Series 3 – The National Commodities Futures Test Series 3 – The National Commodities Futures Test Hedging Strategies & Commodity Market Fundamentals 2 — Questions and Answers
Question 1: An airline company buying jet fuel futures to manage fuel costs is an example of:
- A commercial hedger managing input cost risk (Correct answer)
- A speculator seeking profit
- An arbitrageur exploiting price discrepancies
- A CTA managing client funds
Correct answer: A commercial hedger managing input cost risk
Airlines use energy futures as commercial hedgers to reduce exposure to unexpected increases in jet fuel costs.
Question 2: A 'carrying charge market' exists when futures prices for deferred months are higher than nearby months by an amount reflecting:
- Storage, insurance, and financing costs (Correct answer)
- Supply shortages in deferred months
- Greater speculative demand
- Seasonal demand patterns
Correct answer: Storage, insurance, and financing costs
A full carrying charge market reflects the cost of storing the physical commodity from the nearby delivery period to the deferred period.
Question 3: In an inverted market (backwardation), nearby futures prices are:
- Higher than deferred futures prices (Correct answer)
- Lower than deferred futures prices
- Equal to the spot price
- Unrelated to deferred prices
Correct answer: Higher than deferred futures prices
Backwardation occurs when nearby prices exceed deferred prices, often due to tight current supply or high immediate demand.
Question 4: What is a 'cross hedge' in commodity futures?
- Using a futures contract in a related commodity when no exact futures contract exists (Correct answer)
- Hedging in two different countries simultaneously
- Taking opposing positions in the same contract month
- Using options instead of futures to hedge
Correct answer: Using a futures contract in a related commodity when no exact futures contract exists
A cross hedge uses a futures contract whose price is closely correlated with but not identical to the cash commodity being hedged.
Question 5: When a hedger's basis strengthens (becomes less negative or more positive), the short hedger will:
- Benefit because the cash price rose relative to futures (Correct answer)
- Lose because the futures price rose relative to cash
- Be unaffected by basis changes
- Receive a margin call
Correct answer: Benefit because the cash price rose relative to futures
A strengthening basis means the cash price increased relative to the futures price, improving the net selling price for the short hedger.
Question 6: Gold and silver futures are primarily traded on which US exchange?
- COMEX (part of CME Group) (Correct answer)
- NYMEX Energy Division
- Chicago Board of Trade
- Philadelphia Stock Exchange
Correct answer: COMEX (part of CME Group)
COMEX, now a division of CME Group, is the leading US marketplace for precious metals futures including gold, silver, copper, and platinum.
Series 3 – The National Commodities Futures Test Series 3 – The National Commodities Futures Test Hedging Strategies & Commodity Market Fundamentals 2
An airline company buying jet fuel futures to manage fuel costs is an example of: