Speculators perform all of these functions.
6. (a) A true hedge involves holding opposite positions in
the cash and futures markets. The other positions are
merely forms of speculation, since they cannot offset
losses in one market with gains in another.
7. (d) Futures margins act as performance bonds that
provide proof of an individual’s financial integrity
and one’s ability to withstand a loss in the event of an
unfavorable price change. They do not involve credit
or down payments, as securities margins do.
8. (f) Being long in a falling market (b) or short in a rising
market (c) would result in a loss and, therefore, could
lead to a margin call. Because situations (a) and (d) are
both profitable, there would not be a margin call.
9. (c) Customer margin requirements are set by each
brokerage firm, while clearing margin requirements
for clearing member firms are set by CME Clearing.
Neither the Federal Reserve Board nor the Commodity
Futures Trading Commission is involved with setting
margins.
10. (a) A customer can withdraw gains as soon as they are
credited to the account, provided they are not required
to cover losses on other futures positions. Accounts
are settled after the markets close, so funds are usually
available by the start of the next business day.
Quiz 2
1. (c) Cash prices and futures prices generally move upward
and downward together but not necessarily by
identical amounts. Even so, the changes are usually
close enough to make hedging possible by taking
opposite positions in the cash and futures markets.
2. (a) Protection against rising prices is accomplished by
taking a long futures position — i.e., by purchasing
futures contracts. Protection against declining prices
can be achieved by selling futures contracts.
3. (a) The farmer is in the same position, in terms of market
exposure, as someone who has purchased and is
storing the crop; benefiting if prices increase and
losing if prices decrease.
4. (c) The basis is the amount by which the local cash price
is below (or above) a particular futures price. The
difference between futures prices for different delivery
months is known as the carrying charge or the spread.
5. (d) Credit yourself a bonus point if your sharp eye caught
this tricky question. The question asks what buying
price you can lock in by selling a futures contract.
Buying prices are locked in by buying futures
contracts.
6. (c) The approximate selling price you can lock in by
selling a futures contract is $5.35, the price of the
futures contract you sold minus the local basis of
15 under ($5.50 – $.15).
7. (a) Transportation costs due to location differences
are one of the components of the basis; thus higher
transportation costs would, all else remaining the
same, weaken the basis.
8. (d) An unhedged long cash market position is a
speculative position — you will realize a gain if prices
increase or a loss if prices decrease.
9. (b) When the basis is relatively weak. For example, assume
you initially hedged by purchasing a wheat futures
contract at $6.50. If, down the road, prices rise and your
supplier is quoting you $7.00 and the futures price is
$6.80 (a basis of $.20 over), your net purchase price
when you lift the hedge is $6.70 ($7.00 supplier’s cash
price – $.30 gain on futures). On the other hand, let’s say
futures prices still increased to $6.80 but your supplier is
quoting you $6.90 (a weaker basis of $.10 over). Under
this scenario your net purchase price is only $6.60 ($6.90
supplier’s cash price – $.30 gain on futures).