Series 3 — National Commodity Futures Exam — All Questions
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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.The local cash (spot) price minus the 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 delivery month and selling a different delivery month of the same 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.