AECN 235 Exam 1

What is the main difference between forward and futures contracts?

one of them is highly standardized while the other is highly customized.

What statements below are true about futures contracts?

All trades in the futures market are executed through the clearing house, such that buyers and sellers do not know and do not need to know each other. Buyers and sellers cannot negotiate the terms of their contracts, since they are standardized and determined by the futures exchange.

A producer is considering selling her corn with either a forward or a futures contract. Recalling that the corn futures contract size is 5,000 bu and delivery months are March, May, July, Sep and Dec. which statements below is correct?

Both contracts allow future delivery at the price trade in the contract. with the forward contract she can sell whatever quantity she negotiates with the buyer, while with the futures contract she can only sell in multiples of 5,000 bu

Commodity Producers have relatively less options to market their products. Why does this happen?

Commodity producers cannot benefit from promoting or advertising their commodity.

T/F A commodity can be defined as an economic good that can be legally produced and sold only bu selected individuals who own a patent to the product.

False

T/F Both futures and forward contracts are highly standardized. Hedgers and speculators have no flexibility in changing some specifications of the neither of these contracts.

False

T/F Futures markets were created to meet specific needs of cash market traders and should be traded only by these traders. Speculators have no place in futures markets.

False

T/F Just like there is a limit to how much corn can be traded in the spot market during a given crop year, there is also a limit to how much grain can be traded in the futures market during the same period.

False

T/F Both forward and futures contracts can easily offset in the same way.

False (operational differences)

T/F In a cash market, all transactions are for immediate delivery.

False, can be for immediate delivery or future delivery.

What statements are correct about futures markets?

Futures contracts were created to facilitate buying and selling of commodities for future delivery. Futures markets are delivery markets, sellers can deliver in the futures market if they choose to. futures markets are intrinsically connected to cash markets, the same commodity traded in cash markets can also be traded in futures markets.

Last week I sold soybeans for $10/bu using a futures contract for November delivery. Based on this information, mark all statements below that are correct.

If I choose to deliver the grain in November but the buyer changes his mind and doesn't want to take delivery, the clearing house will make sure that the contract will still be honored.

A corn producer has some grain in storage and is considering whether she should sell it now or hold it a while longer. Her local grain elevator is offering $3.30/bu to buy it today, $3.37/bu to buy it in March, $340/bu to but it in April, and $3.44/bu to buy it in May. The producer calculates storage costs and learns that it will cost her $0.03/bu/month to store corn. What statements are correct?

The highest net price (contract price minus storage cost) is for May delivery. The lowest net price (contract price minus storage cost) is for immediate delivery.

A producer in Lincoln, Ne is selling corn and three elevators are trying to buy from him. Elevator A is also located in Lincoln and offers $3.38/bu. Elevator B is located in eastern Iowa and offers $3.41/bu. Elevator C is located in southeast South Dakota and offers $3.37/bu. Based only on this information, which statement is true?

The net price from elevator C is lower than from elevator A, regardless the transportation costs.

A soybean producer has some grain stored and is considering selling it now. His local grain elevator is offering to pay $9.13/bu now, or $9.03/bu if the producer prefers to sell in November. In this case: (only one is correct)

The producer doesn't need to know the storage cost, because the price offered for November is already lower than the price offered for immediate delivery.

T/F Commodity producers have fewer marketing alternatives because they cannot set prices or benefit from individual promotion, since there are many other sellers of the same product.

True

T/F Both forward and futures contracts were created and developed to facilitate trade in the cash market, and not as speculative financial instruments.

True

T/F Forward and futures contracts have the same economic function.

True

T/F If you have a long position in the futures contract for May delivery you can offset it by either going short in the May contract or taking delivery of the underlying product during the delivery period.

True

T/F On a given day there can be different forward prices for the same commodity, depending on the delivery dates being negotiated.

True

T/F Speculators are more likely to trade futures contracts than forward contracts. That's because futures contracts are standardized and therefore easy to trade with anybody, futures contracts can be offset before delivery, and the financial integrity of futures contracts is guaranteed by the clearing house.

True

T/F when a futures or a forward contract is traded, ownership of the underlying commodity changes hands only when delivery occurs.

True

What is a Commodity

an economic good that can be legally produced and sold by almost anyone. they are not patented, copyrighted, or trademarked.

the basis becomes narrower (less negative) when both spot and futures price decrease, with spot price decreasing more than futures price.

false

Today I sell corn using one futures contract for December 2019 delivery. If next week I buy corn using one futures contract for March 2020 delivery, then I'll be out of the futures market.

false (delivery months)

Today I sell wheat at $5.70/bu using a futures contract for December 2019 delivery. If, later on, I buy wheat at $5.90/bu using a futures contract for December 2019 delivery, I'll be out of the market with a profit of $0.20/bu.

false (prices)

A corn producer has some grain in storage and is considering whether she should sell it now or hold it a while longer. Her local grain elevator is offering $3.29/bu to buy it today, $3.42/bu to buy it in April (3 months ahead), $3.53/bu to buy it in July (6 months ahead) and $3.58/bu to buy it in October (9 months ahead). The producer calculates storage costs and learns that it will cost her $0.03/bu/month to store corn. Based only on this information, the producer should sell her corn: (only one is correct)

for July, and receive $3.53/bu minus storage costs.

Commodity producers are considered to be "price takers" which implies that...

no single producer can individually control the market supply.

In commodity markets it is typically true that...

producers are "price takers"

A producer of a differentiated product has more marketing alternatives because...

producers of differentiated products control the supply of the product, since it is patented, copyrighted or trademarked. it is possible to benefit from promoting it.

What statements below are correct?

research evidence indicated that differences in marketing performance help explain differences in profitability of farming operations. a recent experiment at UNL suggests that profitability in farming operations is driven by a well-balanced combination of production efficiency and marketing.

Commodities such as corn and soybeans are produced once a year, but can be stored for several months. Therefore, a corn or soybean producer can have grain stored by the time she is making plans for the next harvest. In this case, we can say that: (check all that apply)

she should look at current market prices, storage costs and expected prices before making a decision on whether to sell now or keep storing the grain she currently has on storage.

T/F Today I buy wheat for December 2019 delivery in the futures market at $5.50/bu. If later I sell wheat using the December 2019 futures contract at $5.65/bu, I'll be out of the market with a profit of $0.15/bu.

true

t/f In a forward contract, if one side (e.g. buyer) defaults the other side (e.g. seller) will lose money. In a futures contract, if one side (e.g. buyer) defaults the clearing house will guarantee that the other side (e.g. seller) will not lose money.

true

t/f In the futures market, all contract terms are standardized. In addition, with the existence of a clearing house, we can say that even traders in futures markets are standardized.

true

t/f Speculators are more likely to trade futures contracts than forward contracts. That's because futures contracts are standardized and therefore easy to trade with anybody, futures contracts can be offset before delivery (most speculators don't want to deliver or take delivery because they don't have any business with the physical commodity), and the financial integrity of futures contracts is guaranteed by the clearing house.

true

the basis becomes narrower (less negative) when both spot and futures price increase, with spot price increasing more than futures price.

true