AFM Agricultural Marketing & Commodity Markets 2

Question 1

A corn farmer who sells corn futures contracts to protect against a price decline before harvest is executing a:

Accepted Answer

Short hedge

Answer

A short hedge involves selling futures contracts to establish a price floor, protecting a producer who owns or expects to own the physical commodity against declining prices.

Question 2

When the basis is described as 'stronger than expected,' this means:

Accepted Answer

Cash prices rose relative to futures prices, making the basis less negative

Answer

A strengthening basis means the cash price improved relative to the futures price (basis = cash minus futures became less negative or more positive), which is favorable for short hedgers.

Question 3

A basis contract benefits a grain producer primarily by:

Accepted Answer

Fixing the basis level while leaving the futures price component open for later pricing

Answer

A basis contract establishes the basis at contract signing while allowing the producer to set or 'price' the futures component later when futures prices are more favorable.

Question 4

A put option in agricultural markets gives the buyer the right to:

Accepted Answer

Sell a futures contract at the specified strike price

Answer

A put option gives the holder the right, but not the obligation, to sell a futures contract at the strike price before expiration, providing price floor protection for producers.

Question 5

Local cash grain prices at a country elevator are primarily determined by:

Accepted Answer

The relevant futures market price adjusted for the local basis

Answer

Local cash prices are derived by taking the nearby futures price and adjusting it by the local basis, which accounts for transportation, local supply and demand, and handling costs.

(AFM) Accredited Farm Manager Certification Practice Test

(AFM) Accredited Farm Manager Certification Practice Test

AFM Agricultural Marketing & Commodity Markets 2