Exam 19: Commodity and Financial Futures

Margin is required only of those investors who take long positions in futures contracts.

Hedging by using commodity futures locks in a price for the supplier of a commodity.

The futures price of a commodity such as wheat is $2.50 a bushel. Futures contracts are for 10,000 bushels, and the margin requirement is $2,500 a contract. The maintenance market requirement is $1,000. A speculator expects the price of the commodity to rise and enters into a contract to buy wheat. a. How much must the speculator initially remit? b. If the futures price rises to $2.60, what is the profit and return on the position? c. If the futures price declines to $2.47, what is the loss on the position? d. If the futures price rises to $2.70, what must the speculator do? e. If the futures price continues to decline to $2.32, how much does the speculator have in the account?

The futures price of gold is $1,000. Futures contracts are for 100 ounces of gold, and the margin requirement is $3,000 a contract. The maintenance market requirement is $1,500. A speculator expects the price of gold to rise and enters into a contract to buy gold. a. How much must the speculator initially remit? b. If the futures price of gold rises to $1,005, what is the profit and return on the position? c. If the futures price of gold declines to $998, what is the loss on the position? d. If the futures price declines to $984, what must the speculator do? e. If the futures price continues to decline to $982, how much does the speculator have in the account?

The daily limit establishes the maximum amount by which the price of a futures contract may rise or fall during a day.

If a firm expects to buy a commodity in the future, it may hedge against a price increase by taking a short position in the futures contract.

Commodity contracts are 1. bought and sold through commodity exchanges 2. considered to be speculative investments 3. permit investors to take either long or short positions

Currency futures refer to contracts to buy and sell foreign moneys (i.e., foreign exchange).

Speculators who are short

Futures contracts are bought and sold in organized markets such as the Chicago Board of Trade.

Futures contracts offer the advantage of

Entering a futures contract to buy the S&P 500 stock index is a long position.

Investing in futures is

If an investor enters into a contract to sell corn, that position is closed by delivering the contract.

The maximum daily price increase that is permitted in the futures markets is

The cost of carrying a commodity suggests that the futures price will be less than the spot price.

Hedging with commodity futures

When an investor enters commodity contracts (also referred to as "purchases"), the individual takes physical delivery of the goods.

Investors can only buy futures, since these contracts cannot be sold.

Since neither the SEC nor the Federal Reserve have jurisdiction over commodity trading, these markets are unregulated.