LOS b, (Part 2): Identify and explain the arbitrage situations which arise as a result of the convenience yield of commodity spreads.

Q1. Which of the following statements regarding commodity spreads is least accurate?

A)   A trader creates a crush spread by holding a long position in soybeans and a short position in soybean meal and soybean oil.

B)   A commodity spread results from a commodity that is an input in the production process of other commodities.

C)   The difference in prices of crude oil, heating oil, and gasoline is known as a crush spread.

Q2. A trader in soybean futures contracts has discovered an arbitrage opportunity involving soybean futures and futures on soybean meal and soybean oil. Of the following, this most likely can occur with a:

A)   crack spread by holding a long position in soybeans and a long position in soybean meal and short position in soybean oil.

B)   crush spread by holding a short position in soybeans and a long position in soybean meal and soybean oil.

C)   crack spread by holding a long position in soybeans and a long position in soybean meal and soybean oil.

LOS b, (Part 2): Identify and explain the arbitrage situations which arise as a result of the convenience yield of commodity spreads. fficeffice" />

Q1. Which of the following statements regarding commodity spreads is least accurate?

A)   A trader creates a crush spread by holding a long position in soybeans and a short position in soybean meal and soybean oil.

B)   A commodity spread results from a commodity that is an input in the production process of other commodities.

C)   The difference in prices of crude oil, heating oil, and gasoline is known as a crush spread.

Correct answer is C)

The difference in prices of crude oil, heating oil, and gasoline is known as a crack spread.

Q2. A trader in soybean futures contracts has discovered an arbitrage opportunity involving soybean futures and futures on soybean meal and soybean oil. Of the following, this most likely can occur with a:

A)   crack spread by holding a long position in soybeans and a long position in soybean meal and short position in soybean oil.

B)   crush spread by holding a short position in soybeans and a long position in soybean meal and soybean oil.

C)   crack spread by holding a long position in soybeans and a long position in soybean meal and soybean oil.

Correct answer is B)       

The only possible answer is a position in the input (e.g., short) and the opposite position (long in this case) in both of the outputs. This is called a crush spread.

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