Series 3 Exam (3)

The June S&P 500 E-mini futures contract settles at 2,463.65. However, on the next day it closes at 2,459.80. If the S&P E-mini multiplier is $50 per point, what's the dollar value of this change? A. $192.50 B. $962.50 C. $122,990.00 D. $125,000.00

A. $192.50 To find the dollar value of the change, simply take the closing value of 2,463.65 points and subtract the ending value of 2,459.80 points, which equals 3.85 points. The 3.85 difference is then multiplied by $50 per point to arrive at a dollar value of $192.50.

A customer buys a T-bond call at 2-14. He sells the call at 4-22. The profit is: A. $2,125.00 B. $ 2,250.00 C. $5,200.00 D. $6,562.50

A. $2,125.00 T-bond calls are quoted in 1/64ths of a point and a contract size of $100,000. The customer buys at 2-14 or 2 14/64 and later sells at 4-22 or 4 22/64 for a profit of 2 8/64 or $2,000 + [8 x $15.625 (value of 1/64) = $125] = $2,125.00.

A dairy farmer establishes a short hedge in milk. He sells futures at $20.27 per cwt. When the hedge is removed, futures are $20.46 and cash is $20.30. Taking into consideration the hedge, what is the farmer's net selling price for his milk? A. $20.11 B. $20.30 C. $20.46 D. $20.49

A. $20.11 Check one note

Your client is long 3 March live cattle contracts at 45.30 cents. He later offsets at 48.40 cents. The contract size is 40,000 lbs. Ignoring commission, his realized gain is: A. $3,720.00 B. $3,550.00 C. $1,240.00 D. $1,050.00

A. $3,720.00 Check one note for calculation

What's the net capital requirement for an independent IB? A. $45,000.00 B. $1,000,000.00 C. $140,000.00 D. $250,000.00

A. $45,000.00 An independent IB must maintain adjusted net capital that's equal to or in excess of $45,000. FCMs have a net capital requirement of $1,000,000.

A speculator buys a soybean contract at $8.00. The initial margin required is 30 cents per bushel and the trader deposits $1,500. If the soybean contract loses 3% in value, what percent of the original margin is lost? A. 80% B. 10% C. 3% D. 1%

A. 80% The client goes long soybeans at 8.00. If the contract value declines by 3%, this results in a 24-cent loss of equity (8.00 x .03 = .24). A 24-cent loss represents 80% of the client's original margin deposit of 30 cents.

Which of the following hedgers would most likely effect a selling hedge? A. A grain elevator operator who wants to protect his cash position B. An exporter who has entered into a contract to deliver the cash commodity at a later date and who does not own the commodity C. An individual who is short the cash commodity and who is committed to make delivery at a later date D. An individual who thinks the price will fall and would like to make a profit if it does

A. A grain elevator operator who wants to protect his cash position A selling hedge (sale of futures) would be established by an individual who is long the basis (long the cash commodity). A grain elevator operator would be long the cash commodity and would protect himself against falling prices by selling futures.

If the buyer of a futures put option decides to exercise, the seller will: A. Be assigned a long futures position B. Be assigned a short futures position C. Sell the buyer the underlying commodity at the strike price D. Buy the underlying commodity at the strike price

A. Be assigned a long futures position The seller of a put assumes the obligation to buy a futures contract, if the option contract is exercised by the holder. If they were not short the underlying futures contract they would be assigned a long futures position.

If inflation is falling and the dollar is strengthening, an investor will: A. Go long gold put options B. Go short gold put options C. Go long gold futures D. Go long gold call options

A. Go long gold put options Gold typically moves in the opposite direction of the U.S. dollar. If the dollar is rising and inflation is falling, the price of gold is likely going down. Buying puts is a bearish strategy, while all of the other choices are bullish.

A trader believes the market will rally, reach a resistance point, and then sell off sharply. Which of the following orders should he place? A. MIT B. Stop order C. Limit order D. FOK order

A. MIT A sell MIT order is placed above the current price in the market. It is used by someone who wants to establish a short position when the market advances to a certain level.

If the price of a near delivery month is $3.60 and the price of the next delivery month is $3.63, the difference in price is called: A. The carrying charge B. The load C. The basis D. The differential

A. The carrying charge The difference in price between a near month and a deferred month reflects the carrying charges for the commodity.

The maximum number of contracts, either long or short, in any one futures month or in all futures months combined, which may be held open or be controlled by any one person, as prescribed by the CFTC, is: A. The speculative position limit B. The trading limit C. A limit placed on speculators and hedgers D. A limit placed on hedgers only

A. The speculative position limit The CFTC has established position limits and trading limits for certain regulated commodities. These limits apply to long positions, short positions and spread positions established on one or more exchanges. The trading limit is the maximum number of contracts that a trader may enter into in any single trading session, while the position limit is the maximum number of contracts that he may hold at any one time. Trading limits and position limits apply to speculators only. They do not apply to bona fide hedgers.

If a customer dies, an associated person should cancel all open orders. A. True B. False

A. True

Options customers with discretionary accounts must be provided with an explanation of the nature and risks of the strategies to be used for the account. A. True B. False

A. True

Options that are at-the-money have more time value than options that are out-of-the-money. A. True B. False

A. True

A buy stop order becomes a market order when there is an execution or bid at the stop price. A. True B. False

A. True A buy stop order is an order that is placed above the market, to buy the commodity if the price rises to or above the stop price. The buy stop order in commodities differs from the buy stop order in securities in that the securities stop order is one that becomes a market order when the stock trades at or above the stop price. In the commodities stop order, the order becomes a market order when the commodity trades at or above, or is bid at or above, the stop price. Let's examine a buy stop order to see how it is handled. A customer has sold a contract of oats at 99. He thinks that the price will fall, and he will therefore profit by buying the contract at the lower price. However, he realizes that the price could advance as well, and he would like to minimize his loss to around 2 cents a bushel, so he enters an order to buy a contract at 101 stop. The floor broker gets the order and holds it until the price rises. After a few days, the price has risen. The highest bid is now 100 3/4 and the lowest offer is 101 1/4. A broker enters the crowd and buys the contract offered at 101 1/4. The stop is immediately put into effect and a contract will now be bought at the best price available. Let's see how the order would be effected on a bid at the stop price. The market is once again 100 3/4 bid, 101 1/4 offered. A broker enters the crowd and bids for the commodity at 101. Since this bid is at the stop price, the order will immediately become a market order. The broker with the stop order will now buy the contract offered at 101 1/4.

A long futures position is inherently less risky than a short futures position. A. True B. False

A. True Although the maximum loss in a long contract is substantial, it's typically limited to the price falling to zero. However, since there's no maximum value for a futures contract price when prices rise, the losses attributable to a short futures are unlimited. While it's possible for futures contracts to trade at negative prices, they have been historically very rare. It's far more common to see prices rise, which is why short positions are considered riskier positions.

When ex-pit transactions are made, the cash purchase is made at a specified basis and the futures transaction is made outside the trading pit. A. True B. False

A. True An ex-pit transaction (also called an "against actuals" or an "exchange for physicals" transaction) is one in which a hedger enters into a cash market transaction with another hedger. The rules of the exchange allow the futures transaction to be made outside of the trading pit, at a prearranged basis, and open outcry is not required. In an ex-pit transaction, a person who is long the basis (long the cash commodity) will have a selling hedge (sale of futures). He will sell his cash commodity to someone who is short the basis (short cash) who would have established a buying hedge (purchase of futures). The hedgers will determine the basis on which the transaction is to occur and will exchange their futures position on the basis they have negotiated. The person who is long the basis (long cash) will exchange his cash commodity for the long futures of the other person. The person who is short the basis will exchange his long futures position for the cash commodity.

CPOs and CTAs that intend to charge up front fees and expenses to participants in a pool or clients in a managed account must disclose that fact in the disclosure document. A. True B. False

A. True CPOs and CTAs that charge up front fees and expenses must disclose that fact in their disclosure document.

With respect to all written option customer complaints, a firm must make and retain a written summary of the matter raised by the complainant and the firm's response. A. True B. False

A. True Firms must make and retain a written summary of the matter raised by the complainant and the firm's response.

A Commodity Pool Operator is exempt from registration as a CPO if it receives no compensation, does not advertise, and operates only one pool at a time. A. True B. False

A. True In general, registration is required unless: 1. The total gross capital contributions to all pools is less than $400,000; and 2. There are no more than 15 participants in any one pool or - A single pool is operated; - The pool operator does not advertise; and - The pool operator does not receive compensation for operating the pool

An independent introducing broker (IB) can introduce clients to any FCM. A. True B. False

A. True Independent IBs can introduce customers to any FCM. Guaranteed IBs can also introduce customers to any FCM; however, most FCMs will make their guaranteed IBs sign an exclusive agreement.

Promotional material includes standardized oral presentations. A. True B. False

A. True Promotional material includes standardized oral presentations.

NFA members must have a plan in place that enables them to operate their business in the event of a disaster. A. True B. False

A. True The NFA adopted Rule 2-38 that requires members to have in place, a plan that enables them to operate their business with minimal disruption to customers in the event of a disaster. This is called a disaster recovery plan.

The NFA can audit its members on a limited basis without prior notice. A. True B. False

A. True The NFA can do limited scope, spot audits on an unannounced basis. The NFA will also do a full-scope audit of a member firm once every 24 months.

An economic slowdown is continuing. An investor should buy T-bond futures. A. True B. False

A. True The answer is true. If an economic slowdown continues, it is expected that interest rates will decline. This would provide the motivation to buy T-bond futures.

A U.S. automobile importer makes payment in Japanese yen. The importer expects the dollar to fall relative to the yen. To hedge against foreign exchange losses, the importer would buy Japanese yen futures. A. True B. False

A. True The answer is true. If an importer makes payment in a foreign currency, they are short the basis. The proper hedge would be to go long futures contracts.

An RCR may enter an order for a customer who is currently undermargined if the customer assures him that a remittance is under way. A. True B. False

A. True The margin rules of the Chicago Board of Trade require that a member may not accept orders for new transactions from a customer unless the minimum initial margin on the new transaction is deposited and the margin on established positions is at least equal to maintenance requirements of the exchange. However, if a customer states that funds required to fully margin his account are being transmitted at once, the member firm may accept this as adequate for a reasonable period of time and may allow the customer to establish a new position.

The minimum net capital for a Futures Commission Merchant is $1,000,000. A. True B. False

A. True The minimum net capital for an FCM is $1,000,000.

The ratio that the price of an option moves relative to the underlying futures contract is known as the delta. A. True B. False

A. True The ratio that the price of an option moves relative to the underlying futures contract is known as the delta.

The time value of an option decreases at an accelerating rate as the option approaches expiration. A. True B. False

A. True The time value of an option decreases at an accelerating rate as the option approaches expiration.

A customer writes a put option. The market rallies. The customer's potential for profit could have been reduced had he sold a covered put option. A. True B. False

A. True This is true. A put is considered covered if the writer is short the underlying future. If the market rallies the put will expire and the writer will collect the premium. However, since the writer is covered, this profit is offset by the loss on the short future position.

A CPO must include a breakeven calculation in the beginning of the Risk Disclosure Document A. True B. False

A. True This is true. The breakeven point must be disclosed in the beginning of the CPO Disclosure Document.

Delta increase for calls as the mkt rises. A. True B. False

A. True This is true. The delta factor measures the price movement of an option in relation to the price movement of the underlying future. In-the-money options have delta factors closer to 1.00. Out-of-the-money options have delta factors closer to 0.00. As the market increases, call options become deeper in-the-money and the delta factor would increase to 1.00.

An IB can accept checks from customers in the name of the FCM if authorized to do so by the FCM. A. True B. False

A. True This statement is true. An Introducing Broker (IB) may never accept customer funds in its own name.

An American importer places an order with a British manufacturer. The order is to be delivered in May and is valued at 10,000,000 British pounds. The cash price for the pound is $1.2475 and May futures are trading at $1.2625. On the day the goods are delivered, the cash market price of the pound is $1.2835 and May futures are at $1.2855. If the importer did not take any action in the futures market when he placed the order, the total cost will be: A. $12,855,000.00 B. $12,835,000.00 C. $12,475,000.00 D. $12,625,000.00

B. $12,835,000.00 In this question, the importer must buy 10,000,000 pounds in order to make payment to the British company. Since the current price for the pound in the cash market is $1.2835, it will cost him $12,835,000 to purchase 10,000,000 pounds ($1.2835 cash price x 10 million).

A speculator who expects a sharp rise in the market decides to purchase 18 DJIA futures contracts. The positions were established at 9,162. Later, he liquidates 10 contracts at 9,155 while the remaining 8 contracts were closed at 9,150. The contract multiplier for the DJIA is $10 and the investor was charged $360 in commissions. What is the net profit or loss for this investor? A. $2,020 gain B. $2,020 loss C. $1,660 gain D. $1,660 loss

B. $2,020 loss Check one not for calculation

An individual has a profit of 88 points on each of three T-bill futures contracts. What is the total profit? A. $2,200.00 B. $6,600.00 C. $8,800.00 D. $26,400.00

B. $6,600.00 One basis point on a T-bill contract equals $25. A profit of 88 points would, therefore, total $2,200. Based on three contracts, the total profit is $6,600.

A customer takes on a bear call spread position. The prices of the options are 2-20 and 5-24. The strike prices of the options are 84 and 88. The maximum potential loss is: A. $875.00 B. $937.50 C. $3,062.50 D. $3,125.00

B. $937.50 Bear call spreads are credit spreads. Therefore, the investor sold (is short) the call at 5-24, and bought (is long) the call at 2-20 for a net credit of 3-04 (3 4/64 or $3,062.50). The maximum loss potential on a credit spread is the difference in the strike prices (88 - 84, or 4 points, or $4,000) minus the net credit ($3,062.50). The maximum loss is $937.50.

A customer assumes a short position at 14.50 and the contract falls to 11.20. The investor wants to protect the profits. You would recommend placing a buy stop at: A. 13.80 B. 12.80 C. 11.00 D. 10.20

B. 12.80 To protect the profit, the customer will buy futures to cover the short position. They would place a stop order to protect their profit in the event that the market began to rise above its present value (11.20). Two choices given which are above the current market price are incorrect. 12.80 represents a more effective means to protect the profit. 13.80, although by no means incorrect, is not the best answer to the question, since an additional point of profit will have been eroded by the time this order is activated.

A portfolio is valued at $3,500,000. The S&P 500 futures contract is trading 862.45 (contract value equals 250 x the index price). The number of contracts needed to hedge the portfolio is: A. 8 B. 16 C. 4,058 D. 14,000

B. 16 If the S&P 500 is trading at 862.45, each contract provides a hedge of $215,612.50 (862.45 x 250 = $215,612.50). If the portfolio is valued at $3,500,000, it would take sixteen contracts to hedge ($3,500,000 divided by $215,612.50 = 16.2 contracts). 16.2 contracts = 16 contracts to hedge because you always round down.

An individual purchases 2 corn contracts and deposits $2,000 margin. This represents 20 cents per bushel. The price of corn increases by 16 cents and the individual sells the 2 contracts. His commission cost for the 2 contracts totals $60. The contract size for corn is 5,000 bu. What is his net profit margin on the transaction? A. 80% B. 77% C. 74% D. 72%

B. 77% Check one note for calculation

Wheat is trading at 500 cents per bushel. The annual interest rate is 9%, storage costs are 5.2 cents per bushel per month, and freight is 5 cents per bushel. The monthly carrying charge is: A. 50.20 cents B. 8.95 cents C. 13.95 cents D. 55.20 cents

B. 8.95 cents The first step is to calculate the interest. Interest is the cost of borrowing money to purchase the cash position, which is determined by taking the cash price and multiplying by the interest rate to arrive at 1.38 cents (500 cash price x 9% = 45 cents annual interest/12 months = 3.75 cents monthly interest). Next, add the storage to determine monthly carrying charges of 8.95 cents (3.75 cents interest + 5.2 cents storage). Transportation charges are not included in carrying charges.

The margin that a customer deposits with a member firm is: A. A down payment toward the full cost of the contract B. A performance bond C. Established by the CFTC D. Lower on long accounts than on short accounts

B. A performance bond Margin that is deposited on the purchase or sale of futures contracts is a good-faith deposit or performance bond. The purpose of the margin deposit is to protect the member firm against an adverse price movement and to demonstrate the customer's ability and willingness to meet his obligations.

The reason that the basis approaches zero as delivery in the futures is permitted is because: A. The cash price usually rises as delivery approaches B. As long as a difference exists between cash and futures, traders will buy the lower and sell the higher until the difference is eliminated C. Futures reflect carrying charges D. Cash will approach futures when there is an oversupply

B. As long as a difference exists between cash and futures, traders will buy the lower and sell the higher until the difference is eliminated

In a thin market, with relatively few speculators, futures prices will: A. Be about the same as in an actively traded market B. Be more volatile than in an actively traded market C. Be less volatile than in an actively traded market D. Be much closer to the price of the cash commodity than would be the case in an actively traded market

B. Be more volatile than in an actively traded market A thin market, which is one in which there are relatively few participants, is generally more volatile than a market in which there is a relatively large amount of participants. A volatile market is one in which there are wide spreads between bids and offers and large differences between subsequent trades.

In a normal market, the premium of a distant delivery month over the nearby delivery month reflects the: A. Basis B. Carrying charges C. Inadequate availability of the cash commodity D. Spread

B. Carrying charges In a normal market (also called a carrying charge market or a premium market), the cash price is lower than the price of futures, and the price of near futures is lower than the price of distant futures. In a normal market, there is adequate supplies of the cash commodity and adequate storage facilities. The premium of the distant months over the nearer months reflects the cost of holding the commodity and are called carrying charges.

Buying futures, buying calls and selling puts is known as a conversion. A. True B. False

B. False A conversion is buying futures, selling calls and buying puts.

If a speculator maintains accounts for the same CFTC regulated commodity at several different commission firms, he can thereby avoid reporting his position to the CFTC. A. True B. False

B. False CFTC rules require that a trader report to the CFTC once he reaches the position limit in certain commodities. The reporting level is 25 contracts in all regulated commodities except cotton (50 contracts) and grains (200,000 bushels). The trader must report once his position reaches this level, and it is immaterial whether his trading was done on a single exchange or on more than one exchange, or if his position was amassed at a single brokerage firm or at more than one brokerage firm.

The determination for deep out-of-the-money options is set by the CFTC. A. True B. False

B. False Deep out-of-the-money options are determined and monitored closely by the appropriate exchange. Since deep out-of-the-money options are illiquid, they're carefully monitored to protect investors.

A forward contract is a legally binding contract, but doesn't always require the original buyer or seller to make or take delivery. A. True B. False

B. False Forwards are legally binding contracts to either buy or sell a commodity at a later date. Unlike a futures contract, forward contracts cannot be offset; therefore, there's no way for a buyer or seller to get out of their obligation to take or make delivery of the commodity at the future date.

If a country was to devalue its currency, this would mean that it would be able to purchase more U.S. dollars than before the devaluation, and therefore, U.S. exports to that country could be expected to increase. A. True B. false

B. False If a country devalues its currency, this means that more of that currency is required to buy the same amount of U.S. dollars than before the devaluation. This would make U.S. exports more expensive than before the devaluation, and therefore U.S. exports could be expected to decrease.

An IB may be guaranteed by more than one FCM. A. True B. False

B. False Introducing brokers can only be guaranteed by one Futures Commission Merchant at a time.

An omnibus account will be carried at the clearing FCM on a "disclosed basis." A. True B. False

B. False Non-clearing futures commission merchants (FCMs) must open an "omnibus account" with a clearing FCM in order to have its customers' trades cleared. The omnibus account includes the trades belonging to all of the non-clearing firm's customers, and is carried by the clearing FCM on a "non-disclosed basis." In other words, trades in an omnibus account will be in the non-clearing FCM's name, and not in the names of its customers.

If a speculator wishes to avoid having to report his position in regulated commodities, he may do so by opening accounts at different member firms and making certain that no single account reaches the reporting level. A. True B. False

B. False Speculators must report once they reach the specified number of contracts as required by the CFTC and the exchanges. Contracts that are opened at different member firms or on different exchanges are added together and, once the reporting level is reached, must be reported.

Transportation is a factor in the carrying charge. A. True B. False

B. False The carrying charge is made up of interest, storage and insurance. Transportation is not a factor in the carrying charge.

When a customer signs his margin agreement, he is allowing the member firm to automatically transfer funds from his regulated commodities account to his securities account if there is excess equity in the commodities account and a deficit in the securities account. A. True B. False

B. False The margin agreement does not allow the member firm to transfer funds from a commodity futures account into a securities account. In order to transfer funds, the customer would either have to give his written permission each time a transfer is to be made, or would have to sign the transfer consent form (supplemental agreement) to have transfers made automatically.

If the market rises at the same time a put is written, the seller loses money. A. True B. False

B. False The seller of a put option is bullish and wants the market to rise.

The IB must keep the daily and monthly statements sent to customers in his files. A. True B. False

B. False This is false. An IB is not required to keep on file copies of monthly statements sent to customers. The FCM carrying the customer's account must maintain statements. The IB is only required to keep a record or journal of customer transactions if he places some of or all of the orders for the customers.

A customer wishes to buy August Gold on the COMEX Exchange. Another customer immediately calls and wishes to sell December Gold on the COMEX. The AP may combine these two orders and place a spread order. A. True B. False

B. False This is false. Separate customer orders may not be combined and executed as a spread order.

An American importer places an order with a British manufacturer. The order is to be delivered in May and is valued at 10,000,000 British pounds. The cash price for the pound is $1.2475 and May futures are trading at $1.2625. On the day the goods are delivered, the cash market price of the pound is $1.2835 and May futures are at $1.2855. If the importer did not take any action in the futures market when he placed the order, his cost will be: A. Unchanged from the original cash price of $1.2475 B. Increased by $360,000 C. Decreased by $361,000 D. Increased by $230,000

B. Increased by $360,000 If the importer did not hedge her position, she will be forced to absorb the full amount of the increase in the value of the pound. At the time payment is due, the dollar value is $12,835,000 ($1.2835 cash price x 10 million). When the order was placed, the initial cost was $12,475,000 ($1.2475 cash price x 10 million). The importer will have an increased cost of $360,000 if he did not hedge.

A trader initiates a long position in live cattle at a price of 41 cents per pound. The contract size is 40,000 lbs. His initial margin deposit is $500. This means that: A. Margin represents approximately 4% of the value of the contract B. Margin represents approximately 3% of the value of the contract C. He will be called for additional margin if the price of the contract advances D. He will have additional buying power if the contract declines in price

B. Margin represents approximately 3% of the value of the contract The futures price is 41 cents per pound. Therefore, the total value of the contract is $16,400 (40,000 pounds times .41). Dividing the margin of $500 by the contract value of $16,400 indicates that margin is approximately 3% of the value of the contract.

A FCM must furnish to each customer holding an option which has expired or been exercised, a written confirmation statement not later than the: A. Same day B. Next business day C. Fifth business day D. Seventh business day

B. Next business day A written confirmation must be sent to customers holding an expired or exercised option no later than the following business day.

The area on a chart where one can expect a possible increase in the selling of futures would be called a: A. Support area B. Resistance area C. Congestion area D. Contango area

B. Resistance area A resistance area is the top of a congestion area, where increased selling slows the price advance of a futures contract.

A corporation issues bonds with a price equal to 86-24. The corporation intends to issue another $10,000,000 bonds in April. The bonds will have a 20-year maturity. The corporation wishes to hedge on its anticipated offering. Treasury bond futures prices are as follows: Dec 88-16 Mar 88-22 Jun 88-26 Sep 89-02 The corporation would be concerned with: A. Rising interest rates and would establish a buying hedge B. Rising interest rates and would establish a selling hedge C. Falling interest rates and would establish a buying hedge D. Falling interest rates and would establish a selling hedge

B. Rising interest rates and would establish a selling hedge The corporation is concerned that interest rates will rise. If interest rates rise, the price of fixed income securities that are already outstanding will fall. Therefore, the corporation will sell futures.

A customer has a large blue chip stock portfolio. He anticipates a market decline and would like to hedge $2,550,000 of the portfolio using the Major Market Index (MMI). Each index point equals $250. The futures price is currently 440.65. Which of the following would be the best hedging strategy? A. Buy 23 MMI futures contracts B. Sell 23 MMI futures contracts C. Buy 24 MMI futures contracts D. Sell 24 MMI futures contracts

B. Sell 23 MMI futures contracts Check one note

Which of the following is not an important influence affecting futures prices for an agricultural commodity? A. Changes in Government agricultural policy B. Stated opinions of officials of the various exchanges C. News regarding international developments and monetary devaluation D. Weather, seasonal price patterns and general business conditions

B. Stated opinions of officials of the various exchanges

An investor enters a fill-or-kill order to sell 15 June Euro futures at $1.0890. When the order is entered on the exchange, the only bid (buy order) is for 10 June Euro contracts at $1.0895. In this case: A. The investor's order is not executed and is canceled B. The investor will sell 10 June Euro contracts at $1.0895, but the remainder of the order is canceled C. The investor will sell 10 June Euro contracts at $1.0890, but the remainder of the order is canceled D. The investor will sell 15 June Euro contracts at $1.0895

B. The investor will sell 10 June Euro contracts at $1.0895, but the remainder of the order is canceled The investor wants to sell June Euro futures at $1.0890 or higher. Since there's already an order to buy at $1.0895, the investor's order will be executed. However, the buy order is only for 10 contracts; therefore, the investor will only receive a partial fill. In this case, the remainder of the fill-or-kill order will be canceled. If the investor entered a good-til-canceled (GTC) limit order, the remainder of the order would not be canceled and could be executed later.

A restaurant chain enters an order with an orange juice producer to purchase orange juice for delivery in three months, with the price of the orange juice to be based on the price on the day of delivery. The restaurant hedges by buying futures. The price of futures is $1.83 and the price of cash is $1.91. On the day the cash orange juice is delivered, the price of cash orange juice is $1.96 and the price of futures is $2.10. The hedge is lifted and the result is a: A. $0.32 profit B. $0.32 loss C. $0.22 profit D. $0.22 loss

C. $0.22 profit check one note for calculation

An investor believes the S&P 500 Dec contract is overvalued at 945.00 and therefore sells 15 contracts. The market rises to 950. The investor is still convinced his analysis is correct and sells an additional 20 contracts at that price. When the contract drops to 947.70, the investor closes out all 35 contracts. Assume the multiplier is $250 and round-turn commissions are $30 per contact. What is the investor's gain or loss? A. $10,575.00 loss B. $10,900.00 gain C. $325.00 gain D. $1,875.00 gain

C. $325.00 gain Check one note for calculation

A trader buys a contract at a price of $4.55. The price advances to $4.65. The trader anticipates that the price will rise, but he wants to protect his profit if he is wrong. He would most likely place a stop order to sell at: A. $4.70 B. $4.66 C. $4.63 D. $4.55

C. $4.63 The stop order to sell is placed below the current market price. As the market price is $4.65, $4,70 and $4.66 both represent a gain and wouldn't protect the investor's position. While $4,63 and $4.55 are both below the current market price, but $4.55 is not a logical choice because the question states that the trader wants to protect most of his unrealized profit. If he were to enter a stop at $4.55 (his purchase price), he would lose all of his profit.

A customer buys three gold contracts on the Commodity Exchange (Comex) and sells them at a profit of $3.40 an ounce. The total commission on the three contracts is $120. The contract size is 100 troy ounces. The net profit on the trade is: A. $1,440.00 B. $1,200.00 C. $900.00 D. $880.00

C. $900.00 Three contracts would total 300 ounces. As the profit per ounce is $3.40, the total profit is $1,020. Subtracting the total commission of $120 yields a net profit of $900.

In January, a farmer is long 400,000 pounds of hogs that he intends to market in May. The current cash price of hogs is 42.90 and May futures are 44.10. The farmer estimates that his total costs of raising and marketing the hogs will be 35.50 cents. Hogs are quoted in cents per pound and the futures contract is 30,000 pounds. In May, the cash price of hogs is 42 and the price of futures is 42.70. The hedger sells the hogs in the cash market and offsets his hedge. What's the farmer's basis when the hedge is lifted? A. 6.50 under B. 7.20 under C. 0.70 under D. 0.70 over

C. 0.70 under A hedger's basis is the difference between the cash and futures prices and is used to measures the relationship between the two prices. When the hedge is lifted, cash is 42 cents and futures are 42.70 cents; therefore, the basis is 0.70 cents. The basis is always quoted in terms of the cash price and, since cash is less than futures (i.e., under), the basis is 0.70 cents under.

An investor who is bearish on the general trend of the market shorts five S&P 500 futures contracts at the current market price of 1,305.5. The contract multiplier is $250, and the investor is charged a $25 round turn commission per contract. What would the settlement price of the S&P 500 Index need to be in order to provide the investor with a net profit of $5,000? A. 1,301.50 B. 1,325.50 C. 1,301.40 D. 1,285.50

C. 1,301.40 Check one note

On June 15, a copper mining company contracts to sell 500,000 pounds of copper in September. On June 15, the cash price of copper is $2.1805 and the futures price is $2.2300. The futures contract is for 25,000 pounds. If the company hedges its cash position, what's its basis? A. 218.05 cents B. 223 cents C. 4.95 cents under D. 4.95 cents over

C. 4.95 cents under A hedger's basis is the difference between the price of cash and the price of futures. Cash is selling at $2.1805 and futures are selling at $2.2300; therefore, the basis is 4.95 cents ($2.23 - $2.1805). Since cash is under (i.e., less than) the futures price, the basis is considered to be under.

A customer believes wheat prices are currently high due to expectations of poor harvests. In particular, the customer believes that May wheat futures on the CBOT are significantly overpriced. The customer goes short five May contracts at $3.75 per bushel. The contract size is 5,000 bushels. The margin requirement is $2,000 per contract and round-turn commissions are $40. Later, the customer covers the contracts at $3.92 per bushel. What's the percentage profit or loss based on the margin deposited? A. 44.50% profit B. 40.50% profit C. 44.50% loss D. 40.50% loss

C. 44.50% loss Check one note for calculation

An investment company holds 10 million dollars of 7 1/4% Treasury bonds maturing in 2034. The manager wishes to hedge with T-bond futures. The futures contract reflects an 8% coupon. To adjust the difference between 7 1/4% and 8% bonds, a conversion factor of .9229 is used. The number of futures or options that the manager would use to have a weighted hedge is: A. 9 contracts B. 10 contracts C. 92 contracts D. 100 contracts

C. 92 contracts If the investment held 8% bonds they would hedge 100 contracts. ($10,000,000 divided by $100,000 = 100 contracts.) To adjust the difference in coupons multiply 100 contracts by the conversion factors of .9229. 100 x .9229 = 92 contracts.

In a liquid market that has many speculators, futures prices will: A. Be approximately the same as in a thinly traded market B. Be more volatile than in a thinly traded market C. Be less volatile than in a thinly traded market D. Be much further from the price of the cash commodity than is the case in a thinly traded market

C. Be less volatile than in a thinly traded market A liquid market is one in which there are a large number of participants and is generally less volatile than a market in which there are relatively few participants. A volatile market is one in which there are wide spreads between bids and offers and large differences between subsequent trades.

If an investor believes that gold prices are due for a sharp move, but is unsure as to the direction, he can: A. Buy June gold futures and sell June gold futures B. Buy June gold calls and sell June gold puts with the same strike price C. Buy June gold calls and buy June gold puts with the same strike price D. Sell June gold calls and sell June gold puts with the same strike price

C. Buy June gold calls and buy June gold puts with the same strike price In order to profit when the market is volatile, an investor would establish a long straddle. A straddle is created by buying both a put and a call that have the same expiration month and the same strike price. The investor is able to profit if the market moves in either direction.

Which of the following is a crack spread? A. Long soybean futures and short both soybean oil futures and soybean meal futures B. Short soybean futures and long both soybean oil futures and soybean meal futures C. Long crude oil futures and short both gasoline futures and heating oil futures D. Short crude oil futures and long both gasoline futures and heating oil futures

C. Long crude oil futures and short both gasoline futures and heating oil futures Buying crude oil and selling both gasoline futures and heating oil futures is referred to as a crack spread. The name comes from the fact that crude oil molecules are cracked when they're refined to make gasoline and heating oil. Crack spreads help oil refiners hedge their costs (i.e., raw crude oil) and their revenues (i.e., gasoline and heating oil).

Settlement on options is based on the: A. Strike price B. Underlying futures C. Premium D. Price of futures

C. Premium The settlement of options is based on the option premium.

A corporate financial executive in July completes plans to sell 360,000,000 in commercial paper in March. The prime rate for commercial paper is 6.45%. The 3-month Treasury bill rate is 5.5% and March T-bill futures are at 7.4%. What would he do to hedge his position? A. Buy March T-bill futures B. Buy March T-bill futures and sell March T-bills C. Sell March T-bill futures D. Sell March T-bill futures and buy March T-bills

C. Sell March T-bill futures In this situation, he would hedge by selling March T-bill futures. If interest rates do increase, he would get less dollars in March. However, he could buy the March futures at a lower price than he sold them for when he placed the hedge.

IBM Credit Corporation intends to issue $85,000,000 in commercial paper in six months. The current commercial paper rate is 7.85%. The three-month T-bill rate is 7.21%. To hedge against an increase in interest rates, the Treasurer of IBM Credit Corporation should: A. Buy T-bill futures and sell T-bills in the cash market B. Sell T-bill futures and buy T-bills in the cash market C. Sell T-bill futures D. Buy T-bill futures

C. Sell T-bill futures To hedge against an increase in interest rates, one should sell T-bill futures or buy put options on T-bill futures.

The June S&P 500 contract is trading at 1424.91 and has an initial margin requirement of $20,000 per contract. If the multiplier is $250 per point, which of the following option positions has the highest initial margin requirement? A. Long June 1400 S&P 500 call trading at 34.50 B. Long June 1400 S&P 500 put trading at 9.59 C. Short June 1400 S&P 500 call trading at 34.50 D. Short June 1400 S&P 500 put trading at 9.59

C. Short June 1400 S&P 500 call trading at 34.50 For a long position, the initial margin requirement is the option's premium. The long call 1400 call position has a margin requirement of $8,625 ($34.50 x $250) and the long 1400 put position has a requirement of $2,397.50 ($9.59 x $250). For a short position, the initial margin requirement is the premium, plus the futures margin, minus 50% of the out-of-the-money amount. Since the short 1400 call position is an in-the-money option, the initial margin is $28,625 ($34.50 x $250 + $20,000). However, the short 1400 put is out-of-the- money, so the initial margin is $19,283.75 ($9.59 x $250 + $20,000) - [($1,424.91 - $1,400) x $250 x 50%].

An uncovered (naked) gold option is an option: A. That has no intrinsic value B. That's written with a position in cash gold C. That's written without a position in the futures mkt D. That's written with a position in the futures mkt

C. That's written without a position in the futures mkt A naked or uncovered option is written (i.e., sold) without having a futures position. On the other hand, covered options are sold against a futures position with an opposite strategy (e.g., short call and a long futures position).

Buy MIT orders: A. Will be executed B. Will be executed if the mkt rises to the MIT price C. Will be executed if the market falls to the MIT price D. Don't guarantee execution

C. Will be executed if the market falls to the MIT price Buy market-if-touched (MIT) orders become market orders to buy when the price falls to the MIT price (i.e., the MIT is activated or triggered). If the price of a futures contract falls, the market order must be executed immediately.

An individual believes that the S&P 500 Index is undervalued and buys six January S&P 500 futures contracts at 2502.30 points. Round-turn commissions are $20 per contract. In December, the broad market indexes begin to show sustained strength and the individual closes the six contracts at 2575.13. The S&P 500 futures have a multiplier of $250 per point. What's the resulting profit or loss? A. $18,227.50 loss B. $109,365.00 loss C. $18,187.50 gain D. $109,125 gain

D. $109,125 gain The individual bought at 2502.30 points and later offset the contracts at 2575.13 points. The gain per contracts is 72.83 points Gain in dollars per contract $18,207.50 (72.83 x $250 multiplier) Subtract $20 commissions paid Net gain per contract $18,187.50 Total gain $109,125 ($18,187.50 x 6 contracts)

A customer is short seven contracts of orange juice (OJ. at 2.4335. He liquidates the position at 2.5640. Round-turn commissions are $35. The size of the contract is 15,000 lbs. What is the net profit or net loss? A. $13,457.50 profit B. $1,992.50 loss C. $1,992.50 profit D. $13,947.50 loss

D. $13,947.50 loss Check one note for calculation

A portfolio manager buys bonds at a price of 103-12. The fund will be buying another $30,000,000 of 20-year bonds in April. The portfolio manager intends to hedge the upcoming purchase. Treasury bond futures prices are as follows: Dec 101-22 Mar 101-02 Jun 101-07 Sep 101-10 The bonds are purchased in April at 104-28/32 and the futures position is offset at 101-15/32. As a result of the hedge, the purchase price of the bonds for the portfolio manager is: A. 103-20 B. 105-04 C. 102-04 D. 104-20

D. 104-20 Check one note for calculation

Margin for soybean meal futures is $10 per ton. Soybean meal trades on the Chicago Board of Trade. The price quoted is per ton. A customer places a market order to sell 9 August soybean meal futures contracts. The market is trading $218.70 bid/offered at $218.75. The order is filled at $218.70. When the customer is ready to liquidate his position, the effects of the previous year's drought and an increase in current demand has caused the price of soybean meal to rally. The position is liquidated at $221.40. Round-turn commissions are $70. The soybean meal futures contract is 100 tons. The resulting percentage of profit or loss, including commissions, on the margin deposited is: A. 14% B. 25% C. 27% D. 34%

D. 34% Check one note for calculation

Which of the following statements is TRUE regarding the regulatory requirements for CPOs? A. CPOs may combine all of their pools for reporting performance B. Funds of different pools can be commingled C. Separate pools must be run under the same entity as the CPO D. A breakeven calculation must be included in a CPO's disclosure document

D. A breakeven calculation must be included in a CPO's disclosure document CPOs must run each pool as a separate business entity. As a result, performance disclosures must be made separately for each pool and funds from different pools may not be commingled in the same account. CPOs must include a breakeven calculation in their disclosure document.

Membership in the National Futures Association is mandatory for all of the following, EXCEPT: A. Futures Commission Merchants B. Commodity Pool Operators C. Commodity Trading Advisors D. Banks

D. Banks The NFA membership is open to but not required for exchanges, banks and commodity-related business firms.

A plumber successfully bids for a contract that requires the installation of 500,000 pounds of copper tubing in six months. The contract size is 25,000 lbs. In order to hedge against a rise in copper prices, he would: A. Sell 25 copper contracts B. Sell 20 copper contracts C. Buy 25 copper contracts D. Buy 20 copper contracts

D. Buy 20 copper contracts Check One Note for calculation

A copper buyer puts on a hedge when the basis is 22 cents under. When the hedge is lifted, the basis is 27 cents under. A copper contract covers 25,000 pounds. The result of the hedge is a: A. Loss of 49 cents B. Loss of 5 cents C. Gain of 22 cents D. Gain of 5 cents

D. Gain of 5 cents A buyer of copper (user) would profit if the basis weakens. If the basis is under (cash is less than the futures price) and the difference between the cash and futures prices increases, then the basis has weakened. The weakened basis would equate to a gain for the user. When the basis moves from 22 cents under to 27 cents under, the basis has weakened. The result of this hedge is a 5-cent gain for this user of copper.

All orders placed with no specification of time are: A. Good till canceled B. Good till executed C. Good till expiration of the contract D. Good for the day it is placed

D. Good for the day it is placed In the absence of a time specification, the order is presumed to be in force until the close of that day.

A trader has both a regulated futures account and a securities account at an FCM. The trader receives a margin call in his securities account and has excess equity in his regulated futures account. In this case, the member firm: I. Could transfer the money from the regulated futures account to the securities account if the customer gave specific instructions for this to be done II. Could not transfer money from the regulated futures account to the securities account under any circumstances III. Could make the transfer by obtaining written consent from the customer each time such a transfer is to be made IV. Could make the transfer if the customer has signed an agreement that authorizes the firm to make such transfers from the regulated futures account to the securities account A. I and II only B. I and IV only C. II and III only D. III and IV only

D. III and IV only The transfer could be made if a customer has completed a transfer and consent form or supplemental agreement.

Which of the following purposes is served by the Customer Agreement for a commodity futures account? A. Ensure repayment of funds lent to customers to meet margin calls B. Prevent customers from holding futures exchanges liable for losses incurred in futures trading C. Preclude a customer from filing a lawsuit against the brokerage firm D. Inform the customer that the brokerage firm may close out the account if margin requirements are not met

D. Inform the customer that the brokerage firm may close out the account if margin requirements are not met One of the elements covered in the Customer Agreement is the right of the FCM to close out positions, and to close out the account, if margin calls are not met on a timely basis.

In March, a customer shorts an August 1700 gold call option with a $10.25 premium. In July, August gold futures rally to $1,714 an ounce. The customer then rolls the option position up and out into the October 1750 call for a premium of $12.05. What is the customer's profit or loss if the gold futures contract size is 100 Troy Ounces and the customer offsets the August position at 13.47 and the October position at 13.68? A. Gain of $201.00 B. Loss of $201.00 C. Gain of $485.00 D. Loss of $485.00

D. Loss of $485.00 The August option has a loss of $322 (Sold at $10.25 and covered at $13.47 = $3.22/oz. loss x 100 oz. = $322). The October position has a loss of $163 (Sold at $12.05 and covered at $13.68 = $1.63/oz. loss x 100 oz. = $163). The total loss is $485 ($322 + $163).

Which of the following statements regarding the reporting requirements for commodity pools is TRUE? A. Pool participants must receive statements at least monthly if the net assets are equal to $250,000. B. Pool participants must receive statements at least monthly if the net assets are less than $250,000. C. Pool participants must receive statements at least monthly if the net assets are less than $500,000. D. Pool participants must receive statements at least monthly if the net assets are greater than $500,000.

D. Pool participants must receive statements at least monthly if the net assets are greater than $500,000. A CPO must distribute account statements to pool participants at least quarterly. However, for pools that have net assets of greater than $500,000, account statements must be sent monthly.

When futures prices are higher than the cash price, the market would be: A. Inverted B. Reverse C. Discount D. Premium

D. Premium If near futures are selling above cash, and deferred futures are selling above near futures, the market is called a normal or premium market.