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FRM Part I · FRM Exam Part I · Futures Markets

On a given day, a futures exchange reports that open interest in a contract rose from 40,000 to 43,000 while volume was 25,000. Which of the following best describes the trades that must have occurred?

Net new positions were created. Open interest increases when a new long and a new short enter the market, so a rise of 3,000 shows net creation of that many contracts. Volume of 25,000 also includes trades that closed or transferred existing positions.

  1. ANet new positions were created, because open interest rose by 3,000 contractsCorrect
  2. BExisting positions were closed out, because open interest only rises when traders exit
  3. CVolume equals the change in open interest, so 25,000 new contracts were created
  4. DOpen interest cannot rise unless volume is below the change in open interest

Explanation

Open interest rises when a new buyer and new seller open positions, so a 3,000 increase means net new contracts were created. Volume counts all trades including those that transfer or close positions, so it can exceed the change in open interest. Closing trades lower open interest.

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