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123 Cards in this Set
- Front
- Back
What is a cash market
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A market where purchasers tender ash and receive goods upon payment
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True or False
Many business men cherish price risk. |
FALSE - Most businesses do not want price risk
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What 5 things does the commodity futures markets utilize in its functionality
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1. Forward Pricing
2. Efficiency 3. Liquidity 4. Easy Access 5. Storability IS NOT required |
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True or False
Storability is required in the operation of futures markets |
FALSE
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How Long can futures markets determine prices in advance
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A year or more
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Other than futures markets, what guarantees a price in the future
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Nothing. A risk of price change exists unless goods are sold or consumed immediately
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How are prices established in futures markets (basic)
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Supply and Demand
Bids and Offers |
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Define FORWARD CONTRACT
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A contract where the terms are negotiated for future delivery
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What is the knowledge of a future price called?
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Price Discovery
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What makes a market efficient?
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The more readily prices are discovered, the more efficient the markets
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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
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What is the ability to move quickly in or out of a market at or near the last purchase price called?
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Liquidity
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Define LIQUIDITY
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the ability to move quickly in or out of a market at or near the last purchase price
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True or False?
The more liquid the market, the faster and more easily trades can be executed (at or near specific prices) |
TRUE
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True or False?
The less liquid the market, the faster and more easily trades can be executed (at or near specific prices) |
FALSE
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If there were not futures markets, would commodities prices be lower?
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No. They would most likely be higher, due to a less efficient method of price discovery.
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Explain "easy access"
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For every buyer there is a seller. Anyone who wants to transfer, or accept risk, has an easy meeting place to do so.
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Explain why storability is not required
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Markets for the future delivery of commodities are not limited to ones that can be stored.
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What makes a futures contract viable
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Viability is determined by the definable standards of:
1. Quality 2. Price Information 3. Broadly based production |
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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")
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FUTURES CONTRACT
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What is a contract "month"
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The designated delivery period of a futures contract
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a "short" position is also known as_________
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a "sold" contract
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a "long" position is also known as_________
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a "purchased" contract
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If you buy a contract do you have to take delivery?
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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. |
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What is the central theme of commodity futures markets?
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Standardization
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True or false
-From early days in Chicago until the 1970's, the only things traded on "futures" exchanges were tangible goods. |
TRUE
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TRUE OR FALSE
"commodity" and "futures" cannot be used interchangeably |
FALSE
commodity and futures as terms are regularly used interchangeably |
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What is the word "FUTURES" usually used to describe?
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A non-tangible property or cash that will be delivered in the future
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Is a "futures" contract and a "future" contract the same thing?
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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. |
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What is the central theme of commodity futures markets?
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STANDARDIZATION
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_____________ plays the central theme of commodity futures markets
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STANDARDIZATION
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Futures contracts are standardized by the exchange with regard to, _________, _________, _________, and ___________.
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COMMODITY
QUANTITY QUALITY POINT OF DELIVERY |
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_________ dates are standardized within each _________ month; i.e. there is a range of days during will all contracts going in to ________ must be performed.
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DELIVERY
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_________ do not want to bear risk.
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hedgers
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_________are willing to accept risk.
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speculators
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How do futures markets make it easier to transfer risk of loss?
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By standardizing contract terms
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In a given delivery month, what aspects of a futures contract must be negotiated, prior to a sale?
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Nothing.
No negotiation of terms is necessary. Only make a price bid or offer for the contract. |
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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. |
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What do clearinghouses do?
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Clearinghouses act as third parties to all futures transactions.
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TRUE or FALSE
Clearinghouses guarantee the performance of all futures contracts. |
TRUE
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What is a Guarantee Fund?
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A fund established by clearinghouse that clearing members contribute a percentage of their gross revenues to, to protect customer's monies.
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What is a surplus fund, and how is it funded?
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A fund established by clearinghouse that clearing members contribute a percentage of all clearing fees to, to protect customer's monies.
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________ is the number of contracts traded (i.e. bought and sold) of a particular delivery month.
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VOLUME
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________ is the number of contracts outstanding (i.e. the number of long or short positions not yet offset)
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OPEN INTEREST
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________ is an ongoing figure for the life of a contract, while _______ is a daily figure
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Open Interest
Volume |
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How do futures markets make it easier to transfer risk of loss?
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By standardizing contract terms
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In a given delivery month, what aspects of a futures contract must be negotiated, prior to a sale?
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Nothing.
No negotiation of terms is necessary. Only make a price bid or offer for the contract. |
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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. |
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What do clearinghouses do?
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Clearinghouses act as third parties to all futures transactions.
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TRUE or FALSE
Clearinghouses guarantee the performance of all futures contracts. |
TRUE
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What is a Guarantee Fund?
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A fund established by clearinghouse that clearing members contribute a percentage of their gross revenues to, to protect customer's monies.
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What is a surplus fund, and how is it funded?
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A fund established by clearinghouse that clearing members contribute a percentage of all clearing fees to, to protect customer's monies.
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________ is the number of contracts traded (i.e. bought and sold) of a particular delivery month.
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VOLUME
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________ is the number of contracts outstanding (i.e. the number of long or short positions not yet offset)
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OPEN INTEREST
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________ is an ongoing figure for the life of a contract, while _______ is a daily figure
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Open Interest
Volume |
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How do futures markets make it easier to transfer risk of loss?
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By standardizing contract terms
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In a given delivery month, what aspects of a futures contract must be negotiated, prior to a sale?
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Nothing.
No negotiation of terms is necessary. Only make a price bid or offer for the contract. |
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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. |
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What do clearinghouses do?
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Clearinghouses act as third parties to all futures transactions.
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TRUE or FALSE
Clearinghouses guarantee the performance of all futures contracts. |
TRUE
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What is a Guarantee Fund?
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A fund established by clearinghouse that clearing members contribute a percentage of their gross revenues to, to protect customer's monies.
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What is a surplus fund, and how is it funded?
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A fund established by clearinghouse that clearing members contribute a percentage of all clearing fees to, to protect customer's monies.
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________ is the number of contracts traded (i.e. bought and sold) of a particular delivery month.
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VOLUME
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________ is the number of contracts outstanding (i.e. the number of long or short positions not yet offset)
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OPEN INTEREST
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________ is an ongoing figure for the life of a contract, while _______ is a daily figure
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Open Interest
Volume |
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Members of the clearinghouse are known as _________ members.
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CLEARING
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A correspondent that clears through a clearing member is known as a ____________________
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Futures Commission Merchant (FCM)
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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.
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An account that is carried by one FCM with another FCM which combines two or more individuals account transactions.
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What is an OMNIBUS account
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An individual, association, or corporation accepting orders for futures contracts in return for a fee, subject to exchange regulations
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what is a FUTURES COMMISSION MERCHANT
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Clearing members may be
1. _____________ 2. _____________ 3. _____________ 4. _____________ |
individuals
partnerships corporations cooperatives |
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If a clearinghouse member is a corporation, how many officers must be members of the exchange, including the CEO?
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Two
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Are the prices of deferred futures normally higher than cash and near month futures for non-financial contracts?
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YES
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A market where the deferred futures prices are normally higher than cash and near-month futures prices for non-financial contracts
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Normal Market
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futures prices = carrying charges + cash price
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full carrying charge market
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market with:
Shortage of supply High current demand OR an unexpected surplus causing current prices to be higher than deferred prices |
Inverted Market
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TRUE OR FALSE
Cash and futures prices usually move in the same direction by approximately the same amounts. |
TRUE
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The transfer of price risk from one party to another
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HEDGING
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An unhedged cash market position
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SPECULATIVE POSITION
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futures prices = carrying charges + cash price
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full carrying charge market
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market with:
Shortage of supply High current demand OR an unexpected surplus causing current prices to be higher than deferred prices |
Inverted Market
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TRUE OR FALSE
Cash and futures prices usually move in the same direction by approximately the same amounts. |
TRUE
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The transfer of price risk from one party to another
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HEDGING
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An unhedged cash market position
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SPECULATIVE POSITION
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The present sale of a futures contract with the promise to deliver the commodity or repurchase the contract at a future date.
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SELLING SHORT
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AKA
substitute sale |
SHORT HEDGE
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The difference between cash and futures prices
(CASH - FUTURES = ________) |
BASIS
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The present purchase of a futures contract with the promise to take delivery of the commodity or resell the contract at a future date
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LONG HEDGE
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substitute purchase
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LONG HEDGE
BUYING LONG |
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When a hedger _____________he has two positions; a short cash position, and a long futures position.
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BUYS LONG
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__________ allows for more efficient product pricing, and more efficient inventory management.
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HEDGING
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TRUE OR FALSE
Commodities prices would probably be higher without futures markets and hedging. |
TRUE
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__________ is the person or entity that assumes the risk of price change when he takes the futures position opposite the hedger.
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SPECULATOR
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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
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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
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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
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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
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a ______ hedger transfers price risk when the speculator sells futures and the hedger buys futures.
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LONG
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TRUE or FALSE
Any loss in the hedger's cash position can be offset by gains from his long futures position |
TRUE
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Is basis less volatile than prices
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YES
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Anyone engaged in a business that is subject to price changes is a ____________ in a cash market
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SPECULATOR
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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)
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TRUE OR FALSE
More speculators in the market mean greater market liquidity and greater ease in executing trades. |
TRUE
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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
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Name 4 types of Transactions
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Cash, Futures. Futures Options, Securities
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A contract that calls for an execution to be carried out in the future
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FORWARD CONTRACT
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A contract where the buyer and seller exchange goods for cash now
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Cash Transactions
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TRUE OR FALSE
The terms of a futures contract are established by the exchange and are known to all |
TRUE
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True or False
It is easy to change the terms of a forward contract once the papers are signed |
FALSE
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In a __________ contract, all terms are negotiated by the buyer and seller
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FORWARD
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To sell or buy back a contract
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OFFSET
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To offset a ______ futures contract, you sell the same futures contract
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LONG
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To offset a ______ futures contract, you buy the same futures contract
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SHORT
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True or False
The terms of a futures contract are established by the exchange and are known to all |
True
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The time when a futures contract calls for execution, and the futures price and cash price must converge and become equal
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CONVERGENCE
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Futures contract terms are ________, while cash forward contract terms are __________
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Standardized, Negotiated
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T/F
You can always cancel a forward contract |
FALSE
It may not be possible to withdraw from a forward contract |
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T/F
Futures positions are easily offset or liquidated |
True
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Futures contract terms are_______
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standardized
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Cash forward contract terms are __________?
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negotiated
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Futures positions can be more easily _______ or liquidated that to cancel or withdraw from a forward contract
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OFFSET
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Futures contracts are traded on organized _________, and are therefore subject to federal regulations, while forward (cash) contracts are generally not.
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EXCHANGES
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futures prices are determined by ____,
while forward contracts are ______ |
COMPETITIVE BIDDING
NEGOTIATED |