Series 3 – The National Commodities Futures Test Series 3 – The National Commodities Futures Test Hedging Strategies & Commodity Market Fundamentals 1

Question 1

A corn farmer who sells corn futures to lock in a sales price is employing a:

Accepted Answer

Short hedge

Answer

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:

Accepted Answer

Long hedge

Answer

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:

Accepted Answer

The difference between cash and futures prices changes unexpectedly

Answer

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)?

Accepted Answer

Corn, soybeans, and wheat

Answer

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:

Accepted Answer

Simultaneously buying one contract and selling a related contract

Answer

A spread involves holding offsetting long and short positions in related futures contracts to profit from a change in their price difference.

Series 3 – The National Commodities Futures Test Practice Test