Dairy Futures and Options Tutorial

Basis Self Study Questions

For each question, click on the answer you think is correct. The box below each question indicates whether the selected response is correct. To see a listing of the correct answers, click on after each question.

Question 1
Basis is defined as

the final settle price of a futures contract
the fee payed to a brokerage firm to purchase an option
the difference between a cash price and futures contract price
the settle price initially payed for a futures contract when hedging

Question 2
Below is a three year history of Farm A's Mailbox and Class III prices for November 2005, 2006 and 2007:

Year	Mailbox	Class III
2005	$15.09	$13.35
2006	$14.00	$12.84
2007	$20.25	$19.22

The Nov 2005 Mailbox/Class III basis is:

$1.51
$1.74
-$1.74
$13.35

Question 3
Using the three year history shown in the above table, the average Nov. mailbox/Class III basis is:

$1.03
$0.25
$1.31
$15.14

Question 4
Basis risk is

much less than cash price risk
is zero when hedging
has no impact on your net hedged price
all of the above

Question 5
When is basis is said to weaken:

the difference between cash and a particular futures contract decreases
has no impact on the results from hedging
futures prices are increasing
all of the above

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