CPT Commodities & Futures Trading 2 — Questions and Answers
Question 1: What is the 'basis' in commodity trading?
- The difference between the futures price and the spot price of a commodity (Correct answer)
- The minimum price movement allowed in a futures contract
- The total commission paid to a broker per futures trade
- The overnight interest charged on a leveraged futures position
Correct answer: The difference between the futures price and the spot price of a commodity
The basis is calculated as the spot price minus the futures price and is used by hedgers to measure the relationship between cash and futures markets.
Question 2: A grain elevator manager sells wheat futures to lock in a price for upcoming harvest. This is an example of:
- Speculation
- Arbitrage
- Hedging (Correct answer)
- Scalping
Correct answer: Hedging
Hedging involves taking an offsetting futures position to protect against adverse price movements in the physical commodity the business holds or expects to produce.
Question 3: Which commodity futures contract is priced in U.S. dollars per troy ounce?
- Crude oil (WTI)
- Natural gas
- Gold (Correct answer)
- Corn
Correct answer: Gold
Gold futures are quoted in U.S. dollars per troy ounce, with each standard COMEX contract covering 100 troy ounces.
Question 4: What does 'open interest' measure in a futures market?
- The total number of futures contracts traded in a single session
- The total number of outstanding (unsettled) futures contracts (Correct answer)
- The percentage of contracts held by commercial hedgers
- The daily price range of a futures contract
Correct answer: The total number of outstanding (unsettled) futures contracts
Open interest is the total number of futures contracts that have been entered into and not yet offset by delivery, expiration, or an opposing transaction.
Question 5: What is a 'margin call' in futures trading?
- A request from a broker to deposit additional funds when account equity falls below the maintenance margin level (Correct answer)
- A call option embedded within a futures contract
- An exchange notification that a contract is approaching expiration
- A fee assessed when a trader holds a futures position overnight
Correct answer: A request from a broker to deposit additional funds when account equity falls below the maintenance margin level
A margin call occurs when losses reduce a trader's account balance below the maintenance margin threshold, requiring additional funds to be deposited promptly.
Question 6: Which of the following is a key feature that distinguishes futures contracts from forward contracts?
- Futures contracts involve physical delivery; forwards are always cash-settled
- Futures contracts are standardized and exchange-traded; forwards are customized and OTC (Correct answer)
- Futures contracts have no expiration dates; forwards expire quarterly
- Futures require no margin; forwards require full payment upfront
Correct answer: Futures contracts are standardized and exchange-traded; forwards are customized and OTC
Futures contracts are standardized agreements traded on regulated exchanges with daily mark-to-market, while forward contracts are customized OTC agreements between two parties.
Question 7: What is the 'limit move' rule in futures markets?
- A rule capping the number of contracts one trader can hold
- A price movement restriction beyond which trading in that contract is halted or restricted for the day (Correct answer)
- A minimum trade size required to participate in institutional futures markets
- A regulatory cap on leverage ratios for retail futures traders
Correct answer: A price movement restriction beyond which trading in that contract is halted or restricted for the day
A limit move is a price change that reaches the daily maximum allowed by the exchange, which may halt trading or restrict orders to prevent extreme volatility.
CPT Commodities & Futures Trading 2
What is the 'basis' in commodity trading?