1. What is a basis? How is a basis relationship used? What is basis risk? Who is exposed to basis risk?
2. How do futures contracts facilitate trading among strangers?
3. What role does a clearing house play? How does it perform its function? How does the clearing house manage its risk? Who is protected in a clearing member default? Who is not?
4. How would you explain an "Inverted Market"?
5. What are the differences between futures and forward markets?
6. Do futures prices contain information about future spot prices?
7. Develop the regulatory scheme for futures markets. What role do the Exchanges, the CFTC and NFA play?
8. Explain the theory of Normal Backwardation. Explain the expected effects on price relationships and risk premiums. How would you use the theory of Normal Backwardation to explain a futures market at Full Carry?
9. Define convenience yield. Can the convenience yield ever be zero? Under what conditions? What is the relationship between convenience yield and the cost of borrowing a commodity?
10. Why are crude oil futures contracts often in backwardation? Can you make profits on this observation? If yes, How? If no, Why?
11. What are the economic functions of futures markets?
12. How is cash settlement different from delivery? Why would an exchange offer a futures contract with cash settlement?
13. "Daily trading volume was higher than normal but open interest remained unchanged." Explain this statement and the conditions under which open interest rises, remains unchanged, or falls.
14. For a futures contract to be successful, what characteristics should the cash market have? What might be the reasons why some futures contracts fail?
15. You have been requested by the secretary of agriculture of a Central American country to determine whether cattle produced in that country could be hedged using the Chicago Mercantile Exchange(CME) live cattle contract. What information would you need to collect to determine whether this is feasible? What suggestions would you propose (to the country, to the CME) to make hedging Central American cattle in the CME cattle contract?
16. Should a corporation hedge? Why might it increase firm value? Are there any reasons why a firm would not want to hedge? Explain in detail.
17. In class we discuss that given a choice between liquidity and basis risk, futures markets chose institutional arrangements that favored liquidity. Who is most impacted by this choice and why do you think maximizing liquidity is more important than minimizing basis risk?
18. The movies Goldfinger (James Bond Movie) and Die Hard 3 (Die Hard with a Vengeance) both involve the perpetrators doing something to gold. Assume that the bad guys succeed with their plot, what would be the impact on gold prices and gold spreads in each case? Please explain how you reached that conclusion (see plot summaries of the movies below).