Series 3 GL Exam 1

Every employee of an NFA member who's required to register with the CFTC must become an NFA associate. ATrue BFalse

A Every employee of an NFA member firm who's required to register with the CFTC must become an NFA associate.

An investment company portfolio includes $34 million in 7 5/8% Treasury bonds that mature in December of 2019. The company wishes to hedge its portfolio using the CBOT option on T-bond futures contracts. To establish a weighted hedge, how many option contracts should be bought if the bond conversion factor is .9629? A327 puts B328 puts C327 calls D328 calls

A For a weighted hedge, one would need 327 put options. In order not to be considered a speculator, you need to round down to the nearest whole number.

The term "pyramiding" refers to the use of unrealized profits in already-existing positions to use as margin on the purchase of additional contracts. ATrue BFalse

A The term "pyramiding" refers to the use of unrealized profits on existing positions to use as margin on new positions.

An FCM who guarantees an Introducing Broker is responsible to customers of the IB in arbitration and reparations proceedings, but the FCM is not subject to NFA disciplinary actions for violations by the IB. ATrue BFalse

B An FCM who guarantees an IB is subject to NFA disciplinary actions for violations by the IB.

An intramarket spread involves the purchase and sale of the same commodity on two different exchanges in the same or different delivery months. ATrue BFalse

B An intramarket spread is one which involves the purchase and sale of the same commodity on the same exchange in different delivery months. An example of an intramarket spread would be the purchase of March wool on the New York Cotton Exchange and the sale of October wool on the New York Cotton Exchange. An intermarket spread would involve the purchase and sale of the commodity in two different exchanges in the same or different delivery months. An example of an intermarket spread would be the purchase of July wheat on the Chicago Board of Trade and the sale of September wheat on the Kansas City board of Trade.

An inverted head and shoulders pattern usually indicates to technical analysts: AA continuing price decline in a declining market BThe reversal of a declining market CThe reversal of an advancing market DA stagnating market

B An inverted head and shoulders pattern indicates the reversal of a declining market.

At a NFA arbitration hearing, the FCM is required to be represented by an attorney. ATrue BFalse

B At a NFA arbitration hearing, both parties are given the opportunity to appear. Although a party to arbitration can be represented by an attorney, this is not required.

Brokerage Firm A executes an order on behalf of a customer of Brokerage Firm B. This is: ABucketing BA give up CAn account transfer DAn exchange for physicals

B By definition, a give up occurs when one brokerage firm or FCM executes an order on behalf of another brokerage firm.

A Commodity Trading Advisor (CTA) is NOT required to register as a Futures Commission Merchant (CFM) to accept customer funds. ATrue BFalse

B CTAs that are not also registered FCMs cannot accept funds directly from their customers. If the CTA is not a registered FCM, the CTA's disclosure document must indicate to clients that their funds will be deposited directly with the FCM.

A pool that invests only in foreign futures and options is exempt from registration. ATrue BFalse

B Commodity pools sold within the United States must be registered irrespective of the domestic or international character of the futures or commodities contained therein.

An NFA member is required to keep copies of its promotional materials for the lifetime of the firm. ATrue BFalse

B Copies of all promotional materials must be maintained by each NFA member for a period of five years from the date of last use.

If an investor is short a call option on an equity index futures contract and is exercised against, he will take a: ALong futures position BShort futures position CLong position in the equity index DShort position in the equity index

B If a person sells (i.e., shorts) a call option on an equity index futures contract and is exercised against by the buyer, he must take a short futures position.

Your client is a Ghanaian cocoa exporter selling goods to a London importer and receiving payment in British pounds. He would hedge against a decline in the value of the pound by buying British pound futures. ATrue BFalse

B In this situation the importer, who receives British pounds, fears a price decline in British pounds. Therefore, he will place a short hedge, which is the sale of British pound futures.

If the market touches the price of a limit order after that order is entered, the customer is entitled to a fill and can hold the broker responsible if the order is not filled. ATrue BFalse

B Limit orders can only be filled at the specified limit price, or better. If the market moves away from the specified limit price, the customer order will not be executed. If the customer wished to obtain an execution once a specific market point is reached, they may place a "market if touched order." They would not be guaranteed to receive a specific price for execution.

Margin requirements are generally higher for short positions than for long positions. ATrue BFalse

B Margin requirements are the same for both long and short positions.

All option premiums have intrinsic value. ATrue BFalse

B Only in-the-money options have intrinsic value. The premiums for both at-the-money and out-of-the-money options will not include intrinsic value.

Short-term interest rates are not a factor to consider in the basis between cash and futures. ATrue BFalse

B Short-term interest rates are a factor to consider in the basis relationship.

There is an active OTC market in futures contracts similar to the OTC market in equities. ATrue BFalse

B The answer is false. Trading in futures occurs on the organized exchanges. There is no active over the counter market for futures.

The premium is paid by the seller and received by the buyer. ATrue BFalse .

B The premium is paid by the buyer and received by the seller

The purchase of October futures versus the sale of August futures in the same commodity on the same exchange is an: I.Intramarket spread II.Intermarket spread 111.Intradelivery spread IV.Interdelivery spread AI and III BI and IV CII and III DII and IV

B The purchase of October futures of a commodity versus the sale of August futures of the same commodity is called an intramarket spread. Another term that is used to describe this type of spread is an interdelivery spread. The sale of a commodity on one exchange and the purchase of the same commodity in the same or a different month on another exchange is an intermarket spread. For example, the purchase of July wheat on the Kansas City Board of Trade and the sale of September wheat on the Chicago Board of Trade would be an example of an intermarket spread.

In a normal market, the difference between near and deferred futures contract months is called: AReverse crush BCarrying charge CBasis DCrush

B The reason for deferred month prices to exceed near month prices is the cost to store, finance, and insure the commodity. This is known as carrying charges. For this reason a "normal market" is sometimes called a carrying charge market.

Establishing a position in excess of the exchange reporting limits is a violation of CFTC regulations. ATrue BFalse

B The reporting levels apply to both hedgers and speculators; they require a trader to report all trades to the CFTC. However, it is only a reporting requirement, not a position requirement. Therefore, it is not a violation to establish a position beyond the reporting limits.

What is the reason for the leverage found in futures contracts? AThe volatility of futures prices BThe small margin compared to the size of the futures contract CThe size of the minimum price change (tick) DThe size of the contract

B The required margin for a futures contract is a relatively small percentage of the underlying value in the contract. This provides the leverage. For example: if the required margin is 10% for a contract, a client would have 10 times leverage. If the required margin is 5%, the client would have 20 times leverage.

The seller of a put option receives a short futures position when the option is exercised. ATrue BFalse

B The seller of a put option receives a long futures position when a put option is exercised by the buyer.

October sugar is trading 13.87 cents. The October 14 cent sugar call is trading 1.50 cents. This call has a delta of 40% (.4). Sugar rallies .50 cents on news of foreign buying of sugar contracts. The sugar futures contract is 112,000 pounds. What is the 14 cent call worth after the underlying futures contract has advanced .50 cents? A$1,456 B$1,904 C$14,056 D$19,040

B The sugar futures contract changed in value by .50 cents. The delta of the call option is 40%. Therefore, the option premium will increase by .20 cents (.50 cents x .40). The original option premium (1.50 cents) plus the change in the option premium (.20 cents) equals the new option premium (1.70 cents). 1.70 cents x 112,000 lbs. (contract size) equals $1,904

The NFA designates exchanges as contract markets. ATrue BFalse

B This is false. The CFTC designates exchanges as contract markets.

A switch order instructs an associated person to do one of two alternative trades, but not both. ATrue BFalse

B This statement describes an One-Cancels-the-Other (OCO) order. A switch order is used when a customer wants to offset a near month futures positions and establish the position in a later month. For example, if a trader is long March, he may enter a switch order to sell March and go long the December contract.

The December E-mini Nasdaq 100 Index futures are trading at a 1.32% discount to the underlying index. If the trader is bearish on the stock market, he will: ABuy E-mini Nasdaq 100 Index futures BSell E-mini Nasdaq 100 Index futures CBuy E-mini Nasdaq 100 call options DSell E-mini Nasdaq 100 put options

B When a trader is bearish on the market, he will sell index futures. In this case, the size of the discount is not important, but could confirm that the market is expected to drop in the next few months. As for buying calls and selling puts, both are bullish positions.

An investor purchases a March sugar futures contract at 13 cents paying an initial margin requirement of $1,500. He also sells a March 13 call option at a premium of $750. If the futures price at expiration is below 13 cents, the option will provide a return on the original margin deposit of: A5.1% B20.0% C50.0% DNo return

C At the expiration of the short option, the investor will retain the premium of $750. This will provide a return of 50% on the original margin ($750 divided by $1,500).

S&P 500 e-mini index futures prices are at 2871.75. For these contracts, the contract multiplier is $50 times the value of the S&P 500. A customer has a portfolio of stock that's worth $500,000 and wants to hedge his portfolio. In this case, how many contracts will he need? A174 contracts B10,000 contracts C3 contracts D2 contracts

C Each futures contract is worth $143,587.50, which is found by taking the $50 multiplier and multiplying it by the value of the index 2871.75. The customer's portfolio worth $500,000. To determine the number of futures needed to hedge, divide the value of the portfolio by the value of the futures contract to get 3 contracts ($500,000 ÷ $143,587.50 = 3.4822 contracts). For questions that have a fractional number of contracts, round down to the nearest whole contract.

The term "reversal chart" would apply to a: ABar chart BLine chart CPoint and figure chart DMoving average chart

C Point and figure charts are handled differently than bar charts. In a bar chart, the high and low range for the day, plus the closing price, are plotted on the chart. In a point and figure chart, this is not done. In this type of chart, the analyst first determines the scale he will use. The scale might be 1/2 cent, or 1 cent, or any other variation that he chooses. Whatever scale is decided upon then determines what will be plotted on the chart. Let's assume that the analyst determines that he will use a 1 cent scale. He will make entries on his chart only if the price of the commodity advances or declines by one cent. It does not matter over how long a period this change takes place. As soon as the change upward or downward is 1 cent, an entry will be made. Let's assume that the initial price of the commodity is $4.10. The commodity trades the following day up to a high of $.10 3/4. No entry will be made on the chart at all because the price has not varied by the scale amount of 1 cent. The next day, the commodity advances to $4.11 1/4. Since the advance was over 1 cent from the initial starting price, an entry would be made on the chart. The commodity does not fluctuate over the next three days more than 1/4 point, so no entries will be made. On the following day, however, the commodity advances to $4.13. Since the change in price was over 1 cent, another entry would be made on the chart. On the following day, the commodity drops in price to $4.12 1/2. As this is a change of less than 1 cent, no entry is made. The next day, the price drops again, to $4.11 3/4. As the change was now over one cent, another entry would be made. Note that prices are plotted when they either advance or decline by the amount that the analyst has determined as his variation. If the price has advanced, and then reverses itself and declines by the amount of the variation (in this case 1 cent), an entry is made on the chart. This is the reason why the point and figure chart is also referred to as a "reversal chart."

A farmer estimates his corn crop to be 6,500 bushels. He hedges by selling one futures contract at 3.31. He later sells his cash crop at 3.18 and closes out the futures position at 3.20. What is the net amount the farmer received from his crop? A$16,450 B$20,670 C$21,220 D$21,385

C The answer to this question requires knowledge of the futures contract size. In the case of corn, the contract size is 5,000 bushels. The profit on the futures position is: Short @ 3.31 Buy @ 3.20 Profit .11 Contract size x 5,000 Profit $550 Proceeds in the sale of the corn are: Sale @ 3.18 Crop size x 6,500 bushels Proceeds $20,670 The total proceeds are $21,220.

A customer deposits margin of $14,000 and buys a T-Bond futures contract at 105-20. At the close, if the market settles at 106-27, the equity in the account is: A$1,218.75 B$12,781.25 C$15,218.75 D$121,875

C The customer has gained $1,218.75 (106-27/32 - 105-20/32 = 1-07/32 gain = 1.21875% x $100,000 par OR [1 x $1,000 + 7 x $31.25]). Since the initial equity is $14,000, the gain brings the ending equity balance to $15,218.75 ($14,000 initial + $1,218.75 gain).

A customer is long 2 heating oil contracts at $3.5800. The market is now $3.7030. To protect his gain, he places a stop order at $3.6500. The stop is filled at $3.6475. Commissions are $35 per contract. The contract size is 42,000 gallons. What is his profit? A$2,000 B$2,835 C$5,600 D$5,670

C The customer's profit is determined as follows: Long 3.5800 x 42,000 (Contract size)=$150,360 Sells 3.6475 x 42,000=$153,195 Profit=$2,835 No. of Contractsx2$5,670 Commissions @ $35 per Contract70$5,600

In August, an investor buys two December gold $1,650 call options for $140. Later, in November she sells the contracts for $230. Gold futures have a contract size of 100 troy ounces and the round-turn commissions are $100 per contract. The investor's net profit is: A$8,900 B$18,000 C$17,800 D$9,000

C The investor made $90 per oz. ($230 sale - $140 purchase) on the purchase and subsequent sale of the option. Since gold futures have a 100 troy ounces contract size, the investor made $9,000 in gross profits per contract ($90 per oz. profit x 100 troy oz.). After paying round-turn commissions, the investor's net profit is $8,900 per contract ($9,000 gross profit - $100 round-turn commissions). The investor bought and sold two options; therefore, the total profit is $17,800 ($8,900 net profit per contract x 2 contracts).

A plumbing firm bids on a contract that calls for installation of tubing that contains 700,000 pounds of copper. The current price of copper is 108.20 and futures are at 110.40. The size of the futures contract is 25,000 lbs. When the hedge is established, the contractor's basis is 2.20 under. When the hedge is lifted, the firm's basis is 2.10 under. As a result of the hedge, the net cost of the copper to the plumbing firm is: A$756,700 B$757,400 C$758,100 D$785,100

C The plumbing firm is short the cash copper and is convinced that prices will rise between now and installation. Therefore, the firm will hedge by going long futures (long hedge). Current cash price is 108.20 and futures are 110.40. The basis is 2.20 under. When the hedge is lifted the basis has narrowed by .10 to 2.10 under. Since this is a long hedge the firm will lose if the basis narrows. The net result of the hedge is that the firm loses .10. The firm could have purchased copper originally at 108.20. The firm lost .10 on the hedge, so the net cost to the firm when the copper purchased is the 108.20 (original cash price) plus .10 (the net loss on the hedge) or 108.30 per pound or $758,100 for the 700,000 pounds of copper

The Federal Reserve will exert the greatest influence on the price of Treasury bills through: AIncreasing and decreasing margin requirements BIncreasing and decreasing the discount rate CThe purchase and sale of Treasury bills in the open market DIncreasing and decreasing the reserve requirement of member banks

C The primary tool of the Federal Reserve is its open market operations, which involves the purchase and sale of government securities to influence bank credit and interest rates.

A trader buys 4 T-bills a 92.05. When the contract is at 93.04, the trader sells 3 contracts. Later, when the contract is at 93.14, the trader closes the remaining position. The result is a: A$5,200 profit B$9,900 loss C$10,150 profit D$10,900 profit

C This is really two speculation questions: A trader is long @ 92.05 They sell @ 93.04 Profit = [.99 or 99 basis points (each basis point has a value of $25.00)99 x $25 = $2,475 profit for each of three contracts$7,425 = total profit for the first three contracts] In the remaining contract: A trader is long @ 92.05 They sell @ 93.14 Profit = 1.09 or 109 basis points x $25 = $2,725 The total profit is the sum of the two profits: $7,425 + $2,725 = $10,150

The market for a futures contract appears as follows: March$3.85May$3.83July$3.80September$3.76 This type of market would be called: AA carrying-charge market BA normal market CAn inverted market DA premium market

C This market is called an inverted market since the nearer months are selling at higher prices than the deferred months.

In order for a market in a futures contract to be successful, all of the following are necessary, EXCEPT: AThere must be adequate and well-diversified supply and demand for the commodity BThe commodity must be one for which grading standards can be established CThe commodity must be free of excessive government controls over prices and production DThe commodity must be storable and non-perishable for a long period of time

D For a futures contract to be successful, there must be sufficient interest demonstrated by producers and users. The commodity must be one for which grading standards can be established in order to establish confidence in those users of the commodity who stand for delivery. The price must be allowed to fluctuate freely. If the price cannot fluctuate, hedgers will have no need for the market and speculators will have no interest in the market. The commodity does not have to be storable and non-perishable. Eggs for example, are perishable commodities for which there are successful futures markets.

Inflation rates are as follows: Germany 10%, Switzerland 4%, and United States 5%. Which of the following is an appropriate trading strategy if this trend is expected to continue? ASell Swiss franc calls BSell Swiss franc futures CBuy Euro calls DSell Euro futures

D If a country has persistently high inflation, its currency will probably decline in value. Since the rate of inflation in Germany is higher than in the U.S. or Switzerland, the Euro is likely to fall in value. Selling Euro futures will be the most profitable position.

Your client has gold bars and coins and wants to protect the value of his investment against declining gold prices. You would recommend that he buy an: AIn-the-money call BIn-the-money put CAt-the-money call DAt-the-money put

D In this situation, it is expected that gold prices will be declining. Your recommendation should be to buy a short-term, at-the-money put or, if available, an out-of-the-money put. The put will be inexpensive and, hence, highly leveraged. The client's risk is limited to the option premium.

Original margin is all of the following, EXCEPT: AThe amount of funds required by the broker when the futures contract is initiated BEstablished by the commodity exchange on which the commodity is traded CTo insure performance under the terms of a futures contract DEstablished by the federal government

D Original or initial margin is the amount of money prescribed by the exchange on which the commodity is traded. It is the amount that a customer is required to deposit when he takes a position in futures. The purpose of the margin deposit is to insure that the customer will perform under the terms of the contract, and to protect the broker against loss due to adverse price movements. There is no federal regulation of margin deposits in commodity futures, and the CFTC is not involved in establishing margin requirements.

Disciplinary actions imposed by the NFA's Regional Committee can include all of the following, EXCEPT: ASuspension for a fixed period BExpulsion CA fine of up to $250,000 per violation DA prison term of not more than five years

D Possible disciplinary actions imposed by the NFA's Regional Committee include expulsion, suspension, prohibition of future association with any NFA member, censure, reprimand, or a monetary fine that cannot exceed $250,000 per violation. Only a violation of federal law (e.g., the Commodity Exchange Act) can be punished with imprisonment. Violations of NFA rules cannot result in prison sentences.

The Option Risk Disclosure Document does not need to contain which of the following information? ADescription of costs if option is exercised BWriter's margin requirements CProcedure for exercising the option DThe name of the CTA that wrote the customer's option

D The Option Risk Disclosure Document is given before the customer opens an account. Since the customer hasn't purchased any contracts, the name of the CTA (or trader) that wrote (i.e. sold) the option is not known. All of the other items given must be included in the Option Risk Disclosure Document.

A customer is long September T-bonds at 83-17 and short December T-bonds at 84-14. He liquidates when September is at 82-21 and December is at 83-29. What is the profit or loss, excluding commissions? A$171.88 profit B$171.88 loss C$343.75 profit D$343.75 loss

D The customer will have a $343.75 loss, calculated as follows:

A portfolio manager is overseeing a portfolio that tracks the Dow Jones Industrial Average (DJIA). As a hedge, the manager shorts 10 June E-Mini Dow Index futures at 20,875. The DJIA is currently at 21,207.60. The E-mini Dow index multiplier is $5. What's the portfolio manager's basis? A66.52 under B66.52 over C332.60 under D332.60 over

D The portfolio manager's basis is the difference between the cash price and the futures prices. In this question, the basis is 332.60 (21,207.60 DJIA cash price - 20,875 futures price). The basis is always quoted in terms of the cash price. Since cash is more than futures (i.e., over), the basis is 332.60 over.

Which of the following is an advantage of futures trading? AIt's the only market for the cash commodity. BBuyers and sellers are able to deal with one another directly. CThe cost of financing is increased through hedging. DThe value or price of a commodity is constantly being established.

D The price of a commodity is constantly being established through sales that take place on the exchange. When a futures contract is entered into by a buyer and a seller, it's done through a brokerage firm that's a member of the exchange. The buyer and the seller are not aware of each other's identity and they don't deal directly with each other. The futures market does provide an alternate channel for the marketing of the cash commodity, but it's not the only way to market the cash commodity. The cost of financing can be reduced because banks will lend money at more favorable rate when a position is hedged.

A corporation issues bonds with a price that's equal to 104-20. The corporation intends to issue another $100,000,000 of bonds in May. The corporation wants to hedge its anticipated offering. Treasury bond futures prices are as follows: December 103-12 March 103-24 June 103-26 September 103-15 When the bonds are issued, the issue price is 107-18/32. The futures position is offset at 106-30/32. What was the contribution of the hedge to the final issue price of the bond? AA reduction in the overall interest cost of $3,125,000 BAn increase in the overall interest cost of $3,125,000 CA reduction in the overall interest cost of $187,500 DAn increase in the overall interest cost of $187,500

D When the hedge is established, cash is 104-20/32 and June futures are 103-26/32. When the bonds are issued and the futures are offset, cash is 107-18/32 and futures are 106-30/32. The net result is a loss of 0-06/32 (3-04/32 loss on futures minus, 2-30/32 gain on cash). To find the dollar value, convert 6/32nds (i.e., the loss) into a percentage, which is 0.1875%. Then, multiply the by $100 million, to get $187,500 (0.001875 x $100,000,000). Since the hedge lost money, the company will need to pay more interest when it issues the bonds.

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: December 101-22 March 101-02 June 101-07 September 101-10 When the hedge was initially established, the portfolio manager's basis is: A2-10 under B2-10 over C2-05 under D2-05 over

D When the hedge is placed, bonds were purchased at 103-12/32 (i.e., cash now). The portfolio manager will use June futures (i.e., first month after anticipated cash transaction) to hedge at a price of 101-07/32. Therefore, the basis is 2-05/32 over, since cash is over futures.

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 hedged his position, his net hedge result will be: AA profit of .023 BA loss of .023 CA profit of .013 DA loss of .013

D When the importer first placed the order, he was short the British pound (i.e., short the basis) and should place a buying hedge (i.e., long futures position). He would close out his position by buying pounds in the spot market and selling their futures. His position would appear as follows. CashFuturesShort at$1.2475Buy at$1.2625Buy at$1.2835Sell at$1.2855Loss$ .036Profit$ .023 The loss on the cash position is $.036 on each pound. The profit on futures is .023 on each pound. Therefore, the net loss on each pound is $.013 ($.036 loss - $.023 gain)

A fill or kill order may be partially filled. ATrue BFalse

A A fill or kill order will be executed as soon as it is entered. The broker will fill as much of the order as possible and then cancel anything that is left over. For example, if a customer has entered a buy fill or kill order for 10 contracts, but the broker can only get 4, he would buy 4 contracts and cancel the other 6.

The term "liquidating market" is used to refer to a market that is characterized by a large amount of offsetting of positions with a decline in the price of the contract. ATrue BFalse

A A liquidating market is one in which existing long and short traders are exiting the market at a faster pace than new buyers and sellers are entering the market, and the price of the futures contract is declining.

A written demand left at the office of the customer for an additional margin deposit because of adverse fluctuations in the marketplace shall be deemed sufficient notification if the FCM is unable to effect personal contact with the customer. ATrue BFalse

A A member firm will normally attempt to contact a customer if there is a margin call. However, failure to contact the customer does not affect the member firm's right to liquidate the customer's position if market conditions so dictate.

A registered commodity pool operator must deliver a disclosure document to all participants of the pool: APrior to engaging in any activity in that pool BWithin seven business days after pool activity begins CWithin 15 days after pool activity begins DWithin 30 days after pool activity begins

A A registered commodity pool operator must deliver a disclosure document to all participants of the pool prior to their engagement in any activity in that pool (e.g., making investments).

A trader believes the market will rally, reach a resistance point, and then sell off sharply. Which of the following orders should he place? AMarket if touched (MIT) BStop order CLimit order DFill or kill order

A 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.

A customer offsets a position in the current delivery month and simultaneously takes a new position in a deferred futures month. This type of order would be called: QID: 3076340 Mark For Review AA switch order BA spread order CA give-up order DA hedge order

A A switch order is an order to liquidate a futures contract and assume a new position in the same commodity in a later delivery month.

An FCM is responsible for all of the following, EXCEPT: AProhibiting floor brokers from trading for their own accounts BMaintaining records for five years CSegregating customer funds DReporting activity for traders whose positions exceed the reporting level

A An FCM is not responsible for prohibiting floor brokers from trading for their own accounts.

Up-front fees reduce pool performance during the initial period in which they are charged, unless the fees are amortizable under generally accepted accounting principles. ATrue BFalse

A As long as generally accepted accounting principles (GAAP) are followed, certain up-front fees may be amortized over a number of years.

For a pool with net assets of $300,000, a CPO's account statements must be distributed quarterly. ATrue BFalse

A For pools with net assets exceeding $500,000, CPOs must send monthly statements. However, for pools with net assets of $500,000 or less, CPOs must send quarterly statements.

Funds in an account in excess of the amount required to fully margin existing positions may be withdrawn or used to margin new positions. ATrue BFalse

A Funds in an account in excess of the amount required to fully margin existing positions may be withdrawn or used to margin new positions.

If an investor is short a put option on an equity index futures contract and is exercised against, she will be assigned a: ALong futures position BShort futures position CLong position in the equity index DShort position in the equity index

A If a person writes (i.e., shorts) a put option on an equity index futures contract and is exercised against by the buyer, she must take a long futures position.

In which of the following situations should the designation "OB" be used on an order? AOn a sell limit order at 17 when the contract is currently at 17.50 BOn a buy limit order at 17 when the contract is currently at 17.50 COn a sell limit at 17 when the contract is currently at 16.50 DOn a buy limit order at 15 when the market is trading for 15.50

A OB is the abbreviation for "or better". This designation is applicable in the case of marketable limit orders. These orders include buy limit orders which, when placed, have a limit price higher than the current offer price, and sell limit orders in which the limit is less than the current bid price.

A major economic role filled by a futures market is: ADetermination of prices BPrice restraint CProviding a market for surplus commodities DSolving commodity shortages

A One of the most important functions met by commodity exchanges is the determination of the price for commodities. This price is determined by the interaction of the forces of supply and demand which are manifested on the floor of the exchange.

In a bear market, spreads in stock index futures are expected to narrow. ATrue BFalse

A Since deferred month futures prices will fall faster than near month futures prices, the spread in stock index futures will narrow in a bear market. However, in a bull market, stock index futures spreads will widen because deferred month futures will rise more than near month futures.

A speculator believes that current economic conditions in the United States will result in a decrease in the value of the U.S. dollar against the euro. In view of this expectation, she establishes positions in 15 March Euro futures on the CME at $.9675 and her round-turn commissions are $50. Later, the euro futures rise to $.9740 and the customer liquidates the 15 contracts. If the contract size on the CME is 125,000 euros, what's the speculator's gain or loss? A$11,437.50 profit B$12,185.50 profit C$15,187.50 profit D$16,687.50 loss

A Since the speculator expects the value of the euro futures to rise against the U.S. dollar, she will establish a long position in the euro. Long at $.9675 Sell at $.9740 Profit per euro = $.0065 Profit per contract = $812.50 ($.0065 x 125,000 contract size) Commissions paid ($50) Net profit per contract $762.50 Total profit $11,437.50 ($762.50 x 15 contracts)

As a part the Risk Disclosure Statement, the Cautionary Statement must be prominently disclosed on which page of the disclosure document? AThe cover page BThe first page CThe last page DAny page in the document as long as it's prominently stated

A The Cautionary Statement is required to be prominently disclosed on the cover page of the disclosure document.

A trader takes a position in a futures contract and deposits the necessary margin of $1,500; maintenance margin is $1,200. The exchange subsequently raises the initial margin requirement to $3,000 and maintenance margin to $2,400. In this case the trader: AMust immediately deposit an additional $1,500 BNeed not deposit any additional margin on his existing position, but would be subject to the new margin requirement if he took a new position CWould have to deposit an additional $900 DWould be required to liquidate his position

A The equity in the account is $1,500. When the exchange raises the initial margin to $3,000 and the maintenance to $2,400, the equity in the account is below the new maintenance level. The margin rule requires that when the equity in an account falls below the maintenance level, funds must be deposited to restore the equity in the account to the initial margin level.

A soybean oil importer wants to purchase soybean oil in four months. The current cash price quoted is 19.10. May futures are trading at 19.55 per cwt. He then hedges his risk in the futures market. Before delivery, prices rise due to an increase in demand and supply shortages. The importer purchases when the price of oil is 23.70 per cwt. and July futures are 24.23. The hedge is lifted. The net cost of the soybean oil to the importer is: A19.02 B19.10 C28.38 D28.91

A The importer is short the soybean oil currently and will hedge by purchasing May futures at 19.55. The current cash price of the oil is 19.10. Net cost of the oil to the importer is: 19.02

A farmer sells one wheat contract at $4.00. The market rises 5%. The farmer then sells 2 additional contracts. If the market falls 10% and the farmer offsets all of the positions, what is his total profit or loss? A$5,300 profit B$7,300 loss C$6,700 profit D$4,700 loss

A The market starts at $4.00 and rises 5% to $4.20 ($4.00 x .05 = $.20, $4.00 + $.20 = $4.20). The market then falls 10% to $3.78 ($4.20 x .10 = $.42, $4.20 - $.42 = $3.78). The original contract was sold at $4.00 and covered at $3.78, for a profit of $.22 per bushel. The contract size is 5,000 bushels for a total of $1,100. The two additional contracts were sold at $4.20 and covered at $3.78, for a profit of $.42 per bushel. The contract size is 5,000 bushels and there are two contracts for a total of $4,200. If you add the profit on the first contract, $1,100, and the profit on the two subsequent contracts, $4,200, the net profit is $5,300.

A soybean farmer knows that beans in the cash market are trading between $6.55 1/4 and $6.56 3/4. He also knows that the July soybean futures contract on the CBOT is currently trading $6.63 1/4 - $6.64 1/2. He decides to hedge his entire crop and places a market order. The order is filled at $6.63 1/4. When he lifts his hedge, he receives $6.28 in the cash market. July futures are trading $6.38 1/2 - $6.39. He receives a report from his associated person that his order has been filled at $6.39. As a result of the hedge, the price per bushel the farmer receives for his soybeans is: A$6.52 1/4 B$6.04 1/4 C$6.63 1/4 D$6.15 1/4

A The price per bushel that the farmer receives is $6.52 1/4, calculated as follows:

For a futures contract, the small (relative to the size of the contract) margin deposits that are made are the reason that leverage exists in these contracts. ATrue BFalse

A The required margin for a futures contract is a relatively small percentage of the underlying value in the contract. It's this small deposit which provides the leverage. For example, if the required margin is 10% for a contract, a client will have 10 times leverage. On the other hand, if the required margin is 5%, the client will have 20 times leverage.

When a futures contract is offset, the original buyer or seller is not required to take or make delivery. ATrue BFalse

A The term "offset" means the liquidation of a long futures position by the act of selling an equal number of contracts in the same delivery month, or the liquidation of a short futures position by buying an equal number of contracts in the same delivery month on the same exchange. By offsetting his position, the trader transfers his obligation to make or take delivery to the party who takes the opposite side of his offsetting transaction. If a long does not offset his position before the close of trading, he's required to make delivery in accordance with the rules of the exchange.

Exchange rules state that authorization for discretion must be in writing and revoked in writing or is revoked upon the death of the customer (the death of the AP). ATrue BFalse

A This is true. Discretion may be revoked by either the customer or firm. Discretion can be terminated only by written revocation signed by the person in whose name the account is carried; or by the written notification of the AP or firm that they will no longer act pursuant to such discretion. The death of the person in whose name the account is carried or the death of the AP who has been given discretion also terminates discretion.

An individual takes a short position in soybeans when the price of soybeans is $3.50. He deposits 20 cents margin per bushel. His total investment is $5,000. The margin represents what percentage of the value of the soybeans? A5.7% B7.7% C8.5% D33.3%

A To determine the percentage of margin to the value of soybeans, you would divide .20 margin by $3.50 price of the soybeans. The answer is 5.7%.

A merchant with an inventory of fine gold jewelry would hedge by selling gold futures. ATrue BFalse

A To hedge against a decline in the value of their inventory, a jeweler (who is long the basis) would hedge by selling (shorting) gold futures.

A NFA member who is under review by the Business Conduct Committee is subject to a trading restriction until the matter is resolved. ATrue BFalse

B A NFA member under review by the Business Conduct Committee is not subject to a trading restriction until the matter is resolved.

A buy stop order is an order that becomes a market order when the contract sells or is offered at or below the stop price. ATrue BFalse

B A buy stop order becomes a market order when a contract trades or is bid at or above the stop price. It is often used to limit a loss or protect a profit on a short position.

Commodity Pool Operators may receive funds in their own name. ATrue BFalse

B A commodity pool operator must receive customer funds in the name of the pool in which the customer is participating.

The area on a chart where one might expect an increase in selling for a futures contract would be called: AA support area BA resistance area CA congestion area DBackwardation area

B A congestion area is a chart formation with a relatively narrow range of prices in which the futures contract has traded for some time. The top of the congestion area is called a resistance area and the bottom of the congestion area is called a support area. When the price reaches the resistance area on the top side, increased selling prevents further price advance. When the price reaches the support area on the down side, increased buying retards a further price decline.

Speculation in the futures market generally increases fluctuations in futures prices. ATrue BFalse

B A large number of speculators in a market will reduce the range of fluctuation in the price of futures. This is because a large number of speculators will increase the continuity of the market. A market with many bids and offers competing with one another tend to narrow the spread, which leads to trades that are made at small differences from preceding trades and reduced price fluctuation.

A short hedge protects against: APrices rising BPrices falling CThe basis falling DA short cash position

B A short hedge (selling hedge) is the sale of futures. Futures are sold by hedgers who are long the basis (long cash) and are used to protect against falling prices for the cash commodity. If the price of cash should decline, the loss on cash will be approximately offset by the gain on futures, which will also decline in price.

IBs and FCMs are required to keep records of only those option complaints in excess of $1,000 because these must be reported to the NFA. ATrue BFalse

B All option complaints must be kept. If they are verbal complaints, a written record of the complaint must be made.

Which of the following shows a weakening market? ACash increases more than futures. BCash decreases more than futures. CFutures decrease more than cash. DFutures increase less than cash.

B All questions consider a normal market unless otherwise stated. A weakening market is when the basis becomes less positive or more negative. Thus, if the price of the cash commodity decreases more than the price of futures, the basis would widen further into the negative, or it would be a less positive basis.

A commodity order which has no provision as to time of execution is: AAn open order BA day order CFill or Kill DImmediate or Cancel

B If an order does not have any indication of the time duration, it is assumed to be a day order and will automatically be canceled at the end of the trading session if it is not executed. If the trader wants the order to remain in effect beyond the current trading session, he would indicate this by instructing the broker to mark "GTC" (good until canceled) on the order. In this case, the order would remain in effect beyond the current trading session.

If the basis strengthens, the long hedger will have a profit. ATrue BFalse

B If the basis strengthens, the long hedger will have a loss. A strengthening basis is when the basis becomes more positive. A long hedger has bought futures because he is short the basis. We can create a theoretical situation to solve this problem: The basis changed from 2 under to 1 under. This is a strengthening basis. Note: Markets are considered normal unless otherwise stated in the question.

A customer has indicated that he might be interested in taking a position if the price of a commodity reaches a certain level. Two weeks later, the commodity reaches the level indicated. The Registered Commodity Representative tries to contact the customer but is unable to do so. Even though the RCR does not have discretionary authorization, he may enter the order if he thinks he will be able to contact the customer within a short time after the order is executed. ATrue BFalse

B Since the associated person or registered commodity representative does not have discretionary authorization, the order cannot be executed.

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: December 101-22 March 101-02 June 101-07 September 101-10 The portfolio manager will hedge by: ABuying March futures contracts BBuying June futures contracts CSelling March futures contracts DSelling June futures contracts

B Since the portfolio manager anticipates buying bonds in April, he will buy June futures rather than March. Although March is closer to April, the March contract expires before the manager intends to buy bonds, thereby leaving the portfolio unhedged for a period. For this reason, hedgers will typically use the first futures expiration after their anticipated cash transaction.

A T-bond option premium of 1-24 equals: A$1,750 B$1,375 C$1,240 D$3,100

B T-bond option premiums are quoted in 64ths. A premium of 1-24 is 1-24/64ths percent of the T-bond contract size (which is $100,000). To find the dollar value, convert 1-24/64 into a decimal, which is 1.375% (24/64 = .375). Then, multiply by 1.375% by $100,000 to arrive at $1,375.

The CFTC regulates all futures trading except broad-based stock index futures and options. These are regulated by the SEC. ATrue BFalse

B The CFTC regulates futures trading including futures and options on broad-based stock indexes.

Floor brokers must register with the NFA as associated persons. ATrue BFalse

B The CFTC, not the NFA, regulates floor brokers and floor traders. As a result, floor brokers are not required to register with the NFA.

If a pool has been operating for six years, the disclosure document must show the performance for the life of the pool. ATrue BFalse

B The answer is false. Pools in operation for five or more years are required to disclose their most recent five-year performance.

A corporation issues bonds with a price that's equal to 104-20. The corporation intends to issue another $100,000,000 of bonds in May. The corporation wants to hedge its anticipated offering. Treasury bond futures prices are as follows: December 103-12 March1 03-24 June 103-26 September 103-15 The corporation will be concerned with: ARising interest rates and should establish a buying hedge BRising interest rates and should establish a selling hedge CFalling interest rates and should establish a buying hedge DFalling interest rates and should establish a selling hedge

B The corporation is concerned about rising interest rates. If interest rates rise, the price of bonds that are already outstanding will fall and the corporation will receive less money when it sells bonds in May. To protect against this loss, the corporation should sell futures as a hedge.

The Board of Directors of an industrial corporation decides at their board meeting in October to sell $25 million in commercial paper in May. The commercial paper prime rate is 7%. The 90-day Treasury Bill rate is 6% and the Treasury Bill June futures rate is 8%. The board decides to hedge and will: ABuy June T-bill futures BSell June T-bill futures CBuy six-month T-bills DSell six-month T-bills

B The corporation is concerned that interest rates will rise. If interest rates rise, the price of outstanding fixed-income securities will fall. The corporation will therefore sell futures. If interest rates do rise, they will be able to buy the futures at a lower price. The profit on futures will substantially offset the increase in interest rates.

In January, a corporation issues bonds at 91-14. The corporation intends to issue another $10,500,000 of bonds in July. The bonds will have a 25-year maturity. The corporation hedges its offering. Treasury bond futures prices are as follows: March 95-12 June 94-02 September 92-09 December 90-01 When the hedge is lifted, the bonds are issued at 96-24. The futures position is covered at 97-01. The market has strengthened and the basis has narrowed. Including the results of the hedge, the net proceeds realized on the sale of the bonds is: A$9,600,937 B$9,660,000 C$10,158,750 D$10,500,000

B The corporation plans on selling bonds in July and is concerned that bond prices will be lower by July. Therefore, the corporation sells futures to hedge its position. Net proceeds received from bonds equals:96-24 received when bonds were sold - 4-24 loss on futures 92-00 92-00 or 92% of par 92% x $10,500,000 = $9,660,000.00

A trader buys a corn contract at $3.21. Margin is 12 cents a bushel, the commission is $30 and the contract size is 5,000 bushels. If the trader sells the contract at $3.28, the profit is: A45% B53% C58% D63%

B The question states that margin is 12 cents a bushel. Therefore, multiply the margin of 12 cents by the number of bushels (5,000) to indicate a margin deposit of $600. The question further states that the price advances by 7 cents a bushel. Therefore, multiply 7 cents by the number of bushels in the contract, to indicate an advance of $350. The customer's gross profit is therefore $350. From this profit of $350, we must deduct the commission of $30, to indicate a net profit of $320. In order to determine the trader's margin of profit on the investment, we would divide the net profit of $320 by the total amount of the investment ($600), which indicates a profit of 53%.

A trader assumes two long contracts in sugar at a price of 8.45 cents. The commission on each contract is $62. The trader liquidates his position when the price of sugar has advanced to 9.45 cents. The contract size is 112,000 lbs. The trader would have a net profit of: A$2,240 B$2,116 C$2,206 D$1,986

B The trader would make a profit of $.01 per lb. The size of the contract is 112,000 lbs. The profit per contract is $1,120. The customer has two contracts. $1,120 x two contracts = $2,240. The commission is $62 per contract, for a total of $124. The net profit is $2,240 - $124 = $2,116. Remember to take into consideration the number of contracts involved when determining your answer.

To offset the purchase of a call an investor would sell a put. ATrue BFalse

B To offset the purchase of a call, an individual would sell the call.

In figuring the equity in a commodity account, the closed-out positions and monies deposited or withdrawn are considered, not the open contracts. ATrue BFalse

B When a member firm computes the equity in a customer's account, it takes into consideration the open positions and the amount of cash in the account. If there are unrealized profits on open positions, the customer's equity will be credited with the increase in value. If there are unrealized losses on the open positions, the customer's equity will be reduced by the amount of the loss. The customer may withdraw any excess in cash or use the excess to establish new positions. If there is a decline in the equity, the member firm will call for more margin once the equity drops below the maintenance margin level.

A hedger is generally required to deposit less margin than a speculator for all of the following reasons, EXCEPT: AIt is easier for the brokerage firm to check the financial responsibility of the hedge customer than the speculator BThe hedger generally takes a larger position than the speculator CThe hedger has a cash position in the actuals, and therefore his financial risk due to price fluctuation is less DThe hedger is better able to perform on the contract by making or taking delivery if necessary

B All of the other statements are correct. Most exchanges require a lower margin from hedge customers than from speculators. This is because it is generally easier for the brokerage firm to obtain information regarding the financial responsibility of the hedge customer than it is to obtain such information about the speculator. In addition, the hedger has a cash position to offset his futures position. His risk of loss due to adverse price changes in futures is substantially less than it is for the speculator. Any loss that the hedger realizes on his futures position will be essentially offset by the profit that he realizes on his cash position. In addition, the hedge customer is usually a business concern that is better able to perform on the contract if the hedger decides to make or take delivery of the actuals. The fact that the hedger takes a larger position than the speculator has no significance in the granting of lower margin.

An individual has described herself as a technical analyst. This means that she's most concerned with: ASupply factors relating to future crop yields BHow much a recession in the economy will impact demand for commodities CHead and shoulders patterns DGovernment trade policies regarding the importing of commodities

C A fundamental analyst is interested in factors such as supply and demand for the commodity, basic economic data, governmental actions, and weather conditions. On the other hand, technical analysts are interested in factors such as charts, patterns, and trends.

To technical analysts, a head and shoulders pattern typically indicates: AA continuing price decline in a declining market BThe reversal of a declining market CThe reversal of an advancing market DA stagnating market

C A head and shoulders pattern typically indicates the reversal of a bullish (i.e., increasing) market.

An individual who buys a futures contract against a cash forward sale is a: ASpreader BScalper CHedger DSpeculator

C An individual who buys a futures contract against a cash forward sale is known as a hedger. The term "cash forward" sale refers to a cash market transaction in which the buyer and the seller negotiate for the sale of a specified amount of a commodity to be delivered on a specified date in the future. The price might be agreed upon at the time of the sale, or the buyer and seller might agree that the price is to be determined at the time of delivery. If the seller of the commodity does not own it at the time of the sale, and the price is determined as of the time the transaction is negotiated, he will be concerned about a price rise. He would therefore hedge by buying futures.

An AP has opened a discretionary account with a client. Which of the following is NOT a requirement? AThe account must be under the supervision of a partner or officer of the member firm. BThe customer must receive a confirmation after any purchase or sale. CThe customer must be notified each time the account executive plans to take a new position. DThe customer must give the account executive written authority to exercise discretion in the account.

C If an AP has received the necessary papers to open a discretionary account, he need not notify the customer each time he takes a new position.

A customer buys a T-bill call at 2.10. He sells the call at 4.05. His profit is: A$48.75 B$3,046.88 C$4,875.00 D$6,093.75

C T-bill options are quoted in basis points. A purchase at 2.10 and subsequent sale at 4.05 represents a profit of 195 basis points. The profit is therefore 195 basis points x $25 per basis points or $4,875.00.

A customer buys a T-bond contract at 88-16. He liquidates the contract at 90-10. Round-turn commissions are $30. His net profit is: A$1,376.25 B$1,406.25 C$1,782.50 D$1,812.50

C T-bond futures are quoted in 1/32nds of a point. The investor buys the contract at 88-16 or 88 16/32 and sells at 90-10 or 90 10/32, for a gain of 1 26/32. (90 10/32 - 88 16/32), or $1,812.50. After commissions of $30, his net profit is $1,782.50.

A customer buys a T-bond call and pays 2-10. The premium he pays for the call is: A$210.00 B$231.25 C$2,156.25 D$2,312.50

C T-bond option prices are quoted in 1/64th of a point. A price of 2-10 represents 2 10/64% of par ($100,000 per contract).

T-note futures are quoted in: AYields that are measured to the bond's maturity date BPercentages of par with a minimum tick of 1/64th CPercentages of par with a minimum tick of 1/32nd DPercentages of par with a minimum tick of one basis point

C T-note futures prices are quoted as a percentage of par ($100,000 per contract) in minimum increments of one thirty-second (1/32) of a point, or $31.25 per tick.

A customer monitoring the weather in the Midwest anticipates above average rainfall in the next week. He places an order to sell six contracts of August soybeans at 628 1/2 cents. The contract size is 5,000 bushels. The customer's order is filled at 628 1/2 cents and he establishes a short position of six contracts. The rainfall for the next week is below normal. The customer places an order to buy six contracts of August soybeans at the market. The order is filled at 647 1/4 cents. Round-turn commissions are $45. The profit or loss as a result of this trade is a: A$982.50 loss B$892.50 gain C$5,895.00 loss D$5,355.00 gain

C The loss as a result of this trade is $5,895, calculated as follows: Sell628 1/2cents Buy647 1/4cents Loss18 3/4cents Contract sizex5,000.00 bushels Loss$937.50 Commission+45.00(round-turn) Loss$982.50per contract # of Contractsx6 Total Loss$5,895.00

A client is long 5 Sept T-note futures contracts at 94-21. If the contracts are liquidated at 91-26 and round-turn commissions are $45.00 per contract, the net result is: AA loss of $13,993.75 BA gain of $13,993.75 CA loss of $14,443.75 DA gain of $14,443.75

C The net result including commissions is: Long T-note contracts 94-21 Sell T-note contracts 91-26 Loss 2-27 In order to convert the loss of 2-27 into dollars, we first take 2 27/32% of $100,000, which is $2,843.75 and add $45 per contract for commissions. The result of $2,888.75 is multiplied by the 5 contracts to arrive at a total loss of $14,443.75

In January, a farmer is long 300,000 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. If the hedger sells the hogs in the cash market and offsets his hedge, the change in the cash and futures prices resulted in: AA profitable basis change of 1.20 cents BAn unprofitable basis change of 0.70 cents CA profitable basis change of .50 cents DAn unprofitable basis change of .50 cents

C The net result is as follows: The basis changed from 1.20 under to .70 under. The farmer is a producer of cash hogs and is long the basis. Since the basis is increasing, the change represents a profit for the farmer.

A cash forward contract is different than a futures contract because the cash forward contract is: I. (I) A personal transaction between the buyer and the seller II. (II) Not for a standard amount of the commodity, but rather is for a specific amount and quality of the cash commodity III. (III) Not negotiated by open outcry in the trading pits and is not subject to the rules of a futures exchange AI only BI and II only CII and III only DI, II, and III

D A cash forward contract is a personal transaction for a specific amount and quality of the cash commodity and is not subject to the rules of a futures exchange.

A futures contract: AHas a uniform quantity of a commodity as set in the exchange rules. BPermits the buyer to elect the deliverable grade as specified in the exchange rules and regulations. CPermits the buyer to select the exact lot for purchase. DGives the seller discretion over which grade of a commodity he will deliver at settlement.

D A futures contract is a standardized contract that's entered into by a buyer and seller which always specifies a specific quantity (e.g., 5,000 bushels of wheat, 36,000 pounds of imported boneless beef, 100 tons of soybean meal, etc.) of a specific grade (i.e., the basis grade) at the contract's settlement price. The rules of the exchange allow the seller to select the day of delivery within the delivery month, and allows the seller to deliver either the basis grade at the contract price, or a premium or discount grade at appropriate premiums or discount prices. However, the seller is not given total discretion over the grade of a commodity he will deliver. The buyer must accept the grade the seller decides to deliver.

In a normal market: AThe cash commodity offered doesn't meet demand BFutures prices are the same as the cash price CFutures prices are lower than the cash price DFutures prices are higher than the cash price

D A normal market is when cash is trading at a discount to futures prices. A discount market is one in which the price of the cash commodity is higher than the price of futures, and the price of near futures is higher than the price of distant futures. A discount market is also referred to as an inverted market. Inverted markets are often caused by a shortage in which the supply doesn't meet the demand for a commodity.

A spread could be defined as: AThe purchase of two futures contracts for different commodities that can be used interchangeably BThe sales of one futures contract and the sale of another futures contract on the same exchange, but in different delivery months CThe purchase of one futures contract and the sale of the same futures contract on the same exchange DThe purchase of one futures contract and the sale of another futures contract on the same exchange, but in different delivery months

D A spread is when a trader buys one futures contract and then sells a related futures contract. One of the most common spreads is called an interdelivery spread, where futures are bought and sold in different delivery months.

Exchange rules state that changes in margin requirements shall be effective on: ATransactions executed prior to the margin change BTransactions executed subsequent to the margin change CCertain specified transactions only DAll transactions

D Changes in margin requirements are effective on all transactions.

A commodity trading advisor may be subject to registration if the person is: AA processor or seller in cash market transactions and the trading advice is incidental to the conduct of its cash market business BRegistered as a commodity pool operator and its trading advice is solely in connection with its business in that capacity CAdvising a non-profit voluntary membership, trade association, or farm organization DAdvising more than 15 persons during the last 12 months and the trading advice is incidental to the conduct of its advisory business

D Commodity trading advisors (CTAs) are exempt from registration if they have advised no more than 15 persons over the last 12 months. Advising more than 15 persons in one year will mean that a CTA is required to register with the NFA.

A customer purchases 4 silver futures contracts at 16.65. The contract size is 5,000 troy oz. and the initial margin requirement is $5,000 per contract. If the contract closes at 16.70, what is the customer's total equity? A$250 B$1,000 C$5,250 D$21,000

D The client deposited $20,000 ($5,000 x 4 contracts) in initial margin. Since the customer bought the futures contracts and the contracts increased, the equity in the account will increase. The total equity is $21,000 ($20,000 + $1,000).

A client goes short 6 November soybean futures contracts on the CBOT at 565.50 cents per bushel and pays $240 in total commissions. During the next several trading sessions, the price of soybean futures increases. Later, the customer closes out his contracts at 567.25 cents per bushel. Since the contract size of soybeans is 5,000 bushels, what's the customer's total profit or loss? A$285 profit B$285 loss C$765 profit D$765 loss

D The customer is short soybean futures at 565.50 cents per bushel ($5.655 per bushel in dollars). When the customer covers the short position at $5.6725 per bushel, the gross loss is $0.175 per bushel. Since there are 5,000 bushels in a soybean contract, the loss is actually $87.50 per futures contract ($.0175 loss per bushel x 5,000 bushels). Note that the commissions indicated are a total amount, rather than per contract. The next step is to find the total loss, which is $525 ($87.50 loss per contract x 6 contracts). Finally, add the commissions paid to the loss, which results in a total loss of $765 ($525 loss + $240 commissions).

July Cash Wheat 1.35 Wheat future 1.50 September Cash Wheat1.40 Wheat Futures 1.40 December Cash Wheat 1.42 Wheat Futures 1.47 January Cash Wheat 1.43 Wheat Futures 1.40 Referring to the information above for a wheat elevator operator, how much would a hedge placed in July and lifted in September contribute toward carrying charges: A5 cent increase B15 cent increase C5 cent decrease D15 cent decrease

D The hedger establishes his cash and futures positions in July and lifts them in September. The opening and closing positions will appear as follows: The hedger had a combined profit on cash and futures of 15 cents, which decreases the carrying charges. SELL FUTURES

A customer takes a short position in a futures contract that has an original margin requirement of 80 cents and a maintenance margin requirement of 35 cents. The contract consists of 10,000 units at a price of $3.25. If the contract subsequently declines to $1.85, the customer: AWill be called for $9,500 of additional margin BWill be called for $14,000 of additional margin CMay withdraw $22,000 DMay withdraw $14,000

D The initial margin is $8,000 ($0.80 initial x 10,000 units). Since the value of the contract declined, the customer has a profit of $14,000 ($3.25 - $1.85 = $1.40 profit x 10,000 units). As a result, the current equity is $22,000 ($1.40 profit + $0.80 initial equity = $2.20 equity x 10,000 units). The $14,000 profit represents excess equity (i.e., $22,000 equity - $8,000 initial margin = $14,000 excess) and can be withdrawn.

A trader takes a position in a futures contract and deposits the necessary margin of $2,500. Maintenance margin is $1,875. The margin requirement is subsequently raised to $3,000 initial and $2,250 maintenance. In this case, the trader: AMust immediately deposit an additional $500 BMust immediately deposit an additional $1,125 CWould be required to liquidate his position DNeed not deposit any additional margin

D This change in margin requirements will not result in any immediate change to the trader. However, if the equity in the account should drop below the new maintenance margin level ($2,250), the trader would be required to bring the margin in his account up to the new initial margin requirement of $3,000.

An American exporter receives an order from an Australian company. The order is to be delivered in December and is valued at 40,000,000 Australian dollars. The cash price for the Australian dollar is $.6081 and December futures are trading at $.6061. In December, the cash market price of the Australian dollar is $.5822 and December futures are at $.5819. If the exporter had hedged when the order was placed, the value of the 40,000,000 Australian dollars would have: AIncreased by $968,000 BDecreased by $968,000 CIncreased by $68,000 DDecreased by $68,000

D When the exporter first received the 40 million Australian dollar order, it was long the Australian dollar (long the basis) and should place a selling hedge. The exporter will close out his position by selling the Australian dollar in the spot (i.e., cash) market and buying the futures. The positions will appear as follows: The loss on the cash position is $.0259 on each Australian dollar, while the profit on futures is .0242 on each Australian dollar. Therefore, the net loss on each Australian dollar is $.0017 ($.0242 profit on futures - $.0259 loss on cash). To find the change in total value, take the result of the hedge and multiply by the total order to get $68,000 (40 million AUD x $.0017 loss on hedge). Since the net hedge result is a loss, the value of the 40 million Australian dollar order has decreased.

Sugar futures prices are as follows: Oct11.40 March10.71 May10.40 July10.19 Oct9.99 This type of market is known as a(n): APremium market BNormal market CCarrying charge market DInverted market

D When the price of the near month of a futures contract is above the deferred month of a futures contract, the market is known as inverted.

A customer expects interest rates to decline. Which of the following would you recommend to your customer? ABuying puts BSelling puts CBuying calls DSelling calls

c If interest rates decline, bond prices increase. The investor would, therefore, buy a call.