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Ag Futures Exam 2
Futures Exam 2
| Question | Answer |
|---|---|
| True or False: Basis risk is greater than price risk | False |
| True or False: Hedging removes all risk | False, gets rid of price risk, left with basis risk |
| What is another term for short hedge? | Output Hedge |
| What does narrowing indicate when looking at basis from the short hedger stand point? | Stronger |
| What information is needed for expected profits? | Cost of Carry |
| What results from a short hedge realizing a better selling price than the target price? | Cash market strengthens (stronger basis) |
| In short hedging, if the basis narrows, what happens? | Money is made |
| When placing a short hedge, what position is taken in the futures market? | Short |
| True or False: If a hedger maintains opposite positions in the cash and futures market, it is no longer considered a hedge. | False |
| If crop production is strong and it is near harvest time, is the basis stronger or weaker and what does this do to a short hedger? | Weak, this is bad for short hedgers |
| Stronger basis will hurt the __ hedger and benefit the __ hedger. | long; short |
| What is an example of a cross hedge? | A sorghum producer buying corn futures |
| Using a similar contract for something that doesn't have a futures contract, but it is correlated to the price of your commodity. | Cross hedge |
| What is it called when a trader decides to hedge based on price expectations? | Selective Hedge |
| Any and all hedges are ____. | Anticipatory |
| What is the rule of thumb on the basis for a product when hedging in a main production area of a commodity? | Basis is normally negative |
| A short hedger will realize a price greater than target price if? | Basis is stronger |
| True or False: A corn farmer should short hedge to minimize the risk of rising prices. | False, falling prices |
| In a short hedge, what does a hedger do to protect him/herself against falling prices? | Sell futures |
| What can a long hedge be used for? | Purchasing an asset in the future in order to lock in the purchase price |
| What is a rolling hedge? | Allows to continue a hedge for additional months; offsets an original contract; opens a new position |
| A ___ basis is good for a buyer. | Negative |
| When a producer makes a hedge and the futures price goes up more than they expected what might they consider doing? | Place a hedge, but observe you can get a better target price, then roll the hedge forward |
| What does a long hedger short in basis mean? | The trader makes money if the basis decreases, and loses money if basis increases |
| True or False: Hedging can reduce price risk and also generate prices. | False |
| When does price risk occur for a feed lot operation? | On both ends |
| What is the purpose of hedging? | To reduce risk |
| For a ___ hedger, if basis weakens they make money | Long |
| If you are planning to lift a hedge in December, you would use the basis for which month? | January, because it is close to expiration but still actively trading |
| True or False: To continue a hedge for an additional month by offsetting the original contract while simultaneously initiating a new hedge in the same month this is called a rolling hedge. | False |
| What would a long hedger hope to expect to see from prices if he is buying now? | Prices go up |
| What affects target price? | Opening futures price and expected basis |
| The cash market price and the futures market price is ___ correlated. | Positively |
| What happens if the cash market price decreases relative to a futures price over time? | Basis weakens and benefits the long hedger |
| What characteristic is shared by both a long hedger and a short hedger? | Protection against fluctuations |
Created by:
ellenc6
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