CPT Commodities & Futures Trading 1 — Questions and Answers
Question 1: What is a futures contract?
- An agreement to buy or sell an asset at a predetermined price on a specified future date (Correct answer)
- An option to purchase a commodity at the current market price within 30 days
- A spot market transaction settled within two business days
- A forward contract exclusively traded on over-the-counter markets
Correct answer: An agreement to buy or sell an asset at a predetermined price on a specified future date
A futures contract is a standardized, exchange-traded agreement to buy or sell an underlying asset at a set price on a specific future delivery date.
Question 2: What does 'initial margin' represent in futures trading?
- The total contract value that must be paid upfront in full
- The good-faith deposit required to open a futures position (Correct answer)
- The profit earned on the first day of holding a futures position
- The fee charged by the exchange for listing a futures contract
Correct answer: The good-faith deposit required to open a futures position
Initial margin is the performance bond or good-faith deposit a trader must post with the broker to open a futures position.
Question 3: Which of the following is the primary regulator of U.S. futures markets?
- Securities and Exchange Commission (SEC)
- Federal Reserve Board (FRB)
- Commodity Futures Trading Commission (CFTC) (Correct answer)
- Financial Industry Regulatory Authority (FINRA)
Correct answer: Commodity Futures Trading Commission (CFTC)
The CFTC is the independent federal agency responsible for regulating U.S. derivatives markets, including futures, swaps, and certain options.
Question 4: What is 'contango' in commodity futures markets?
- When spot prices exceed futures prices for a commodity
- When futures prices are higher than the expected future spot price (Correct answer)
- A situation where futures prices decline sharply over a single session
- When the basis between two delivery months narrows to zero
Correct answer: When futures prices are higher than the expected future spot price
Contango occurs when futures prices are higher than the expected future spot price, often because of storage costs and the cost of carry.
Question 5: What is 'backwardation' in a futures market?
- When futures prices exceed current spot prices
- When a trader reverses a position before delivery
- When spot prices are higher than futures prices for the same commodity (Correct answer)
- A strategy of selling futures while buying the underlying physical commodity
Correct answer: When spot prices are higher than futures prices for the same commodity
Backwardation is the market condition where the spot price of a commodity is higher than its futures price, indicating strong near-term demand.
Question 6: A trader who is 'long' a crude oil futures contract profits when:
- Crude oil prices fall below the contract's strike price
- Crude oil prices rise above the contract's purchase price (Correct answer)
- The contract expires without being exercised
- The futures premium over spot price increases
Correct answer: Crude oil prices rise above the contract's purchase price
A long futures position gains value when the price of the underlying commodity rises above the entry price, as the trader can sell at a higher price.
Question 7: What is 'marking to market' in futures trading?
- Placing buy orders at the current market price
- Daily settlement of gains and losses in a futures account based on end-of-day prices (Correct answer)
- Calculating the theoretical value of a futures contract at expiration
- The process of matching buyers and sellers on a futures exchange
Correct answer: Daily settlement of gains and losses in a futures account based on end-of-day prices
Marking to market is the daily process by which futures gains and losses are credited or debited to trader accounts based on each day's closing price.
CPT Commodities & Futures Trading 1
What is a futures contract?