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# Enter our weekly Trivia Contest and Win!!!!

#### Nicole Seaman

Staff member
Subscriber
Head on over to our Facebook page to enter our Trivia Contest! You will be entered to win a $15 gift card of your choice from Starbucks, Amazon or iTunes (iTunes is US only)! If you do not have Facebook, you can enter right here in our forum. Just answer the following questions: These are BASIC questions about Futures Trading and Terminology sourced from new (in 2014) FRM Reading 14 (Futures and Options by The Institute for Financial Markets) Question 1. Which of the following items in a futures contract is standardized? A. The total number of contracts available for purchase and sale B. The size: the amount of the underlying item covered by the contract C. The price of the underlying commodity D. None of the above Question 2: Which of the following is a prerequisite for a commodity futures contract? A. It must be paired with a comparable option on the same commodity. B. The commodity underlying the futures contract must have low price volatility. C. There must be competition in the underlying cash market. D. The commodity must be storable. Question 3: Which of the following is essential to the operation of a successful futures contract based on a physical commodity? A. Viable spot or actuals market in the same or comparable cash commodities as those underlying the futures market B. Competitive market conditions in both production and distribution channels C. Access to inspection and grading facilities D. All of the above Question 4: If a client holding 1 short futures position buys 1 futures contract to offset her existing position and a client holding 1 long futures position sells 1 futures contract to offset his existing position, open interest. A. Decreases by 2 contracts. B. Increases by 2 contracts. C. Is not changed. D. Decreases by 1 contract. Question 5. The counterparty to every cleared futures or futures option trade is: A. The customer's futures commission merchant. B. The exchange's clearinghouse. C. The customer who took the opposite side of the trade. D. The Introducing Broker (IB) #### Alex_1 ##### Active Member Hi there, I would answer with the following: Question 1 - B Question 2 - C Question 3 - D Question 4 . D Question 5 - B #### Atin ##### Consultant Hi, here are my answers: Q1 - B Q2 - C Q3 - D Q4 - C Q5 - B #### frm_risk ##### New Member My answers are: 1 – B 2 – C 3 – D 4 – C 5 – B Thank you. #### BlackSwan ##### New Member #1: B #2: C #3: D #4: C #5: B #### Nicole Seaman ##### Director of FRM Operations Staff member Subscriber Make sure to get your entries in today!! We will be drawing a winner today after the contest closes at 5:00 p.m. EST #### Nicole Seaman ##### Director of FRM Operations Staff member Subscriber It is time to announce our winners for this week! Thank you all for your participation in our Facebook Trivia Contest!! The winners are: @frm_risk and @BlackSwan Congratulations to our winners! Please email me at [email protected], reply to this post or start a conversation with me here on the forum to let me know if you would like to redeem your prize now or let it accrue. Prizes: •$15 iTunes gift card (US only)
• $15 Amazon gift card •$15 Starbucks gift card

#### Alex_1

##### Active Member
Hi,

I just want to understand something regarding question 4. I read Chapter 1 from "Futures and Options" (The Institute of Financial Markets), which is an assigned reading for the FRM exam. From there I understood that "open interest decreases if both parties, the buyer and the seller, are offsetting existing long and short positions." (page 8 in GARP book no. 3 Financial Markets and Products, 2014).
If this is the case then I don't understand why the answer to question 4 should be C ("Is not changed") and not D ("Decreases by 1 contract")?

Thanks.

#### David Harper CFA FRM

##### David Harper CFA FRM
Staff member
Subscriber
Hi @Alex, you are correct, great point
... I guess we aren't requiring all correct answers @Nicole Manley? I agree with that, unlike the regular forum stars, the intent here is just participation ....

The correct answers are (Alex's responses above are all correct)
1. B
2. C
3. D
4. D
5. B
The detail
• Question 1. Which of the following items in a futures contract is standardized?
Answer 1: B.The size (the amount of the underlying item covered by the contract). A prerequisite for futures and options markets is that the underlying commodity or financial instrument be capable of standardization in terms of its size, quality, delivery, packaging, etc. The price of a futures contract and the number of contracts traded are determined by the forces of supply and demand on the exchange.

• Question 2: Which of the following is a prerequisite for a commodity futures contract?
Answer 2: C. There must be competition in the underlying cash market. If the underlying cash market lacks volatility, is monopolistic or otherwise noncompetitive, there likely is very limited need to shift price risk. There is no requirement that a futures contract be paired with an options contract. In fact, there have been futures contracts since the mid-nineteenth century, and during most of the time, options on futures have not been traded. Further, price volatility, rather than its absence, encourages both hedging and speculation. Futures contracts exist on non-storable products such as live hogs and live cattle. Finally, it is in competitive markets that commercial entities are subject to price risks that are hedgeable in futures markets.

• Question 3: Which of the following is essential to the operation of a successful futures contract based on a physical commodity?
Answer 3: D. All of the above. Successful futures markets require a degree of competitiveness in both the underlying cash and futures markets and assurance that both markets have integrity. In addition, successful futures markets require participation by hedgers as well as speculators.

• Question 4: If a client holding 1 short futures position buys 1 futures contract to offset her existing position and a client holding 1 long futures position sells 1 futures contract to offset his existing position, open interest.
Answer 4: D.Decreases by 1 contract. The offsetting of these two client's positions results in a decrease of open interest by one contract.

• Question 5: The counterparty to every cleared futures or futures option trade is:
Answer 5: B.The exchange's clearinghouse. After a futures trade is matched and cleared, the futures clearinghouse interposes itself between the original buyer and seller and becomes the counterparty to every open position. This is the basis of the statement, "The clearinghouse becomes the buyer to every seller and the seller to every buyer of a cleared futures trade."

#### Alex_1

##### Active Member
Thanks, David, I wasn't offended or anything, I just wanted to know if my thought process there was correct.

#### Nicole Seaman

##### Director of FRM Operations
Staff member
Subscriber
Hi @Alex_1 and @David Harper CFA FRM CIPM,

I apologize that I completely forgot to post the correct answers on Friday before I left for the day! Thank you for posting those David! We do award entries for participation and not just correct answers. I think that it is great to get everyone involved even if they don't answer all of the questions correctly.

Watch for our new trivia today!!

Nicole