CFA Practice Question

There are 206 practice questions for this study session.

CFA Practice Question

In order to benefit from the price discovery function of futures markets, one must ______.

A. buy futures
B. sell futures
C. observe futures prices
Correct Answer: C

A strong relationship exists between current futures prices and the actual commodity prices in the future. As a result, current futures prices may be used to form reliable forecasts of future commodity prices.

User Contributed Comments 8

User Comment
bobert you really can't benefit at all by simply observing. If you observe futures prices, that is all you are doing. Where is the benefit?
thekapila i believe he should do all of above...just observing and doing nothing..wht can be the benefit achieved..
Farina equity analysts use prices established in a futures market (e.g., oil) to make estimations on a companies medium term (i.e., 12 month) cost base. Equity analysts who cover oil firms normally use the longer-term futures contracts as an accurate indication, without having to be active market participants. Same goes for any other derivative market whether it be futures, FWDs etc, these prices touch most companies in some way, some of the time.
Farina Sorry, to clarify the comment above, oil and/or fuel prices observed in a futures market would be a cost base for a logistics firm or an airway, but would be relatively accurate estimator of revenues for an oil firm.
magicchip observing would benefit by giving an indication of market sentiment and direction at the open for example.
I routinely short certain financials when the dow futures are substantially lower before open.
viannie The question here is about 'Price Discovery'. So what is the meaning of price discovery? It is through observing the strike price of the underlying assets which has a strong relations with future prices of of the assets itself => so we can predict future prices of the assets thru' this observatory exercise.
To-be-CFA Going long or short is not a pre-requisite of discovering future prices. You just gotta have an internet connection!
ankurwa10 Excatly, To-be-CFA, if you don't have a skin in the game, nothing stops you from knowing where the prices will be anyway. No need to transact.
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