FIA Commodities Markets & Trading 2

Question 1

What is the 'basis' in commodity futures trading?

Accepted Answer

The difference between the local cash (spot) price and the futures price

Answer

The basis is the difference between the local cash (spot) price of a commodity and its futures price, reflecting factors like location, quality differences, transportation costs, and time to delivery.

Question 2

A commodity producer who sells futures contracts to lock in a future sale price is engaging in:

Accepted Answer

A short hedge to protect against falling prices

Answer

A short hedge involves selling futures contracts to lock in a future selling price, protecting commodity producers against the risk that prices will fall before they can sell their physical output.

Question 3

Which factor does NOT typically serve as a direct driver of commodity spot prices?

Accepted Answer

The price-to-earnings (P/E) ratio of commodity-producing companies

Answer

Commodity spot prices are driven by physical supply/demand fundamentals, weather, geopolitical factors, and production costs; P/E ratios are equity valuation metrics that do not directly determine commodity prices.

Question 4

What does 'rolling over' a futures position mean in commodity trading?

Accepted Answer

Closing the near-month contract and simultaneously opening a later-month contract

Answer

Rolling over means closing the expiring near-month futures contract and simultaneously opening a contract with a later expiration date, maintaining continuous market exposure without taking physical delivery.

Question 5

The cost-of-carry model for commodity futures pricing includes all of the following EXCEPT:

Accepted Answer

Dividend yield on the underlying asset

Answer

The commodity cost-of-carry model includes storage, insurance, and financing costs; dividend yield is an equity concept applicable to stocks, not to physical commodities.

(FIA) Financial Information Associate Certification Practice Test

(FIA) Financial Information Associate Certification Practice Test

FIA Commodities Markets & Trading 2