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LOS a: Explain the relationship between spot prices and expected future prices in terms of contango and backwardation. ffice ffice" />
Q1. Which of the following best defines a backwardated commodities market?
A) The futures price is below the current spot price.
B) The futures price is below the expected future spot price.
C) The futures price is above the current spot price.
Correct answer is A)
A backwardated commodities market occurs when the futures price is below the current spot price
Q2. Which of the following best defines a contango commodities market?
A) The futures price is above the current spot price.
B) The futures price is below the expected future spot price.
C) The futures price is below the current spot price.
Correct answer is A)
A contango commodities market occurs when the futures price is above the current spot price
Q3. In the futures market for a variety of wheat, suppose breakfast cereal companies are the dominant market participant. What will be the most likely shape of the futures price curve?
A) An upward sloping curve, reflective of contango markets.
B) A downward sloping curve, reflective of contango markets.
C) An upward sloping curve, reflective of backwardated markets.
Correct answer is A)
The dominant traders in the market are long hedgers (i.e., users of the commodity) since they purchase wheat for cereal production. Thus, they will go long futures contracts to hedge price exposure. To induce speculators to take the other side of the futures contract, they must pay a premium for the hedging benefit received. As a result, the futures price curve will be upward sloping, which would be classified as a contango market.
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发表于 2009-3-2 09:13
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