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True or False: Basis risk is greater than price risk
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True or False: Hedging removes all risk
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Ag Futures Exam 2

Futures Exam 2

QuestionAnswer
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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