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Econ 235 Final Exam
Terms in this set (61)
Demand for pork (a normal good) will shift in if consumer income in China decreases
If a trader is short in the cash market, she has the capability to deliver a commodity
A trader that is long in the futures market has purchased a futures contract
A farmer who takes a long position in the futures market is hedging against a potential reduction in prices
A demand function is inelastic if the absolute value of its elasticity is less than one
The cross-price elasticity for a complement is negative
All else equal, a decrease in cattle herds will decrease derived demand for U.S. corn
A futures contract is essentially the same thing as a forward contract
The income elasticity of a necessity is between zero and one
The price of a futures contract represents the price the market expects the commodity to when the contract expires
A farmer that is holding corn is short in the cash market
The price of non-storable commodities will reflect both current and expected future market conditions
In a long hedge the trader has a short position in the cash market and a long position in the futures market
Own price increases of a good cause the demand curve to shift
A firm's long-run supply function is the segment of the marginal cost curve above the average fixed cost curve
How are daily gains and losses settled in the futures market?
Through withdrawals and deposits in the margin account
An ethanol producer purchases 10 futures contract of corn for delivery in December for a price of $4/bu. Each contract represents 5,000 bu of corn. What is the total gain or total loss to the ethanol producer if the price then increases to $5/bu?
Total gain of $50,000
Which of the following is an example of a forward contract?
A farmer near Ames and Key Co-op agree on a price and quantity of corn to be delivered 6 months from now
Why does the supply curve for a commodity tend to be more elastic in the long run than in the short run?
All inputs are variable in the long run
In the short-run, can a firm stay in the market if its profit is negative?
Yes, if operating minimizes its losses
You observe last week that the price of organic tomatoes in Ames was $4/lb and that the quantity sole was 50 lbs. This week, you observe the price of organic tomatoes increased to $5/lb and consumption is 30 lbs. What is the elasticity of demand for organic tomatoes?
Based on your answer above, which of the following statements best characterizes demand for organic tomatoes?
Demand for organic tomatoes is elastic
Yesterday the future price of corn for March delivery in Chicago was $4.40/bu and today it is $4.30/bu. Yesterday, the local cash price was $4.87/bu. What was the local basis yesterday?
All else equal, what is the impact of an increase in the price of feed on cattle markets?
Increase in the price and decrease in the quantity of fed cattle
Hydraulic fracturing has unleashed a large supply of natural gas in the U.S., leading to large decreases in natural gas prices and therefore fertilizer (an important input in corn production) costs. What is the impact of the hydraulic fracturing revolution on the market for corn markets?
A shift to the right of the supply curve and a decrease in the price of corn
The corn basis in Nevada is -$0.20/bu and the corn basis is Gilbert is -$0.25/bu. A farmer located exactly halfway between Nevada and Gilbert should:
Sell his corn in Nevada
Why do you expect the price of storable commodities such as grains to increase during a crop season?
To compensate for the cost of storage and the interest rate
If the transactions cost between two locations increases, what happens to the basis between these two locations if trade continues?
The basis widens
Suppose you have wheat in storage and that you can sell your wheat immediately at $7.00/bu. You expect that the price of wheat in six months will be $8.00/bu. Your cost of storage is $0.75/bu for six months. One dollar in six months is worth one dollar to you today. What is the profit maximizing strategy?
Hold onto your wheat and sell in six months
How does technological progress affect long-run supply of agricultural products?
All of the above
A farmer can establish a price floor, but still benefit from a price increase, for her grain by purchasing a futures contract
The strike price is the price a trader pays to purchase a put option
All else equal, the lower the strike price, the higher the premium of a call option will be
The buyer of an option is required to maintain a margin account by the clearinghouse
The time value of an option is zero at the expiration date
By hedging with futures, buyers and sellers are eliminating futures price level risk and assuming basis level risk
The strike price of an option is determined by the market
An option buyer has limited loss potential (premium paid) and unlimited gain potential
At the expiration the premium of an option is equal to the option intrinsic value
A trader that wants the right but not the obligation to go short in the futures market purchases a put option
A hedger can profit from a change in the basis
A farmer can remove price and basis risk by hedging with futures contracts
A call option is in the money if the futures price is greater than the strike price
If market volatility increases, the time value portion of the option generally increases
The intrinsic value of an option is always larger than its time value
A November Soybean call has a strike price of $11.50. The underlying November futures price is $12.00. The intrinsic value is _________.
A May corn put has a strike price of $5.80. The underlying May futures price is $5.55. The intrinsic value is ________.
All else being equal, an option with 60 days remaining until expiration has more or less time value than an option with 30 days remaining until expiration
More time value
In which of the following situations would you hedge using a futures contract?
You are long in the cash market, the price is at a historical high, and you are certain that the price will decline
Complete the sentence- A put option on a futures contract gives its owner:
The right to sell a futures contract at the strike price
What happens to the intrinsic value of a call option that is out of the money if the price of the underlying futures contract declines?
The intrinsic value remains zero
You hold a put option on December corn with a strike price of $4.00/bu. The December corn futures price is $4.75/bu. The intrinsic value of the option is:
You hold a call option on December corn with a strike price of $3.50/bu. The December corn futures price is $4.00/bu, and the option premium is $1.20/bu. What is the time value?
Which statement best describes who benefits from basis strengthening over a hedge with a futures contract?
Buyers lose, sellers gain
When hedging with options, what is the cost to enter into your hedging position?
The option premium
Suppose you hedge with a put option. What are the consequences of selecting a put option with a lower strike price?
Lower premium, lower price floor
If you pay a premium of 10 cents per bushel for a Corn put option with a strike price of $6.60, what's the most you can lose?
July corn futures are trading at $6.00. A $5.50 July corn call is trading at a premium of 60 cents. The time value is _______.
September Soybean futures are trading at $12.20. A $12.50 September Soybean put is trading at a premium of 38 cents. The time value is _________.
The components of option premiums are:
The sum of (A) and (B)
The premise that makes hedging possible is cash and futures prices:
Generally change in the same direction by similar amounts
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