Commodities & Futures Trading Flashcards

What is a futures contract?

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.

What does 'initial margin' represent in futures trading?

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.

Which of the following is the primary regulator of U.S. futures markets?

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.

What is 'contango' in commodity futures markets?

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.

What is 'backwardation' in a futures market?

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.

A trader who is 'long' a crude oil futures contract profits when:

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.

What is 'marking to market' in futures trading?

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.