Seance 2 : Commodity Futures Trading and Arbitrage Quiz

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Questions and Answers

Which market is characterized by immediate exchange of the underlying asset?

Physical market

Spot market (correct)

Forward market

Futures market

What is the main function of forward transactions?

Decentralization of markets

Driving supply and delivery facilitation

Hedging of the price risk (correct)

Standardization of transactions

What is the characteristic of transactions in the spot and forward markets?

Lack of standardization (correct)

Centralization of markets

High liquidity

Immediate exchange of underlying asset

What is the relationship between the futures market and the spot and forward markets?

The futures market complements the spot and forward markets Signup and view all the answers

Which of the following is the maximum daily price fluctuation for commodity futures Oil contracts traded on Nymex?

$10.00 per barrel Signup and view all the answers

Why is there a need for a maximum price fluctuation in commodity futures trading?

To protect against market squeezes Signup and view all the answers

What happens if the price of a commodity futures contract reaches the maximum daily price fluctuation?

Trading is halted for five minutes Signup and view all the answers

What is the purpose of inspection in commodity futures trading?

To determine the quality of the delivered oil Signup and view all the answers

Which of the following is NOT a role of the clearing house in futures markets?

negotiate the contracts or specify the details of the contracts Signup and view all the answers

What is the purpose of daily margin calls in futures markets?

To monitor exposure and ensure coverage Signup and view all the answers

What is the function of collateralization in OTC markets?

To guarantee the transaction Signup and view all the answers

What is the purpose of the G20 objectives in futures markets?

To mitigate systemic risk Signup and view all the answers

According to the text, what is the formula for the theoretical futures price?

$F(t, T) = S(t) + CS(t, T)$ Signup and view all the answers

What is the formula for the net profit in a cash-and-carry arbitrage?

Net Profit = Futures Sale - Purchase Cash - Storage and Delivery Signup and view all the answers

When storage costs are positive, what can cause the futures price to be less than the spot price?

The convenience yield is higher than the storage costs Signup and view all the answers

What is the formula for the futures price in a market in backwardation?

$F(t, T) = S(t) + CS(t, T) - CY(t, T)$ Signup and view all the answers

Which of the following is true about the liquidity of the forwards market?

The forwards market is illiquid because participants cannot find anyone to enter a particular position. Signup and view all the answers

Which of the following is true about the initial outlay in futures and forwards markets?

In the forward market, there is no requirement for an initial outlay, while in the futures market, participants need to make an initial deposit and margin calls. Signup and view all the answers

Which of the following is true about hedging in the futures and forwards markets?

Hedging in the forward market is perfect but costly due to its illiquidity, while hedging in the futures market is imperfect due to standardization but is easy to cancel. Signup and view all the answers

Which of the following is true about the evolution of the futures market?

The futures market started with agricultural products, then moved on to currencies, financial fixed income, petroleum products, and finally equity indices. Signup and view all the answers

Which of the following is the correct formula for the cost of carry in the pricing of futures contracts?

$F(t,T) = S(t) + Cp(t,T) - CY(t,T)$ Signup and view all the answers

What is the formula for the cost of carry expressed as a simple interest rate?

$F(t,T) = S(t) * (1 + ct(T - t))$ Signup and view all the answers

What is the correct formula for the valuation of a futures contract in continuous time?

$F(t,T) = S(t) * exp[ct (T - t)]$ Signup and view all the answers

What is the correct formula for the valuation of a futures contract with a maturity of three months and accumulated interest for 6 months, using compounded interests?

$F = 100 * (1 + 0.06)^{6/12}$ Signup and view all the answers

Which formula is used to calculate the theoretical price of a futures contract on a coupon-bearing bond using a simple interest rate?

F = S(1 + r(T−t)) Signup and view all the answers

What is the value of a forward contract if the spot price of the underlying asset is $110 and the forward price is $100?

$10 Signup and view all the answers

Which formula is used to calculate the theoretical price of a futures contract on equities and equity indices using a continuously compounded interest rate?

F* = S * e(r−d)(T − t) Signup and view all the answers

What is the theoretical price of a futures contract on a coupon-bearing bond if the spot price is $90, the interest rate is 8%, the coupon rate is 4%, and the time to maturity is 1 year?

$97.49 Signup and view all the answers

What is the value of a forward contract if the spot price of the underlying asset is $85 and the forward price is $100?

$-15 Signup and view all the answers

Which formula is used to calculate the theoretical price of a futures contract on equities and equity indices using a simple interest rate?

F* = S[1+(r−d)]T − t Signup and view all the answers

Study Notes

Spot Market

Characterized by immediate exchange of the underlying asset.

Forward Transactions

Their main function is to lock in a price for a future transaction.

Spot and Forward Markets

The spot market involves immediate delivery, while the forward market involves future delivery.

Futures Market Relationship

The futures market is closely related to the spot and forward markets.

Maximum Daily Price Fluctuation

For commodity futures Oil contracts traded on Nymex, the maximum daily price fluctuation is set at $10 per barrel.

Need for Maximum Price Fluctuation

It is important to limit price fluctuations to prevent excessive speculation and ensure market stability.

Reaching Maximum Daily Price Fluctuation

If the price of a commodity futures contract reaches the maximum daily price fluctuation, trading will be halted for a short period.

Inspection in Commodity Futures Trading

The purpose of inspection is to ensure the quality and quantity of the underlying commodity.

Role of the Clearing House in Futures Markets (NOT a role)

The clearing house does not provide investment advice.

Daily Margin Calls in Futures Markets

The purpose of daily margin calls is to ensure that traders have sufficient funds to cover potential losses.

Collateralization in OTC Markets

The function of collateralization in OTC markets is to mitigate counterparty risk by providing security for the transaction.

G20 Objectives in Futures Markets

The G20 objectives aim to promote global financial market stability, including transparent and robust futures markets.

Theoretical Futures Price

The formula for the theoretical futures price is: Futures Price = Spot Price + Carrying Costs - Convenience Yield.

Net Profit in Cash-and-Carry Arbitrage

The formula for the net profit in a cash-and-carry arbitrage is Net Profit = (Futures Price - Spot Price - Carrying Costs) x Contract Size.

Futures Price Less Than Spot Price

When storage costs are positive, the futures price can be less than the spot price due to a negative convenience yield.

Futures Price in Backwardation

The formula for the futures price in a market in backwardation is Futures Price = Spot Price - (Carrying Costs - Convenience Yield) x Time to Maturity.

Forwards Market Liquidity

The forwards market is generally less liquid than the futures market.

Initial Outlay in Futures and Forwards Markets

Both futures and forwards markets typically require an initial outlay of capital, known as margin or collateral.

Hedging in Futures and Forwards Markets

Hedging in futures and forwards markets involves using these instruments to mitigate risk.

Evolution of the Futures Market

The futures market has evolved from a primarily agricultural marketplace to a more diversified market encompassing a wide range of assets.

Cost of Carry in Futures Contract Pricing

The correct formula for the cost of carry in the pricing of futures contracts is: Cost of Carry = Storage Costs + Interest Costs - Convenience Yield.

Cost of Carry Expressed as a Simple Interest Rate

The formula for the cost of carry expressed as a simple interest rate is: Cost of Carry = (Storage Costs + Interest Costs - Convenience Yield) / Spot Price.

Valuation of a Futures Contract in Continuous Time

The correct formula for the valuation of a futures contract in continuous time is: Futures Price = Spot Price x exp(r x T).

Valuation of a Futures Contract with Compounded Interest

The correct formula for the valuation of a futures contract with a maturity of three months and accumulated interest for 6 months, using compounded interests, is: Futures Price = Spot Price x (1 + r)^(T/2).

Theoretical Price of a Futures Contract on a Coupon-Bearing Bond using Simple Interest

Futures Price = Spot Price x (1 + rt).

Value of a Forward Contract

The value of a forward contract if the spot price of the underlying asset is $110 and the forward price is $100 is $10 per unit.

Theoretical Price of a Futures Contract on Equities and Equity Indices using Continuous Compounding

Futures Price = Spot Price x exp(r x T).

Theoretical Price of a Futures Contract on a Coupon-Bearing Bond with Simple Interest

The theoretical price of a futures contract on a coupon-bearing bond if the spot price is $90, the interest rate is 8%, the coupon rate is 4%, and the time to maturity is 1 year, is $97.20.

Value of a Forward Contract with Different Prices

The value of a forward contract if the spot price of the underlying asset is $85 and the forward price is $100 is $15 per unit.

Theoretical Price of a Futures Contract on Equities and Equity Indices using Simple Interest

The theoretical price of a futures contract on equities and equity indices using a simple interest rate is calculated as: F = S(1 + rt).

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Description

Test your knowledge on commodity futures trading and arbitrage strategies! Learn about the concept of oscillating between overvaluations and undervaluations, and how the ease and cost of arbitrage operations change with maturity. Explore examples of commodity futures oil contracts traded on Nymex and their standardization.