Series 3 – The National Commodities Futures Test Series 3 – The National Commodities Futures Test Hedging Strategies & Commodity Market Fundamentals 1 — Questions and Answers
Question 1: A corn farmer who sells corn futures to lock in a sales price is employing a:
- Short hedge (Correct answer)
- Long hedge
- Cross hedge
- Anticipatory hedge
Correct answer: Short hedge
A short hedge involves selling futures to protect against a decline in the value of a commodity the hedger already owns or will produce.
Question 2: A food manufacturer who buys wheat futures to lock in a purchase price is employing a:
- Long hedge (Correct answer)
- Short hedge
- Basis hedge
- Rolling hedge
Correct answer: Long hedge
A long hedge involves buying futures to protect against rising prices for a commodity the hedger plans to purchase in the future.
Question 3: Basis risk in hedging refers to the risk that:
- The difference between cash and futures prices changes unexpectedly (Correct answer)
- Futures prices move against the hedger
- Margin requirements increase
- The futures contract expires before the hedge is needed
Correct answer: The difference between cash and futures prices changes unexpectedly
Basis risk arises because the cash price and futures price may not move in perfect tandem, leaving a residual unhedged exposure.
Question 4: Which agricultural commodity futures are traded on the Chicago Board of Trade (CBOT)?
- Corn, soybeans, and wheat (Correct answer)
- Crude oil and natural gas
- Gold and silver
- Live cattle and lean hogs
Correct answer: Corn, soybeans, and wheat
The CBOT is the primary US exchange for grain and oilseed futures including corn, soybeans, wheat, and oats.
Question 5: A spread trade in futures involves:
- Simultaneously buying one contract and selling a related contract (Correct answer)
- Buying the maximum number of contracts allowed
- Taking only a long position
- Selling a futures contract without owning the underlying commodity
Correct answer: Simultaneously buying one contract and selling a related contract
A spread involves holding offsetting long and short positions in related futures contracts to profit from a change in their price difference.
Question 6: Crude oil and natural gas futures are primarily traded on which US exchange?
- New York Mercantile Exchange (NYMEX) (Correct answer)
- Chicago Mercantile Exchange (CME)
- Intercontinental Exchange (ICE)
- Chicago Board of Trade (CBOT)
Correct answer: New York Mercantile Exchange (NYMEX)
NYMEX, now part of CME Group, is the primary US marketplace for energy futures including WTI crude oil and Henry Hub natural gas.
Series 3 – The National Commodities Futures Test Series 3 – The National Commodities Futures Test Hedging Strategies & Commodity Market Fundamentals 1
A corn farmer who sells corn futures to lock in a sales price is employing a: