Flashcards in Fin 4319-Record C3 Deck (18):
for futures, when you are long do you want the future to go up or down?
for futures, when you are short do you want the future to go up or down?
what are 2 types of cattle futures?
feeder cattle (1 year old cattle), and live cattle futures
if a person has spot cattle, are they long or short?
long because they own real cows and want to sell them at a high price
how do they hedge the spot cattle?
they short cattle futures market.
if you are long spot cattle and hedge live cattle futures, and spot prices go up, do you make money money?
no, you make more money on long spot cattle but lose money on live cattle futures so it's even.
if you need to feed cattle with corn, are you long or short corn?
short corn because you need to buy it and you benefit when it's lower price
how to hedge corn price in case corn prices rise?
buy corn futures so if corn prices rise, you make money
as a producer of cattle, if you don't hedge your cattle, are you speculating?
yes, you are speculating that prices of cattle will go up
where do individual farmers sell their grains?
they sell to grain elevator for fixed future price and give them all of their grain when it's ready. the grain elevator will sell it to big companies for a profit and also hedge their position in the grain futures market
what is managerial risk?
when the futures manager speculates instead of hedging
Valero, a oil refinery, which buys crude oil to produce and sell gasoline, Is valero long or short crude futures?
they want to buy crude oil so they want price to be lower, to hedge the price they need to go long
Valero, a oil refinery, which buys crude oil to produce and sell gasoline, Is valero long or short spot gasoline?
they want to sell gasoline so they want price to be higher, to hedge the price they need to go short
what is a short crack spread?
it's a regular trade where they long crude oil futures and short gasoline
what happens if crack spread narrows?
the oil refining margin goes down, widens margin goes up.. you protect spread getting to narrow.
what is the spark spread?
electric companies long natural gas and short electricity
what is the crap spread?
long corn, short cattle