Chapter 1 Practice Question Answers
1. Answer: C. While the Grain Futures Act, the first of these acts, passed in 1922, it did nothing to regulate the brokers trading on exchange floors. That task was left to the Commodity Exchange Act of 1936, which also created a Commodity Exchange Commission to investigate trading practices and to establish position limits on speculative trading, helping to prevent large price swings. Nearly 40 years later, the Commodity Futures Trading Commissions Act replaced that commission with an independent regulatory authority, which was given jurisdiction over futures contracts on all goods. Finally, the Shad-Johnson Accord, which was passed in 1982, expanded the Commodity Futures Trading Commission’s oversight capacity, giving it jurisdiction over securities index futures and options on foreign currencies traded over the counter.
2. Answer: D. Today the CME trades mostly in foreign exchange and stock index futures, the CBOT focuses on agricultural commodity and interest rate futures, and NYMEX on energy futures and metals. The NYBOT was bought by the Intercontinental Exchange (ICE), which specializes in soft commodities.
3. Answer: B. A commodity is a commercial product whose quality is essentially the same wherever it is produced or sold. Commodities include most agricultural products that are grown or raised or must be mined or extracted, such as gold and petroleum. By contrast, manufactured items, whose type and quality vary from manufacturer to manufacturer, are not classified as commodities.
4. Answer: A. Stocks and bonds are securities. Securities are a financial instrument representing a claim on a group of assets. Futures, options, and swaps are derivatives.
5. Answer: A. Because a forward contract is negotiated privately, the parties are exposed to the risk that one of them will not live up to its terms and will default on the contract. This is known as counterparty risk. In a futures contract, a clearingho