Exam 1

Question 1

forward contract

Answer 1

an agreement to buy or sell at a future date for a given amount of a commodity or an asset at a price agreed on today

Question 2

futures contract

Answer 2

exchange-traded, standardized, forward-like contract that is marked to market daily

Question 3

cash market

Answer 3

market for immediate settlement of transactions

Question 4

futures prices

Answer 4

prices negotiated in futures market for a futures contract

Question 5

counterparty risk

Answer 5

the risk that your counterparty will default

Question 6

clearinghouse

Answer 6

separate corporation of a futures exchange response for settling trading accounts & clearing trades

Question 7

delivery month/maturity

Answer 7

the month in which a futures contract expires

Question 8

pricing unit

Answer 8

unit of price quoted for a futures contract

Question 9

pit/floor trading

Answer 9

words and hand signals are used to submit trades

Question 10

electronic trading

Answer 10

bids and ask prices are submitted electronically

Question 11

CFTC

Answer 11

independent federal agency that has regulatory jurisdiction over almost all persons or entities involved in futures trading

Question 12

tick size

Answer 12

minimum increment a given futures contract price can move

Question 13

price limit

Answer 13

maximum level that the futures price is allowed to change

Question 14

nearby contract

Answer 14

next contract to expire

Question 15

distant contract

Answer 15

contract that matures after the nearby contract

Question 16

hedger

Answer 16

producers, buyers, and users of underlying products

Question 17

speculator

Answer 17

traders who do not have cash market position and cannot take actual delivery of commodity, but hope to make profit by anticipating price changes

Question 18

zero-sum game

Answer 18

market as all has no profit

Question 19

scalper

Answer 19

speculator who exploits the bid-ask spread and earns money by anticipating short-run price changes

Question 20

long

Answer 20

to buy a futures contract

Question 21

short

Answer 21

to sell a futures contract

Question 22

long perspective - if price goes up

Answer 22

price goes up = gain

Question 23

short perspective - price goes up

Answer 23

price goes up = loss

Question 24

offset position

Answer 24

to remove yourself from any responsibility

Question 25

take opposite position

Answer 25

long positions go short and short positions go long

Question 26

delivery or take delivery

Answer 26

long positions take delivery of product and short positions deliver the underlying product to exchange-certified location

Question 27

bull market

Answer 27

prices are increasing

Question 28

cash settlement

Answer 28

traders receive or make payments at contract maturity rather than physical delivery

Question 29

bear market

Answer 29

prices are falling

Question 30

mark-to-market

Answer 30

monetary differences for each account are settled by the clearinghouse at the end of each day

Question 31

initial margin

Answer 31

amount required when futures position is opened

Question 32

maintenance margin

Answer 32

minimum amount that must be maintained at all times

Question 33

margin call

Answer 33

call to deposit more funds when equity in margin account falls below maintenance margin

Question 34

volume

Answer 34

total number of contracts that changed hands during a period of time

Question 35

open interest

Answer 35

total number of contracts that have been traded and not yet liquidated

Question 36

market order

Answer 36

buy/sell a certain number of contracts promptly at the current price at the moment

Question 37

limit order

Answer 37

specifies price for execution of trade

Question 38

contango

Answer 38

futures prices for distant delivery months are higher than the contracts closer to maturity. aka normal market

Question 39

backwardation

Answer 39

futures prices for distant delivery months are lower than the contracts closer to maturity. aka inverted market

Question 40

commodity

Answer 40

good or service for which the demand has no qualitative differentiation across a market

Question 41

fungibility

Answer 41

little differentiation between a commodity coming from one producer and the same commodity from another

Question 42

storable commodities

Answer 42

can be stored for an extended period of time without a loss of quality: grains, energy products, softs, and metals

Question 43

nonstorable commodities

Answer 43

cannot be stored easily or for extended period of time: livestock products

Question 44

cost of carry

Answer 44

cost of buying the commodity today and carrying it to a certain time in the future

Question 45

full carry value

Answer 45

cash price today + the cost of carry

Question 46

arbitrage

Answer 46

purchasing a commodity at one price and selling at a higher price to profit from price discrepancy

Question 47

market

Answer 47

place or situation that puts sellers & buyers in communication with one another, discovers prices, and facilitates ownership transfer