Commodities Markets & Trading Flashcards

An oil refinery buys crude oil futures and simultaneously sells refined petroleum product futures. This risk management strategy is called a:

Answer: Crack spread

A crack spread involves simultaneously buying crude oil futures and selling petroleum product (gasoline or heating oil) futures to hedge or profit from the refining margin, named after the oil refining 'cracking' process.

What is the primary consequence for a commodity futures trader who fails to meet a margin call?

Answer: Forced liquidation of the trader's position by the broker

If a trader cannot meet a margin call, the broker will forcibly close (liquidate) the trader's positions to cover the deficit and prevent losses from being passed to the clearinghouse.

A trader who buys a December corn futures contract and sells a March corn futures contract is executing a:

Answer: Calendar (intra-commodity) spread between two delivery months

A calendar spread (intra-commodity spread) involves buying and selling futures contracts on the same commodity but with different delivery months to profit from changes in the price relationship between the two contract months.

Which of the following best describes 'physical delivery' in a commodity futures contract?

Answer: The actual underlying commodity is transferred from the short to the long at contract expiration

Physical delivery means the seller (short) of a futures contract transfers the actual underlying commodity to the buyer (long) at contract expiration according to the exchange's delivery specifications.

The term 'position limit' in commodity markets refers to:

Answer: The maximum number of futures contracts a single trader may hold in a specific commodity

Position limits cap the maximum number of futures contracts a single trader can hold in a specific commodity, preventing any one participant from accumulating sufficient positions to manipulate market prices.

Soybean processors buy soybean futures and sell soybean oil and soybean meal futures to manage their processing margin. This hedging strategy is known as a:

Answer: Crush spread

A crush spread involves buying soybean futures and selling soybean oil and soybean meal futures to hedge or capture the processing margin from 'crushing' soybeans into their two primary products.

What are the two primary economic functions served by commodity futures markets?

Answer: Price discovery and risk transfer between hedgers and speculators

Commodity futures markets serve the dual economic functions of price discovery (revealing market consensus about future prices) and risk transfer (allowing hedgers to shift price risk to speculators willing to bear it for potential profit).