Series 3 — National Commodity Futures Exam — All Questions
18 questions
A wheat farmer expecting to harvest and sell grain in three months is worried that prices will fall. The appropriate hedge is to:
- a.Buy wheat futures (a long hedge)
- b.Sell wheat futures (a short hedge)✓
- c.Buy wheat call options only
- d.Take no position because the farmer owns the physical wheat
A producer who owns or will own the physical commodity and fears falling prices sells futures, establishing a short hedge. A decline in the cash price is then offset by a gain on the short futures position.
Basis is defined as:
- a.Cash price minus futures price✓
- b.The futures price minus the strike price
- c.The initial margin minus the maintenance margin
- d.The difference between two option premiums
Basis equals the cash price minus the futures price for a given location and delivery month. Hedging converts price risk into basis risk, and cash and futures prices converge as delivery nears.
A cereal manufacturer that will need to buy corn in six months and fears rising prices should establish a:
- a.Short hedge by selling corn futures
- b.Calendar spread by selling the near month
- c.Long hedge by buying corn futures✓
- d.Naked short call position
A user or future buyer of a commodity who fears rising prices buys futures, creating a long hedge. A later rise in the cash purchase price is offset by a gain on the long futures.
An intramarket (calendar) spread in futures involves:
- a.Buying a call and selling a put on the same contract
- b.Buying the same commodity on two different exchanges
- c.Buying two unrelated commodities
- d.Buying one month and selling another of one commodity✓
A calendar or intramarket spread buys one delivery month and sells another of the same commodity, profiting from a change in the price difference between the two months. Because the legs move together, spreads typically carry lower risk than outright positions.
Cash soybeans are $11.90 and the nearby futures are $11.75. The basis is:
- a.15 under
- b.15 under the deferred month
- c.$23.65
- d.15 over✓
Basis is cash minus the nearby futures price: $11.90 − $11.75 = +$0.15, or 15 over. A positive basis means cash is above futures.
A basis that moves from 10 over to 25 over has:
- a.Weakened by 15
- b.Strengthened by 15✓
- c.Weakened by 35
- d.Strengthened by 35
With basis as cash minus futures, moving from +0.10 to +0.25 is an increase of 0.15 — cash gained on futures, a strengthening. Thirty-five adds the two levels.
A soybean crusher that has contracted to sell soybean meal at a fixed price next quarter, but has not yet bought soybeans, is exposed to:
- a.Rising soybean prices✓
- b.Falling soybean prices
- c.Falling interest rates only
- d.No price risk
The crusher must buy soybeans later at an unknown price but has fixed its selling price, so a rise in soybeans would cut its margin. A long hedge — buying futures — protects against possible increases in the cost of commodities.
A farmer hedges by selling futures at $5.10. At harvest she sells her crop for $4.62 and buys back the futures at $4.95. Her net price is:
- a.$5.10
- b.$4.95
- c.$4.77✓
- d.$4.62
Futures gain: $5.10 − $4.95 = $0.15; net price = $4.62 + $0.15 = $4.77, which equals $5.10 plus the ending basis of −$0.33. A short hedge protects against lower prices but leaves the basis risk.
An elevator stores corn bought at $3.80 and sells March futures at $4.25 as a hedge. It later sells the corn at $4.10 and buys back the futures at $4.30. The hedge result per bushel is:
- a.A gain of 25 cents✓
- b.A loss of 5 cents
- c.A gain of 30 cents
- d.A loss of 25 cents
Cash gain $0.30; futures loss $0.05; net +$0.25, equal to the basis change from −$0.45 to −$0.20. Owning grain hedged with short futures makes the elevator long the basis, so a strengthening basis helps.
A baker buys wheat futures at $6.30 to hedge a purchase. When the bakery buys cash wheat at $6.05, futures are at $5.90. The net purchase price is:
- a.$6.30
- b.$6.45✓
- c.$5.65
- d.$6.05
The futures lost $6.30 − $5.90 = $0.40, which adds to the cost: $6.05 + $0.40 = $6.45, equal to $6.30 plus the ending basis of +$0.15. A long hedge protects against increases; when prices fall instead, the futures loss offsets the cheaper cash price.
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Which hedger benefits when the basis weakens?
- a.An elevator storing hedged grain
- b.A farmer holding unsold grain hedged with short futures
- c.A processor hedged with long futures✓
- d.A mine holding unsold metal hedged with short futures
The CFTC calls buying futures as a hedge against a commitment to sell in the cash market being short the basis; a long hedger such as the processor holds that position (long futures, effectively short cash) and gains when the basis weakens. Holders of hedged inventory are long the basis and gain when it strengthens.
A hedge swaps which risk for which?
- a.Liquidity risk for basis risk
- b.Price risk for basis risk✓
- c.Credit risk for price risk
- d.Basis risk for price risk
A hedger takes a futures position opposite a cash position to minimize the risk of loss from an adverse price change. What remains is basis risk — the risk of an unexpected change in the basis between placing and lifting the hedge.
A company that will issue bonds in two months fears interest rates will rise before then. The appropriate hedge is to:
- a.Buy Treasury note futures
- b.Do nothing until the bonds are issued
- c.Buy Treasury bill calls
- d.Sell Treasury note futures✓
Rising yields lower debt prices — when yield exceeds a note's interest rate, its price is below par — so a short futures position gains as rates rise, offsetting the higher borrowing cost. A hedge may anticipate a transaction that will occur later.
An American exporter will receive 5,000,000 British pounds in three months. To hedge, it should:
- a.Buy British pound futures
- b.Sell British pound futures✓
- c.Buy U.S. Treasury bond futures
- d.Sell euro futures
The exporter is long pounds and loses if the pound falls against the dollar; an exchange rate is the price of one currency in another. Selling futures protects against a decline in price.
Using futures on a different but price-related commodity to hedge a cash position is called:
- a.A spread
- b.A cross-hedge✓
- c.An EFP
- d.Arbitrage
A cross-hedge hedges a cash market position with futures or options on a different but price-related commodity. It carries extra basis risk because the two prices can diverge.
A trader buys July corn at 441 and sells December corn at 462. Later July is 460 and December 470. The result per bushel is:
- a.A loss of 11
- b.A gain of 19
- c.A gain of 11✓
- d.A loss of 8
July gained 19; December lost 8; net +11. The December-over-July spread narrowed from 21 to 10, and the trader held the lower-priced leg. A spread profits from a change in the price relationship between its legs.
A bear spread in agricultural futures is established by:
- a.Selling two deferred months
- b.Buying futures and a put
- c.Buying the nearby and selling the deferred
- d.Selling the nearby and buying the deferred✓
The CFTC defines a futures bear spread, in agricultural products, as selling a nearby delivery and buying a deferred delivery. Buying the nearby and selling the deferred is the bull spread.
A grain dealer quotes corn at "8 under March." March corn futures are $4.40. The dealer's cash price is:
- a.$4.40
- b.$4.32✓
- c.$4.48
- d.$3.60
A basis quote states a cash price as a difference above or below a futures price. "Under" means the cash price is below futures, a negative basis under the cash-minus-futures convention: $4.40 − $0.08 = $4.32.