Lesson #12 Quiz :Financial Markets (Financial Markets) answer 2025

Question 1

What is the effect of traders storing grain to wait for higher prices?

❌ Most grain ends up getting moldy in storage.
❌ Traders are able to monopolize the market.
❌ Most shortages could have been prevented if traders had not speculated on grain prices.
✅ It is essential in preventing grain shortages.

Explanation:
Grain storage allows supply to be shifted from periods of surplus to periods of scarcity, helping stabilize availability and prevent shortages.

Question 2

In commodities trading, what is the role of forwards and futures?

❌ Farmers and warehouses sell crops in both forwards and futures.
✅ Warehouses buy from the farmer in forwards, and then hedge on futures.
❌ Farmers sell in forwards and warehouses sell in futures.
❌ Farmers and warehouses sell exclusively in futures.

Explanation:
Warehouses typically lock in purchase prices with farmers using forwards and then hedge price risk using futures contracts.

Question 3

When an investor uses margin to buy or sell securities, how are the securities paid for?

❌ A combination of an investor’s own funds and futures
❌ On money borrowed from a broker only
❌ On money borrowed from a broker whereby the broker may tell the investor at any time to sell securities or contribute money
✅ A combination of an investor’s own funds and money borrowed from a broker

Explanation:
Margin trading involves leverage, combining the investor’s capital with borrowed funds from a broker.

Question 4

What is the primary purpose of purchasing futures if they are rarely delivered?

❌ To allow a corporation to buy and sell commodities which would be impossible without futures
❌ To purchase the industry standard of a commodity
✅ To protect against price fluctuations
❌ To negotiate the best price on a commodity with a farmer

Explanation:
Futures are mainly used for hedging price risk, not for physical delivery.

Question 5

What often happens to futures at the time of the crop for commodities with a specific harvest window?

❌ Due to defaults, investors could lose a lot of money.
✅ They tend to be traded exactly at the expected spot price at the contract’s maturity, making it difficult to profit as an investor.
❌ They tend to be traded above the expected spot price at maturity.
❌ They tend to be traded below the expected spot price at maturity.

Explanation:
As maturity approaches, futures prices converge to the spot price, limiting arbitrage profits.

Question 6

How is it possible to have a future based on the S&P 500?

❌ Delivery of S&P 500 index fund shares
❌ Settlement of other commodities
✅ Final cash settlement of the difference between the futures price and the actual index
❌ A fine for holding to maturity

Explanation:
Index futures are cash-settled because an index itself cannot be physically delivered.

Question 7

What is the fair value of a futures contract (Spot = $1000, storage = 3%, interest = 5%, 1 year)?

❌ $1800.00
❌ $1080.00
❌ $1000.00
✅ $1081.50

Explanation:
Using the cost-of-carry model with compounding gives a value close to $1081.50.

Question 8

How can you determine whether a future is in backwardation or contango?

❌ Positive slope = backwardation, negative = contango
❌ Based on second derivative
❌ Falling = contango, rising = backwardation
✅ If the price falls over time (negative derivative), it is backwardation; if it rises (positive derivative), it is contango

Explanation:

• Backwardation: Futures prices decrease with maturity

• Contango: Futures prices increase with maturity

Question 9

What is the Federal Funds Futures Market?

✅ Futures contracts created by an exchange board, settled monthly at 100 − the average federal funds rate
❌ Futures created by the government, settled monthly
❌ Futures created by an exchange board, settled yearly
❌ Futures created by the government, settled yearly

Explanation:
These exchange-traded futures reflect market expectations of the federal funds rate.

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