i have attached a sample midterm for my futures class. I need help for the questions that i haven not answered.

FIN 4720 - Spring 2017 MIDTERM QUESTIONS 1. What is a basis? How is a basis relationship used? What is basis risk? Who is exposed to basis risk? the basis is the cash price of a commodity at a specific location minus the price of the nearby futures contract. Since there are multiple cash markets to one futures market, there can be several basis for any commodity market. The relationship of basis can be used to determine if the difference between cash price and futures price makes sense to allow to deliver amongst local markets. Basis risk is the risk that the futures price and cash price change by different amounts. Hedgers are exposed to basis risk. 2. How do futures contracts facilitate trading among strangers? Futures markets facilitate trading by reducing quality risk by standardizing the definition of the commodity being traded. Futures markets reduce credit risk by establishing clearing houses. 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? To manage the risk associated with the futures contracts, each futures exchange has an associated clearinghouse. The clearinghouse is substituted as the buyer to the seller and the seller to the buyer, with the clearing member assuming the opposite side of each transaction. Clearinghouses manage their risk by using the following risk management techniques/procedures: 1) Marking-to-market in cash each day all open futures positions. 2) Requiring original margin on deposit at the clearinghouse before any clearing member can carry a position at the clearinghouse. 3) Relating the size of positions a clearing member can carry to the amount of the capital the clearing member has. 4)Margin calls during the day. 5)The guarantee fund. 6) Assessment process. 7)Rules and procedures of the clearinghouse. Clients of the default member whose positions that can be transferred to another clearing member are protected. A client's position which cannot be transferred to another clearing member is not protected. 4. How would you explain an \"Inverted Market\"? This is when futures prices are in backwardation. Meaning, nearby futures contracts are priced higher than distant futures contracts. 5. What are the differences between futures and forward markets? Futures trade on highly organized exchanges, are standardized, have closely specified terms, delivery guaranteed by clearinghouse, and regulated by the government. Forward contracts are negotiated, non-standardized, trade OTC, and with high counterparty credit risk. 6. Do futures prices contain information about future spot prices? Yes, as they can be used to assist in formulating a future spot price if we are anticipating a change in a price of a good or commodity in the future. It is safe to say that as the delivery month of a futures contract approaches, the futures contract will generally come to close to or even equal the spot price as time progresses. This is a very strong trend that happens regardless of the contract's underlying asset. This convergence can easily be explained by arbitrage and the law of supply and demand. 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? Because oil is so much more expensive to store than gold is, low inventory levels makes immediate access to oil very valuable. This makes for expensive spot prices. Oil rigs have steeply declined producing lower levels of oil. One way to benefit from this backwardation is shorting the commodity in the spot market and buying the futures market, and earning a risk-free rate. 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). 19. Compare and contrast centralized clearing between exchange traded and OTC products. What particular risk exists in clearing OTC products compared to clearing exchange traded products? Goldfinger James Bond Movie After destroying a drug laboratory in Latin America, James Bondagent 007goes to Miami Beach. There he receives instructions from his superior, M, via CIA agent Felix Leiter to observe bullion dealer Auric Goldfinger, who is staying at the same hotel as Bond. The agent sees Goldfinger cheating at gin rummy and stops him by distracting his employee, Jill Masterson, and blackmailing Goldfinger into losing. Bond and Jill consummate their new relationship; however, Bond is subsequently knocked out by Goldfinger's Korean manservant Oddjob. When Bond regains consciousness, he finds Jill dead, covered in gold paint, having died from "epidermal suffocation". In London, Bond learns that his objective is determining how Goldfinger smuggles gold internationally. Bond arranges to meet Goldfinger socially and wins a high-stakes golf game against him with a recovered Nazi gold bar at stake. Bond follows him to Switzerland, where Tilly, Jill Masterson's sister, makes an unsuccessful attempt at revenge by firing a sniper rifle at Goldfinger. Bond sneaks into Goldfinger's plant and discovers that he smuggles the gold by melting it down and incorporating it into the bodywork of his car, which he takes with him whenever he travels. Bond also overhears him talking to a Red Chinese agent named Mr. Ling about "Operation Grand Slam". Leaving, Bond encounters Tilly as she tries to kill Goldfinger again, but trips an alarm in the process; Oddjob kills Tilly with his hat. Bond is captured and Goldfinger ties Bond to a cutting table underneath an industrial laser, which begins to slice a sheet of gold in half, with Bond lying over it. Bond lies to Goldfinger that MI6 knows about Grand Slam, causing Goldfinger to spare Bond's life to mislead MI6 into believing that Bond has things in hand. Bond is transported by Goldfinger's private jet, flown by his personal pilot, Pussy Galore, to his stud farm near Fort Knox, Kentucky. Bond escapes and witnesses Goldfinger's meeting with U.S. mafiosi, who have brought the materials he needs for Operation Grand Slam. Whilst they are each promised $1 million, Goldfinger tempts them that they "could have the million today, or ten millions tomorrow". They listen to Goldfinger's plan to rob Fort Knox before Goldfinger kills them all using some of the "Delta 9" nerve gas he plans to release over Fort Knox. Bond is recaptured while eavesdropping and tells Goldfinger the reasons why his stated plan to rob the gold repository won't work. Goldfinger hints he doesn't intend to steal the gold, and Bond deduces that Goldfinger will detonate an atomic device containing cobalt and iodine inside the vault, which would supposedly render the gold useless for 58 years. This will increase the value of Goldfinger's own gold and give the Chinese an advantage from the potential economic chaos. Should the authorities be alerted, he would simply detonate the bomb in a major city or target. Operation Grand Slam begins with Pussy Galore's Flying Circus spraying the gas over Fort Knox. However, Bond had seduced Galore, convincing her to replace the nerve gas with a harmless sleep agent and alert the U.S. government about Goldfinger's plan. The military personnel of Fort Knox convincingly play dead until they are certain that they can prevent the criminals from escaping the base with the bomb. Believing the military forces to be neutralised, Goldfinger's private army break into Fort Knox and access the vault itself as he arrives in a helicopter with the atomic device. In the vault, Oddjob handcuffs Bond to the device. The U.S. troops attack; Goldfinger takes off his coat, revealing a U.S. Army colonel's uniform, and kills Mr. Ling and the troops seeking to open the vault, before making good his escape. Bond extricates himself from the handcuffs, but Oddjob attacks him before he can disarm the bomb. They fight and Bond manages to electrocute Oddjob. Bond forces the lock of the bomb, but is unable to disarm it. An atomic specialist who accompanied Leiter turns off the device with the clock stopped on "0:07". With Fort Knox safe, Bond is invited to the White House for a meeting with the President. However, Goldfinger has hijacked the plane carrying Bond. In a struggle for Goldfinger's revolver, the gun discharges, shooting out a window, creating an explosive decompression. Goldfinger is blown out of the cabin through the ruptured window. With the plane out of control Bond rescues Galore and they parachute safely from the aircraft before it crashes into the ocean. Die Hard 3 (Die Hard with a Vengeance) In New York City, a bomb detonates destroying the Bonwit Teller department store. A man calling himself "Simon" phones Major Case Unit Inspector Walter Cobb of the New York City Police Department, claiming responsibility for the bomb. He demands that suspended police officer Lt. John McClane be dropped in Harlem. Harlem shop owner Zeus Carver spots McClane and tries to get him off the street before he is killed, but a group of offended black men attack the pair, who barely escape. Returning to the station, they learn that Simon is believed to have stolen several thousand gallons of an explosive compound. Simon calls again demanding McClane and Carver put themselves through a series of "games" to prevent more explosions. McClane and Carver are instructed by Simon to travel to Wall Street station 90 blocks south, within 30 minutes to stop a bomb planted on a Brooklyn-bound 3 train. McClane succeeds in locating and throwing the bomb off the train but it detonates, causing the rear car of the train to derail, demolishing many of the station's support columns. FBI agents inform McClane that Simon is actually Peter Krieg, a former Colonel in the East German People's Army and commander of an elite unit of soldiers trained to impersonate Americans in the event of World War III. Since the fall of communism, Colonel Krieg and his men have launched a career of "freelance terrorism for hire." When McClane asks what this has to do with him, he is informed that Colonel Peter Krieg was born Simon Peter Gruber. He is the older brother of Hans Gruber, whom McClane killed in Nakatomi Towers 7 years before. His vendetta against McClane is thus a matter of vengeance for Hans. During the debriefing, Simon calls again claiming that another bomb is planted in one of the city schools, and is sensitive to police radio signals. As McClane and Carver are forced to complete more riddles to identify the school, the police organize a citywide search of schools, and shut down the police radio band. After overhearing a chance remark by a passerby on the road, McClane realizes that he and Carver, as well as the rest of the NYPD, are being distracted to keep them away from Wall Street; Simon is planning a heist there and the bombs are deliberately placed far away to keep the police busy at the other parts of the town, and the false radio-sensitive information was placed to prevent any other officers to report. Returning downtown to Wall Street, he finds Simon's men disguised as cops, businessmen, construction workers, and guards have raided the Federal Reserve Bank of New York via the damaged subway station and made off with $140 billion of gold bullion in 14 stolen dump trucks. After killing Simon's henchmen at the bank, McClane trails the dump trucks to an aqueduct in the New York City Water Tunnel No. 3 and captures one of the trucks. Simon destroys a cofferdam, flooding the tunnel; McClane is thrown clear through a vertical air shaft, and he regroups with Carver. They continue to follow the dump trucks to a tanker, but are captured attempting to board. The police locate and attempt to evacuate the school they think the bomb is in. As the timer reaches zero, the police discover that the bomb is filled with pancake syrup. Meanwhile, Simon has captured McClane and Carver. He explains that, despite sometimes working for monsters, he is not one himself. The only real bomb was aboard the ship. As an act of revolutionary terror, Simon intends to "level the playing field" by "redistributing" the West's gold reserves across the bottom of Long Island Sound. After tying them to the bomb, Simon explains that, although he did not like his brother, that is not the same as not caring, "when some dumb Irish flatfoot drops him out of a building." Before he leaves the tanker, Simon tosses McClane a bottle of aspirin for the killer hangover he has been nursing all day. After escaping the ship just ahead of the explosion, McClane laments to Carver that Simon has stolen the gold and gotten away with it. While phoning to make amends with his estranged wife, McClane realizes the aspirin bottle gives an address in Quebec. In a Canadian warehouse hours later, Simon boasts to his men that, due to the stupidity of the NYPD, they have gone from an army with no country to an army that can buy any country they wish. To his outrage, McClane and Carver then arrive in a helicopter as the Royal Canadian Mounted Police raids the warehouse. Snarling that he has "something personal to finish," Simon boards another helicopter piloted by his mistress and attempts to finish McClane and Carver with a machine gun. Despite being shot down, McClane waits for Simon to come closer and snaps, "Say hello to your brother!" He shoots a power line which hits the helicopter blades, sets off a major explosion, and burns Simon alive. Carver tosses McClane a quarter and convinces him to finish his call to Holly from a nearby pay phone