Seance 2 : Commodity Futures Trading and Arbitrage Quiz

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).