FIA Commodities Markets & Trading 3

Question 1

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

Accepted Answer

Crack spread

Answer

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.

Question 2

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

Accepted Answer

Forced liquidation of the trader's position by the broker

Answer

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.

Question 3

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

Accepted Answer

Calendar (intra-commodity) spread between two delivery months

Answer

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.

Question 4

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

Accepted Answer

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

Answer

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.

Question 5

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

Accepted Answer

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

Answer

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.

(FIA) Financial Information Associate Certification Practice Test

(FIA) Financial Information Associate Certification Practice Test

FIA Commodities Markets & Trading 3