Risk Management & Mitigation Flashcards

A customer is long December corn and wants to limit loss if prices fall. Which order is most appropriate?

Answer: Sell stop below the market

A sell stop below the market becomes a market order if price trades at or through the stop, exiting the long.

What is the main risk of using a stop-limit order for protection?

Answer: It may not be executed if the market gaps past the limit

Once triggered, a stop-limit becomes a limit order and may go unfilled in a fast market.

A bona fide hedging exemption allows a commercial user to:

Answer: Exceed speculative position limits when offsetting a genuine commercial risk

Positions that qualify as bona fide hedges may exceed speculative limits.

A market is locked limit-down and a long customer wants to exit. The key risk is:

Answer: Illiquidity, since there may be no buyers at permitted prices

Daily price limits can prevent trades, trapping positions until limits expand or buyers appear.

A market-if-touched (MIT) order to buy is placed:

Answer: Below the current market, becoming a market order when touched

A buy MIT sits below the market and becomes a market order when that price is reached.

Before opening a speculative futures account, the FCM must generally provide the customer with:

Answer: A risk disclosure statement

CFTC rules require delivery of a risk disclosure statement that the customer acknowledges.

Speculative position limits are intended primarily to:

Answer: Reduce the risk of market manipulation and excessive concentration

Limits curb large positions that could distort prices or enable manipulation.