Deck 6: The Wide World of Futures Contracts

Question 1

When answering the questions below, refer to the following table of commodity forward and spot prices. The annual risk free interest rate is 4.0%.
$$\begin{array} { l c c c } \begin{array} { r } \text { Expiration } \\\underline {\text { Time }}\end{array} & \begin{array} { c } \text { Pork Bellies } \\\underline {\text { cents/pound }}\end{array} & \begin{array} { c } \text { Com } \\\underline {\text { cents/bushel }}\end{array} & \begin{array} { c } \text { Soybeans } \\\underline {\text { cents/bushel }}\end{array} \\\text { Today=spot } & 540 & 212 & 430 \\6 \text { months } & 560 & 208 & 440 \\12 \text { months } & 590 & 203 & 452 \\18 \text { months } & 625 & 200 & 445 \\24 \text { months } & 655 & 195 & 437\end{array}$$

-What is the approximate annualized lease rate on the 18-month soybean forward contract?

A) 0.69%
B) 1.21%
C) 1.69%
D) 2.31%

Answer 1

1.69%

Question 2

Which of the following terms most accurately describes the forward curve for soybeans over the next two years?

A) Contango
B) Backwardation
C) Contango and backwardation
D) None of the above

Answer 2

C

Question 3

If hog farmers expect a return of 8.0% on their investment in livestock, what is the approximate implied increase in pork belly commodity prices over the next 6 months?

A) 3.75%
B) 4.59%
C) 5.26%
D) 6.37%

Answer 3

B

Question 4

The 6-month futures price for oil is $21 per barrel (or 50 cents per gallon). The 6-month futures prices for gasoline and heating oil are 80 cents and 69 cents, respectively. What is the gross margin on a simple 3-2-1 crack spread?

A) $0.79
B) $0.65
C) $0.57
D) $0.42

Question 5

The spot price of gasoline is 106 cents per gallon and the annualized risk free interest rate is 4.0%. Given a lease rate of 1.0%, a continuously paid storage rate of 0.5%, and a convenience yield of 0.75%, what is the no-arbitrage price range of a 1-year forward contract (in cents)?

A) 108.96 to 109.78
B) 107.42 to 108.96
C) 106.00 to 108.96
D) 107.42 to 109.78

Question 6

If the December HDD contract for Chicago is quoted as 994, what is the implied average HDD for the month of December?

A) 26
B) 32
C) 49
D) 65

Question 7

The spot price of corn is $2.23 per bushel. The opportunity cost of capital for an investor is 0.5% per month. If storage costs of $0.04 per bushel per month are factored in, all else being equal, what is the likely price of a 4-month forward contract?

A) $2.114
B) $2.124
C) $2.212
D) $2.231

Question 8

Nine-month gold futures are trading for $306 per ounce. The spot price is $295 per ounce. LIBOR during each of the upcoming 4 quarters is listed as 1.04%, 1.22%, 1.30%, and 1.35%, respectively. Calculate the 9-month lease rate on the futures contract.

A) 2.4%
B) 2.1%
C) 1.3%
D) 0.0%

Question 9

The spot price of corn is $2.60 per bushel. The opportunity cost of capital for an investor is 0.6% per month. If storage costs of $0.03 per bushel per month are factored in, all else being equal, what is the future value of storage costs over a 6-month period?

A) $0.1534
B) $0.1684
C) $0.1772
D) $0.1827

Question 10

Interest rates on the U.S. dollar are 5.4% and euro rates are 4.6%. Given a dollar per euro spot rate of 0.918, what is the 6-month forward rate ($/E)?

A) 0.912
B) 0.917
C) 0.922
D) 0.934

Question 11

Oil is selling at a spot price of $42.00 per barrel. Oil can be stored at a cost of $0.42 per barrel per month. The opportunity cost of capital is 7.2% per year (or 0.6% per month). What is the gain or loss realized by an oil refinery that floats its exposure and purchases oil on the spot market in 2 months at a price of $43.00 per barrel, instead of hedging with a forward contract?

A) $0.35 gain
B) $0.35 loss
C) $1.00 gain
D) $1.00 loss

Question 12

The lease rate on the 6-month soybean contract is 0.35%. What is the implied annual storage cost if the cost is continuously paid and proportional?

A) 1.0%
B) 2.0%
C) 3.0%
D) 4.0%

Question 13

When answering the questions below, refer to the following table of commodity forward and spot prices. The annual risk free interest rate is 4.0%.
$$\begin{array} { l c c c } \begin{array} { r } \text { Expiration } \\\underline {\text { Time }}\end{array} & \begin{array} { c } \text { Pork Bellies } \\\underline {\text { cents/pound }}\end{array} & \begin{array} { c } \text { Com } \\\underline {\text { cents/bushel }}\end{array} & \begin{array} { c } \text { Soybeans } \\\underline {\text { cents/bushel }}\end{array} \\\text { Today=spot } & 540 & 212 & 430 \\6 \text { months } & 560 & 208 & 440 \\12 \text { months } & 590 & 203 & 452 \\18 \text { months } & 625 & 200 & 445 \\24 \text { months } & 655 & 195 & 437\end{array}$$

-What is the approximate annualized lease rate on the 12-month corn forward contract?

A) 0.00%
B) 2.25%
C) 4.50%
D) 8.25%

Question 14

During one winter week, the city of Indianapolis had daily average Fahrenheit temperatures of 55, 45, 38, 48, 35, 50, and 42 degrees. What is the HDD for this week?

A) 100
B) 122
C) 135
D) 142

Question 15

Given a lease rate of 7.0% on the 24-month corn forward contract, what is the approximate potential arbitrage profit per contract?

A) 3.68 cents
B) 4.65 cents
C) 5.84 cents
D) 6.90 cents

Question 16

Forward prices for gold, in dollars per ounce, for the next five years are 305, 333, 360, 388, and 425, respectively. A mine can be opened for 3 years at a cost of $600. Annual mining costs are a constant $100 and interest rates are 5.0%. When should the mine be opened to maximize NPV?

A) Year 1
B) Year 2
C) Year 3
D) Never

Question 17

Interest rates on the U.S. dollar are 6.5% and euro rates are 5.5%. The dollar per euro spot rate is 0.950. What is the arbitrage profit on a required $1 million Euro payment if the forward rate is 0.980 dollars per Euro and the exchange occurs in one year?

A) $10,000
B) $21,000
C) $28,000
D) $34,000

Question 18

During one fall week, the city of Indianapolis had daily average Fahrenheit temperatures of 85, 72, 65, 70, 76, 62, and 73 degrees. What is the CDD for this week?

A) 3
B) 35
C) 48
D) 51

Question 19

An investor wants to hold 200 euro two years from today. The spot exchange rate is $1.31 per euro. If the euro denominated annual interest rate is 3.0% what is the price of a currency prepaid forward?

A) $200
B) $206
C) $231
D) $247

Question 20

The current currency spot rate is $1.31 per euro. If dollar denominated interest rates are 3.0% and euro denominated interest rates are 4.0%, what is the likely dollar per euro exchange rate for a 2-year forward contract?

A) $1.28
B) $1.30
C) $1.31
D) $1.33

Question 21

Explain the steps necessary to take advantage of an arbitrage opportunity, which may exist between the dollar and yen, when a future yen payment is required.

Question 22

Why is the cash-and-carry strategy employed in the financial futures market not readily available in the commodity futures market?

Question 23

Housing index and housing futures contracts attempt to track which of the following?

A) Change in value of repeat home sales
B) The value of home improvements
C) New home construction values
D) Value of homes sold in non arms-length transactions

Question 24

Give one example of how price discovery functions in the commodity futures market.

Question 25

What function does the convenience yield serve in setting forward prices and how does this influence arbitrage opportunities?

Question 26

Which of the following is most likely to short a housing futures contract?

A) Home buyer
B) Renter
C) New home builder
D) Real estate broker

Question 27

Explain how a negative correlation between agricultural production and commodity prices creates a natural hedge.