Oil Futures Strategy Quiz
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Questions and Answers

What is the total payoff at an oil price of 70 when entering a long oil and selling a forward contract at 60?

  • 20
  • -10
  • 0 (correct)
  • 10

    • How does the total payoff change as the oil price increases from 0 to 60 under a long oil position with a forward contract?

  • Payoff remains constant at 60 (correct)
  • Payoff increases until it reaches 60, then decreases
  • Payoff decreases as the oil price increases
  • Payoff increases linearly at the same rate as oil price

    • What happens to the total payoff at an oil price of 80 when a forward contract is sold at 60?

  • -20
  • 60
  • 10
  • -10 (correct)

    • Which statement best describes the risk elimination effect of the strategy 'long oil + sell one forward'?

    <p>It reduces the risk to a predetermined payoff level regardless of oil prices.</p> Signup and view all the answers

    What is the payoff when the oil price reaches 100 under the described strategy?

    <p>-20</p> Signup and view all the answers

    What happens to the payoff if the price of oil rises above $60 when shorting a forward contract?

    <p>Payoff decreases without limit</p> Signup and view all the answers

    If the price of oil is $50 and one is long an oil barrel, what is the total payoff with a short forward contract priced at $60?

    <p>-10</p> Signup and view all the answers

    At what oil price does the payoff equal zero if one is long an oil barrel and short a forward contract at $60?

    <p>Exactly $60</p> Signup and view all the answers

    What is the payoff at an oil price of $40 with a short forward contract priced at $60?

    <p>-20</p> Signup and view all the answers

    What does F0,T represent in the context of forward contracts?

    <p>The price agreed upon in the forward contract</p> Signup and view all the answers

    What is the primary purpose of shorting a forward contract when holding a long position in oil?

    <p>To hedge against potential price declines</p> Signup and view all the answers

    What occurs when one enters a forward contract in relation to selling the underlying asset?

    <p>One must sell the asset at the forward price F0,T.</p> Signup and view all the answers

    If an investor expects the price of oil to drop below $30, what strategy can mitigate losses?

    <p>Short a forward contract</p> Signup and view all the answers

    What does the opportunity gain F0,T − ST signify?

    <p>The difference between the forward price and market price at maturity</p> Signup and view all the answers

    Which of the following best describes the outcome of combining a long position in oil with a short forward at the price of $60?

    <p>Limited losses and potential for profit</p> Signup and view all the answers

    In a short forward position, what is one obligated to do at maturity?

    <p>Sell the underlying asset at the forward price Ft,T</p> Signup and view all the answers

    If the oil price fluctuates widely but remains below $60, what can one expect regarding the payoff from the strategy?

    <p>Payoff will always be negative</p> Signup and view all the answers

    How can the payoff of a forward contract be identified?

    <p>Independently of the settlement and the initial position</p> Signup and view all the answers

    What defines a forward contract?

    <p>An agreement for deferred delivery of an asset at a pre-determined price.</p> Signup and view all the answers

    Which term describes a person agreeing to buy in a forward contract?

    <p>Long position</p> Signup and view all the answers

    What is the only monetary transfer in a forward contract?

    <p>The price paid by the long side at the delivery date</p> Signup and view all the answers

    What does the notation Ft,T represent?

    <p>The forward price for delivery at time T initiated at time t.</p> Signup and view all the answers

    What happens at the time a forward contract is signed?

    <p>Counterparties agree on a future transfer.</p> Signup and view all the answers

    Which statement is true regarding the obligations in a forward contract?

    <p>Both buyer and seller are obligated to carry out the transaction.</p> Signup and view all the answers

    What can be inferred about a futures contract compared to a forward contract?

    <p>A futures contract is essentially a forward contract traded on an exchange.</p> Signup and view all the answers

    What does S̃T denote in the context of forward contracts?

    <p>The price of the underlying asset at a future time T</p> Signup and view all the answers

    What is the payoff from a long position (buying) in a put option when the oil price is $50?

    <p>$10</p> Signup and view all the answers

    At what oil price does exercising the put option become unprofitable?

    <p>$60</p> Signup and view all the answers

    What happens to the payoff as the oil price increases beyond the strike price of $60?

    <p>Payoff remains constant at $0</p> Signup and view all the answers

    If the oil price at maturity is $30, what is the total profit from exercising the put option?

    <p>$20</p> Signup and view all the answers

    What is the maximum loss incurred from a long position in a put option?

    <p>$0</p> Signup and view all the answers

    What strategy is employed by taking a long position in a put option?

    <p>Speculating on falling prices</p> Signup and view all the answers

    If the strike price is $60 and the oil price at maturity is $0, what is the payoff from the put option?

    <p>$60</p> Signup and view all the answers

    How does the payoff change as the underlying asset price approaches the strike price?

    <p>Becomes zero once equal to the strike price</p> Signup and view all the answers

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