ACE 222 Exam 2

A producer of corn would be considered

A natural long in the corn market

A cattle feeder who needs a continual supply of corn to feed to her cattle is

A natural short in the corn market

An ethanol plant that continually needs to acquire corn to produce ethanol and continually needs to sell the ethanol it produces is

A natural short in corn and natural long in ethanol

Consumers of a commodity are described as

Natural shorts

A natural long will prefer

Narrow Basis

A natural short will prefer

Wide Basis

If they had to choose one of these, a natural long would prefer

A really high futures price

If they had to choose one of these, a natural short would prefer

A really low futures price

Which would lead to the best possible price for a natural long?

A high futures price and narrow basis

Which would lead to the best possible price for a natural short?

A low futures price and wide basis

Both natural longs and natural shorts would like

To separate the basis part of the cash price from the futures part of the cash price

If you have a long position in the cash market and a short position in the futures market, as prices go up and down the gain or loss in one will be exactly equal to the loss or gain in the other so long as

The basis remains constant

Who would be worried about the price of a commodity falling?

A natural long

Who would be worried about the price of a commodity rising?

A consumer of that commodity

When a corn farmer hedges, the risk

Is transferred to the speculator who took the other side of the futures part of the hedge

When would a corn farmer hedge?

When they see a favorable price can be achieved by hedging

The good news for a natural long after they have placed a hedge is

They won't be hurt by falling prices

The good news for a natural short after they have placed a hedge is

They won't be hurt by rising prices

The bad news for a natural long after they have placed a hedge is

They won't be helped by rising prices

The bad news for a natural short after they have placed a hedge is

They won't be helped by falling prices

Someone who produces a branded product is a

Price maker

Someone who produces a non-branded fungible commodity is a

Price Taker

A forward contract is

A cash market transaction

Which is true regarding basis?

Basis is specific to a specified place at a specified time

Which is true regarding basis?

Basis usually changes more slowly than futures prices do

The chance that a farmer's expectation about basis will turn out to be wrong is referred to as

Basis Risk

On Monday, a corn farmer sees that basis for corn ash the local elevator is -14. Four days later the basis has changed to -16. The farmer would say that basis

Widened

On Monday, a corn farmer sees that basis for corn at the local elevator is -14. Four days later the basis has changed to -12. The farmer would say that basis

Narrowed

On Monday, a corn farmer sees that basis for corn at the local elevator is -2. Four weeks later the basis has changed to +2. The farmer would say that basis

Inverted

On Monday, a corn farmer sees that basis for corn at the local elevator is -26. Four days later the basis has changed to -28. The farmer would say that basis

Weakened

On Monday, a corn farmer sees that cash corn at the local elevator is 359 and the nearby futures contract is at 379. Four days later cash corn at the local elevator is 373 and the nearby futures contract is at 390. The farmer would say that basis

Narrowed

On Monday, a corn farmer sees that cash corn at the local elevator is 402 and the nearby futures contract is at 412. Four days later cash corn at the local elevatory is 422 and the nearby futures contract is at 420. The farmer would say that basis

Inverted

On Monday, a corn farmer sees that cash corn at the local elevator is 313 and the nearby futures contract is at 343. Four days later cash corn at the local elevator is 316 and the nearby futures contract is at 348. The farmer would say that basis

Weakened

On Monday, a corn farmer sees that cash soybeans at the local elevator are at 868 and the nearby futures contract is at 873. Four days later cash soybeans at the local elevatory are at 846 and the nearby futures contract is at 854. The farmer would say that basis

Weakened

A corn farmer sees that cash soybeans at the local elevatory are at 1143 and the nearby futures contract is at 1141. The farmer would say that basis is

2 over

A corn farmer sees that cash soybeans at the local elevator are at 1141 and the nearby futures contract is at 1143. The farmer would say that basis is

2 under

A corn farmer sees that cash wheat at eh local elevator is at 586 and the nearby futures contract is at 585. The farmer would say that basis is

1 over

A corn farmer who looks at the list of futures contract prices on their phone and notices that the prices are higher for the later dated contracts and lower for the nearby contracts would say the forward curve is

Normal

A corn farmer who looks at the list of futures contract prices on their phone and notices that the prices are lower for the later dated contracts and higher for the nearby contracts would say the forward curve is

Abnormal

A corn farmer who looks at the list of futures contract prices on their phone and notices that the prices are lower for the later dated contracts and higher for the nearby contracts would say the forward curve is

Inverted

A corn producer who sees an inverted forward curve might say

The market will reward me for selling now instead of later

When traders engage in arbitrage, the result is

The price of the cheaper contract rises and the price of the more expensive contract falls, which brings the price relationship back to normal

Spread trading is sometimes referred to as

Arbitrage

Which is considered a safer way to speculate

Spread Trading

The WSJ article refers to the later-dated contracts as the

Deferred contracts

The purpose of margin is

To guarantee a trader's financial performance

The contract month that is about to expire is sometimes referred to as the

Delivery Month

Once delivery is underway

Neither party is allowed to make an offsetting trade to liquidate their position

The WSJ article says that the price of later-dated contracts is normally higher because of

Storage and other costs

Margin account funds

Are put into an account that can only be used for margin purposes

Initial Margin is always

110% of the maintenance margin

The WSJ article refers to the nearer-dated contracts as the

Shorter-dated contracts

When a trader gets a margin call, they must deposit the required funds

By the start of the next trading session

If a trader does not meet a margin call

The trader's position will be liquidated

Before a futures position is first established

Both buyer and seller are required to post initial margin

The WSJ article says that backwardation suggests

Very tight nearby supplies of the commodity

When a futures position is established, which must be posted?

Initial margin

One possible cause of backwardation, according to the article is

An unexpected surge in demand

Who establishes margins?

The clearinghouse

At delivery, the futures price and the cash price of the commodity come together. This is called

Convergence

According to the textbook, initial margin is usually between

5% and 10% of the full value of the futures contract

The article suggests that you can think of backwardation as

A premium for convenience

The creation of stock index futures led to the introduction of

Cash settlement

Cash settlement is often used for financial products, and sometimes it is also used for some physical commodities such as

Perishable products

U.S agriculture is described as

A large number of very small farms and a small number of very large farms

When economists talk about the "structure" of an industry, they are talking about the

Number, size, and concentration of firms in that industry

Which is true?

About 5% of all U.S. farms account for 75% of all agricultural sales

Where is the majority of US corn grown?

Primarily in the Midwest and Upper Midwest

The local elevator, to whom most Midwestern farmers deliver and sell their grain is referred to as the

"Country" elevator

In addition to buying grain from farmers and re-selling it to larger elevators and end-users, many elevatory also generate revenue from

Storing and drying grain for a fee

Which is true regarding farmers in the Midwest?

They usually have several choices regarding to where to deliver and sell their grain

Grain that is currently being delivered to an elevator

Could be grain that is being sold right now, or could be grain that is being delivered in fulfillment of a forward contract made in the past, or could be grain that isn't sold and is just going to be stored in the elevator

Why do they call it an "elevator"?

The grain that is delivered is dumping into in-ground pits then it is elevated from ground level to the top of the storage bins, using a "bucket elevator"

One of the advantages of the elevator system is that

"Middlemen" like the elevator reduce transactions costs

When a farmer calls the elevator and sells grain using a forward contract, the elevator will make the agreement verbally, then

Follow up by sending the farmer a written contract that must be signed and returned to the elevator

Regarding a forward contract

It's a legally binding agreement that can and will be enforced in court, if either party tries to back out

An agreement between an elevator and a farmer for the delivery and sale of grain at a prescribed date in the future, at a price agreed upon now, is a

Forward Contract

If a farmer told you they just sold 14,000 bushels of corn at an agreed-upon price for futures delivery and payment, you would conclude

They used a forward contract

If a farmer told you they just sold 14,000 bushels of corn at an agreed-upon price for future delivery and payment, you would conclude

They made a cash sale

When a farmer makes a cash sale, which is true?

It could be grain the farmer is harvesting and delivering that day, or grain that the farmer is taking out of an on-farm grain storage bin, or grain that has already been stored in the elevator

Farmers

Typically are marketing at least two crop years of grain at any given time

Which is true?

The USDA's crop marketing year is 12 months, but a farmer's marketing period for a given crowd is often 18 to 20 months

Which is true regarding basis?

Basis is specific to a specified place at a specified time

The map shown in the video displays wide variance between basis levels. This is because

Basis depends on local supply and local demand, and those vary a lot from place to place

One typical basis pattern is that, here in the Midwest, we usually expect

Cash prices to be lower than futures prices

Which is true regarding basis?

Basis usually changes more slowly than futures prices do

Basis

Is usually widest at harvest

The chance that a farmer's expectation about basis will turn out to be wrong is referred to as

Basis Risk

Why is there a somewhat-predictable relationship between cash and futures prices?

One can be used as a substitute for the other. So, when the price relationships are out of the normal range, commercial market participants (like the large grain companies) will buy the one that is cheapest and avoid buying the one that is most expensive. This arbitrage will bring the cash and futures prices back into their normal range.

How do farmers know, or predict, what basis will be at different times of year?

Typical basis patterns are common knowledge in the ag community and many farmers rely on elevator managers, relatives, and other farmers for information regarding basis

Which is true?

Basis=the cash price minus the nearby futures contract price

Which is true?

The nearby futures contract price plus basis equals the cash price

When basis changes so that cash prices are at a greater discount to futures than they used to be, farmers and traders would say that basis

Widened

When basis changes so that cash prices are at a smaller discount to futures than they used to be, farmers and traders would say that basis

Narrowed