A market is said to be in contango when:
- A.The futures price is higher than the spot price
- B.The futures price is lower than the spot price
- C.The spot price and the futures price are equal
- D.Trading in the futures contract is suspended
Correct answer
Explanation
The correct answer is A, the futures price is higher than the spot price. Contango is the normal condition of a commodity market, because anyone holding goods until a future date must pay for storage, insurance and interest on the money locked up, and those carrying costs are added to the spot price to arrive at the futures price. Option B is wrong because the opposite situation, in which the futures price is below the spot price, is called backwardation, and it usually signals a shortage of the commodity today or an expectation that prices will fall. Option C is wrong because an equal spot and futures price is not given a special name of this kind, and the difference between them is in any case called the basis. Option D is wrong because contango describes a price relationship and has nothing to do with the suspension of trading.
Read the full article: Commodity Market and Derivatives: Notes for Exams
Practice Questions
View allA derivative is a financial instrument whose value is:
- A.Fixed by the government
- B.Derived from an underlying asset
- C.Equal to the face value of a share
- D.Determined by the Reserve Bank of India
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A derivative has no independent value of its own; it is a contract whose worth is drawn from the price of something else, which may be a commodity such as gold or crude oil, a share, a stock index, a currency or an interest rate.
Read the full explanation →Which derivative contract gives the buyer a right but not an obligation to buy or sell the underlying asset?
- A.Forward
- B.Future
- C.Option
- D.Swap
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An option gives its buyer the right, but not the obligation, to buy or sell the underlying asset at the strike price on or before a stated date, and for this right the buyer pays a premium to the seller, who is called the writer.
Read the full explanation →A call option gives its holder the right to:
- A.Buy the underlying asset at the strike price
- B.Sell the underlying asset at the strike price
- C.Borrow the underlying asset free of interest
- D.Cancel the contract without paying a premium
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A call is the right to call the asset away from the seller, that is to buy it, and a buyer purchases a call when he expects the price of the underlying to rise above the strike price.
Read the full explanation →Which of the following is a feature of a futures contract but not of a forward contract?
- A.It is a contract for a future date
- B.It is traded on a recognised exchange with standard terms
- C.It can be used to hedge price risk
- D.It has an underlying asset
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A future is a standardised contract in which the exchange fixes the quantity, quality, delivery date and delivery centre, both parties deposit margin, positions are marked to market daily and a clearing corporation becomes the counterparty to both sides, so the risk of default is removed.
Read the full explanation →Commodity derivatives in India are regulated by which authority?
- A.Reserve Bank of India
- B.Forward Markets Commission
- C.Securities and Exchange Board of India
- D.Ministry of Consumer Affairs
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The Forward Markets Commission was merged with SEBI on 28 September 2015, the Forward Contracts (Regulation) Act of 1952 was repealed by the Finance Act of 2015, and commodity derivatives were brought within the definition of securities under the Securities Contracts (Regulation) Act, 1956, so SEBI now regulates them.
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