Series 3 – The National Commodities Futures Test Series 3 – The National Commodities Futures Test Hedging Strategies & Commodity Market Fundamentals 2

Question 1

An airline company buying jet fuel futures to manage fuel costs is an example of:

Accepted Answer

A commercial hedger managing input cost risk

Answer

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:

Accepted Answer

Storage, insurance, and financing costs

Answer

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:

Accepted Answer

Higher than deferred futures prices

Answer

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?

Accepted Answer

Using a futures contract in a related commodity when no exact futures contract exists

Answer

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:

Accepted Answer

Benefit because the cash price rose relative to futures

Answer

A strengthening basis means the cash price increased relative to the futures price, improving the net selling price for the short hedger.

Series 3 – The National Commodities Futures Test Practice Test