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123 Cards in this Set

  • Front
  • Back
What is a cash market
A market where purchasers tender ash and receive goods upon payment
True or False
Many business men cherish price risk.
FALSE - Most businesses do not want price risk
What 5 things does the commodity futures markets utilize in its functionality
1. Forward Pricing
2. Efficiency
3. Liquidity
4. Easy Access
5. Storability IS NOT required
True or False
Storability is required in the operation of futures markets
FALSE
How Long can futures markets determine prices in advance
A year or more
Other than futures markets, what guarantees a price in the future
Nothing. A risk of price change exists unless goods are sold or consumed immediately
How are prices established in futures markets (basic)
Supply and Demand
Bids and Offers
Define FORWARD CONTRACT
A contract where the terms are negotiated for future delivery
What is the knowledge of a future price called?
Price Discovery
What makes a market efficient?
The more readily prices are discovered, the more efficient the markets
Which makes a market more efficient?
- A large number of contracts being traded
- A small number of contracts being traded
A large number of contracts being traded increases efficiency
What is the ability to move quickly in or out of a market at or near the last purchase price called?
Liquidity
Define LIQUIDITY
the ability to move quickly in or out of a market at or near the last purchase price
True or False?
The more liquid the market, the faster and more easily trades can be executed (at or near specific prices)
TRUE
True or False?
The less liquid the market, the faster and more easily trades can be executed (at or near specific prices)
FALSE
If there were not futures markets, would commodities prices be lower?
No. They would most likely be higher, due to a less efficient method of price discovery.
Explain "easy access"
For every buyer there is a seller. Anyone who wants to transfer, or accept risk, has an easy meeting place to do so.
Explain why storability is not required
Markets for the future delivery of commodities are not limited to ones that can be stored.
What makes a futures contract viable
Viability is determined by the definable standards of:
1. Quality
2. Price Information
3. Broadly based production
A ____________ is a legally enforceable agreement to make delivery (a "short" position; the contract is "sold") or to take delivery (a "long" position; the contract is "purchased") of a specific quantity and grade of a particular commodity or cash, during a designated delivery period (the contract "month")
FUTURES CONTRACT
What is a contract "month"
The designated delivery period of a futures contract
a "short" position is also known as_________
a "sold" contract
a "long" position is also known as_________
a "purchased" contract
If you buy a contract do you have to take delivery?
No.
At any time before the last day of trading for the contract month a contract can be repurchased or resold. This offsets a trader's initial position, and frees him from any further obligation under the contract.
What is the central theme of commodity futures markets?
Standardization
True or false
-From early days in Chicago until the 1970's, the only things traded on "futures" exchanges were tangible goods.
TRUE
TRUE OR FALSE
"commodity" and "futures" cannot be used interchangeably
FALSE
commodity and futures as terms are regularly used interchangeably
What is the word "FUTURES" usually used to describe?
A non-tangible property or cash that will be delivered in the future
Is a "futures" contract and a "future" contract the same thing?
NO
A future contract is one that does not yet exist but will be formed some time in the future, while a FUTURES contract exists presently for the delivery of a commodity, non-tangible property or cash flow in the future.
What is the central theme of commodity futures markets?
STANDARDIZATION
_____________ plays the central theme of commodity futures markets
STANDARDIZATION
Futures contracts are standardized by the exchange with regard to, _________, _________, _________, and ___________.
COMMODITY
QUANTITY
QUALITY
POINT OF DELIVERY
_________ dates are standardized within each _________ month; i.e. there is a range of days during will all contracts going in to ________ must be performed.
DELIVERY
_________ do not want to bear risk.
hedgers
_________are willing to accept risk.
speculators
How do futures markets make it easier to transfer risk of loss?
By standardizing contract terms
In a given delivery month, what aspects of a futures contract must be negotiated, prior to a sale?
Nothing.
No negotiation of terms is necessary. Only make a price bid or offer for the contract.
TRUE OR FALSE
There is one master clearinghouse for all the exchanges, worldwide.
FALSE
Each exchange has a clearinghouse, except the CBOT and CME, which have a joint clearinghouse.
What do clearinghouses do?
Clearinghouses act as third parties to all futures transactions.
TRUE or FALSE
Clearinghouses guarantee the performance of all futures contracts.
TRUE
What is a Guarantee Fund?
A fund established by clearinghouse that clearing members contribute a percentage of their gross revenues to, to protect customer's monies.
What is a surplus fund, and how is it funded?
A fund established by clearinghouse that clearing members contribute a percentage of all clearing fees to, to protect customer's monies.
________ is the number of contracts traded (i.e. bought and sold) of a particular delivery month.
VOLUME
________ is the number of contracts outstanding (i.e. the number of long or short positions not yet offset)
OPEN INTEREST
________ is an ongoing figure for the life of a contract, while _______ is a daily figure
Open Interest

Volume
How do futures markets make it easier to transfer risk of loss?
By standardizing contract terms
In a given delivery month, what aspects of a futures contract must be negotiated, prior to a sale?
Nothing.
No negotiation of terms is necessary. Only make a price bid or offer for the contract.
TRUE OR FALSE
There is one master clearinghouse for all the exchanges, worldwide.
FALSE
Each exchange has a clearinghouse, except the CBOT and CME, which have a joint clearinghouse.
What do clearinghouses do?
Clearinghouses act as third parties to all futures transactions.
TRUE or FALSE
Clearinghouses guarantee the performance of all futures contracts.
TRUE
What is a Guarantee Fund?
A fund established by clearinghouse that clearing members contribute a percentage of their gross revenues to, to protect customer's monies.
What is a surplus fund, and how is it funded?
A fund established by clearinghouse that clearing members contribute a percentage of all clearing fees to, to protect customer's monies.
________ is the number of contracts traded (i.e. bought and sold) of a particular delivery month.
VOLUME
________ is the number of contracts outstanding (i.e. the number of long or short positions not yet offset)
OPEN INTEREST
________ is an ongoing figure for the life of a contract, while _______ is a daily figure
Open Interest

Volume
How do futures markets make it easier to transfer risk of loss?
By standardizing contract terms
In a given delivery month, what aspects of a futures contract must be negotiated, prior to a sale?
Nothing.
No negotiation of terms is necessary. Only make a price bid or offer for the contract.
TRUE OR FALSE
There is one master clearinghouse for all the exchanges, worldwide.
FALSE
Each exchange has a clearinghouse, except the CBOT and CME, which have a joint clearinghouse.
What do clearinghouses do?
Clearinghouses act as third parties to all futures transactions.
TRUE or FALSE
Clearinghouses guarantee the performance of all futures contracts.
TRUE
What is a Guarantee Fund?
A fund established by clearinghouse that clearing members contribute a percentage of their gross revenues to, to protect customer's monies.
What is a surplus fund, and how is it funded?
A fund established by clearinghouse that clearing members contribute a percentage of all clearing fees to, to protect customer's monies.
________ is the number of contracts traded (i.e. bought and sold) of a particular delivery month.
VOLUME
________ is the number of contracts outstanding (i.e. the number of long or short positions not yet offset)
OPEN INTEREST
________ is an ongoing figure for the life of a contract, while _______ is a daily figure
Open Interest

Volume
Members of the clearinghouse are known as _________ members.
CLEARING
A correspondent that clears through a clearing member is known as a ____________________
Futures Commission Merchant (FCM)
TRUE OR FALSE
Clearing members must know if their clients are fully margined, even if they use an omnibus account.
FALSE, while they do need to know if their clients are fully margined, they do not always need to know if their client's customers are, of even who they are, if they are using an omnibus account.
An account that is carried by one FCM with another FCM which combines two or more individuals account transactions.
What is an OMNIBUS account
An individual, association, or corporation accepting orders for futures contracts in return for a fee, subject to exchange regulations
what is a FUTURES COMMISSION MERCHANT
Clearing members may be
1. _____________
2. _____________
3. _____________
4. _____________
individuals
partnerships
corporations
cooperatives
If a clearinghouse member is a corporation, how many officers must be members of the exchange, including the CEO?
Two
Are the prices of deferred futures normally higher than cash and near month futures for non-financial contracts?
YES
A market where the deferred futures prices are normally higher than cash and near-month futures prices for non-financial contracts
Normal Market
futures prices = carrying charges + cash price
full carrying charge market
market with:
Shortage of supply
High current demand
OR an unexpected surplus
causing current prices to be higher than deferred prices
Inverted Market
TRUE OR FALSE
Cash and futures prices usually move in the same direction by approximately the same amounts.
TRUE
The transfer of price risk from one party to another
HEDGING
An unhedged cash market position
SPECULATIVE POSITION
futures prices = carrying charges + cash price
full carrying charge market
market with:
Shortage of supply
High current demand
OR an unexpected surplus
causing current prices to be higher than deferred prices
Inverted Market
TRUE OR FALSE
Cash and futures prices usually move in the same direction by approximately the same amounts.
TRUE
The transfer of price risk from one party to another
HEDGING
An unhedged cash market position
SPECULATIVE POSITION
The present sale of a futures contract with the promise to deliver the commodity or repurchase the contract at a future date.
SELLING SHORT
AKA
substitute sale
SHORT HEDGE
The difference between cash and futures prices
(CASH - FUTURES = ________)
BASIS
The present purchase of a futures contract with the promise to take delivery of the commodity or resell the contract at a future date
LONG HEDGE
substitute purchase
LONG HEDGE
BUYING LONG
When a hedger _____________he has two positions; a short cash position, and a long futures position.
BUYS LONG
__________ allows for more efficient product pricing, and more efficient inventory management.
HEDGING
TRUE OR FALSE
Commodities prices would probably be higher without futures markets and hedging.
TRUE
__________ is the person or entity that assumes the risk of price change when he takes the futures position opposite the hedger.
SPECULATOR
TRUE OR FALSE
A speculator does not have a cash position - usually intends to resell or repurchase the futures contract in hopes of realizing a profit.
TRUE
A speculator will realize a profit if:
(a) Prices decline on his long position and rise on his short position
(b)Prices rise on his long position and decline on his short position
(c)Prices stay flat on both his long and short positions.
B
A speculator will realize a loss if:
(a) Prices decline on his long position and rise on his short position
(b)Prices rise on his long position and decline on his short position
(c)Prices stay flat on both his long and short positions.
A
The risk of loss from price change is transferred from _______ to ________ because the sale of futures to a speculator.
(a) speculator to hedger
(b) hedger to speculator
B
a ______ hedger transfers price risk when the speculator sells futures and the hedger buys futures.
LONG
TRUE or FALSE
Any loss in the hedger's cash position can be offset by gains from his long futures position
TRUE
Is basis less volatile than prices
YES
Anyone engaged in a business that is subject to price changes is a ____________ in a cash market
SPECULATOR
The role of a speculator is:
(a) To assume risk transfered by hedgers
(b) To pass risk onto hedgers
(c) To provide liquidity in the market
(d) Both (a) and (b)
(e) Both (a) and (c)
(e)
TRUE OR FALSE
More speculators in the market mean greater market liquidity and greater ease in executing trades.
TRUE
STATEMENT
The minimum margins, small relative to the total contract value being controlled, result in the high degree of leverage associated with futures speculation
yes
Name 4 types of Transactions
Cash, Futures. Futures Options, Securities
A contract that calls for an execution to be carried out in the future
FORWARD CONTRACT
A contract where the buyer and seller exchange goods for cash now
Cash Transactions
TRUE OR FALSE
The terms of a futures contract are established by the exchange and are known to all
TRUE
True or False
It is easy to change the terms of a forward contract once the papers are signed
FALSE
In a __________ contract, all terms are negotiated by the buyer and seller
FORWARD
To sell or buy back a contract
OFFSET
To offset a ______ futures contract, you sell the same futures contract
LONG
To offset a ______ futures contract, you buy the same futures contract
SHORT
True or False
The terms of a futures contract are established by the exchange and are known to all
True
The time when a futures contract calls for execution, and the futures price and cash price must converge and become equal
CONVERGENCE
Futures contract terms are ________, while cash forward contract terms are __________
Standardized, Negotiated
T/F
You can always cancel a forward contract
FALSE
It may not be possible to withdraw from a forward contract
T/F
Futures positions are easily offset or liquidated
True
Futures contract terms are_______
standardized
Cash forward contract terms are __________?
negotiated
Futures positions can be more easily _______ or liquidated that to cancel or withdraw from a forward contract
OFFSET
Futures contracts are traded on organized _________, and are therefore subject to federal regulations, while forward (cash) contracts are generally not.
EXCHANGES
futures prices are determined by ____,
while forward contracts are ______
COMPETITIVE BIDDING

NEGOTIATED