Practice Test 3 Flashcards
1
Q
A businessman sells his product in Japan and receives payment in Japanese currency. If he fears a devaluation of the Japanese yen, he would sell yen in the futures market.
a. True
b. False
A
a. True
The exporter, anticipating a decline in the Japanese yen, would protect himself by selling yen contracts. If the yen does decline in price, he will be able to close out his purchase by buying yen at a lower dollar amount, thereby generating a profit to offset his loss on the actual yen he receives.
2
Q
A pool has operated for seven years. The pool operator must include the entire performance history in the disclosure document.
a. True
b. False
A
b. False
The risk disclosure document must include performance history for five years. If the pool for which the CPO is soliciting has been trading for more than five years, the disclosure document must contain only the last five years.
3
Q
A sell stop order is an order that becomes a market order when the contract sells or is offered at or below the stop price.
a. True
b. False
A
a. True
A sell stop order becomes a market order when a contract sells or is offered at or below the stop price. It is used to limit a loss or protect a profit.
4
Q
In a normal market, the difference between near and deferred futures contracts is called:
a. Basis
b. Crush
c. Reverse crush
d. Carrying charge
A
d. Carrying charge
A normal market is when the price for the nearest month is selling at the lowest price, while the prices for deferred months are selling at higher prices. This type of market is also referred to as a carrying charge market or a premium market.
5
Q
A bottom head and shoulders and a descending triangle are bearish configurations on a chart.
a. True
b. False
A
b. False
This is false. A bottom head and shoulders is technically bullish.
6
Q
A CPO’s account statements must be distributed at least quarterly.
a. True
b. False
A
a. True
This is true. A CPO must distribute statements of account at least quarterly. Pools with Net Asset Value greater than $500,000 must send statements monthly.
7
Q
A client shorts a Eurodollar futures contracts on the CME at 94.70. Original margin is $810 per contract and maintenance margin is $600. Later the contracts settlement price is 94.88, the client would be required to deposit an additional:
a. 0
b. $110
c. $270
d. $450
A
d. $450
The client deposited original margin of $810. Since the Eurodollar futures values settled at a higher price and the client is short the contract, the equity in the contract will decline. The contract increased by 18 basis points and the value of each basis point is equal to $25. The equity is reduced by $450 (18 x $25). The equity is now $360 ($810 - $450). Since the equity in the account is below the maintenance requirement, the client must deposit $450 to bring the equity to the original margin requirement level.
8
Q
Arbitration is used as a means of dispute settlement. Decisions of the arbitrator(s) are non-appealable.
a. True
b. False
A
a. True
Decisions of the arbitrator(s) are nonappealable and can be enforced in any court of competent jurisdiction.
9
Q
Open interest decreasing while prices are going down is referred to as a:
a. Weak market
b. Liquidating market
c. Overbought market
d. Inverted market
A
b. Liquidating market
In this situation, existing positions are being liquidated more aggressively than new positions are being established. Therefore, since prices are going down, it is evident that longs are liquidating their positions more aggressively than shorts, i.e., selling their positions in order to leave the market and offering the contracts at progressively lower prices in order to offset their positions. This type of market is considered to be technically strong and is called a liquidating market.
10
Q
A hedger establishes a futures position that is opposite to his cash position. He would be most concerned with:
a. The cash price
b. The futures price
c. Changes in the basis
d. Whether the cash and futures market will move up or down
A
c. Changes in the basis
The hedger does not care about the price of the cash or the futures. Instead, he cares about the basis, which is the relationship between the price of cash and the price of futures.
For example, if a hedger is long cash at $3.50 and short futures at $3.60, he does not care if the price of cash rises by $1.00 and the price of futures rises by $1.00 as his basis will not change. However, he would care if the price of cash rises by 99 cents and the price of futures rises by $1.00 as this would represent a basis change of 1 cent and would represent in this case a loss of 1 cent.
11
Q
Variation margin is the amount of funds deposited by a customer in addition to the original margin when:
a. The market price moves against his position
b. The futures position is closed out
c. The customer holding the opposite side of the futures contract makes a demand for the deposit of additional funds
d. The market price declines by 50% or more if the customer is long or advances by 50% or more if the customer is short
A
a. The market price moves against his position
Variation margin is the margin that a member firm calls for when the market goes against a customer’s position. The call for additional margin will be sent when the equity drops to a predetermined level. For example, the initial margin requirement, which is deposited when the position is assumed, might be $1,000 and the variation margin level might be $750. If the equity drops to $750 or less, the member firm will call for additional margin necessary to bring the account to the initial level of $1,000.
12
Q
An elevator operator has inventory of 5,000,000 bushels of corn. He wishes to hedge, but is reluctant to use the futures market. He decides to use options and wants to have minimum risk. Cash corn is 1.80 1/2 and December corn is 1.91 3/4. A December 190 call is 14 1/2 and a December 190 put is 11. The corn contract is 5,000 bushels. He decides to buy 1,000 options. In November, the cash price of corn is 1.76 3/4. The December option prices are 3 1/4 and 17 3/4. As a result of the hedge, what is the market price of the corn to the hedger?
a. 180
b. 180 1/4
c. 180 1/2
d. 183 1/2
A
d. 183 1/2
The market price of the corn to the hedger is 183 1/2, calculated as follows: ##
13
Q
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
A
c. $4.63
The stop order to sell is placed below the current market price. As the market price is $4.65, choices (a) and (b) are not possible choices. Choices (c) and (d) are both below the current market price, but choice (d) 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.
14
Q
An individual has a profit of 88 points on each of three T-bill futures contracts. What is the total profit?
a. $2,200
b. $6,600
c. $8,800
d. $26,400
A
b. $6,600
One 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.
15
Q
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
A
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.
16
Q
An IB does not maintain the signed and dated acknowledgment from the customer that he has reviewed the Risk Disclosure Document. It is given to the FCM.
a. True
b. False
A
b. False
The IB must maintain this record.
17
Q
A trader buys a contract of corn at $1.25 and deposits margin of 12 cents a bushel. Commission is $30. He sells the corn at $1.41. The contract size of corn is 5,000 bushels. His net profit on the trade would be:
a. 15%
b. 25%
c. 45%
d. None of the above
A
d. None of the above
On a margin deposit of 12 cents a bushel, the trader is investing $600. The contract now advances 16 cents. His profit is therefore 16 cents a bushel times 5,000 bushels, which equals $800. From this profit, we deduct the commission of $30. This yields a net profit of $770. As his original margin investment was $600, a profit of $770 would represent slightly more than 128% ($770 divided by $600). Therefore, none of the figures in choices (a), (b), or (c) is correct.
18
Q
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
A
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.
19
Q
A customer buys a T-bill put and pays 1.75. The premium he pays for the put is:
a. $175.00
b. $2,734.38
c. $4,375.00
d. $5,468.75
A
c. $4,375.00
T-bill options are quoted in basis points. A premium of 1.75 represents 175 basis points at $25 each for a total of $4,375 (175 x $25).
20
Q
In order for a trader to exceed speculative position limits, he must register with the CFTC.
a. True
b. False
A
b. False
The CFTC has established trading limits and position limits for certain commodities. These limits apply to speculators only. The limits do not apply to bona fide hedgers. There is no way that a trader could exceed these limits by applying to the CFTC for an exemption, as there are no exemptions of any kind granted to a trader by the CFTC.
21
Q
On January 26, Jack Stevens agrees to purchase from XYZ Copper Industries 200,000 pounds of copper at 65.00 on May 1. Mr. Stevens also agreed to sell the 200,000 pounds of copper to DEF Heating Supply Co., on May 1, at the cash market price. On January 26, the cash market price is 65.00 and the May Futures is at 66.00. On February 2, copper prices begin to weaken and the cash market is now 64.50. The copper contract size is 25,000 lbs. To protect himself against an adverse price change, Mr. Stevens should:
a. Buy May copper futures
b. Sell May copper futures
c. Buy February and sell May futures
d. Sell February and buy May futures
A
b. Sell May copper futures
On May 1, Mr. Stevens has a commitment to purchase 200,000 pounds of copper at 65.00. He will then sell the copper at the cash market price to DEF Heating Co. His concern is declining copper prices, therefore, he should sell the May futures.
22
Q
A futures contract:
Is for the purchase or sale of an established uniform quantity of an actual commodity as set forth in the exchange rules and regulations
Permits the seller to elect the deliverable grade as specified in the exchange rules and regulations
Permits the buyer to select the exact lot for purchase
Permits the seller to specify the exact lot for delivery
a. I and II
b. I and III
c. II and III
d. III and IV
A
a. I and II
A futures contract is a standardized contract entered into by a buyer and seller that always specifies a specific quantity (5,000 bushels of wheat, 36,000 pounds of imported boneless beef, 100 tons of soybean meal, etc.) of a specific grade (the basis grade with allowances for delivery of premium and discount grades) at the contract price. The rules of the exchange allow the seller to elect 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 differentials. The buyer must accept whatever grade the seller elects to deliver.
The buyer does not have the option of specifying the exact lot of the actuals that he wants, and the seller does not specify the exact lot that he will deliver when both enter into the contract.
23
Q
The Commodity Pool Operator must distribute the Account Statement to the pool participants at least monthly in the case of pools with net assets of more than $500,000 at the beginning of the pool’s fiscal year.
a. True
b. False
A
a. True
The Account Statement must be distributed at least monthly to the pool participants in the case of pools with net assets of more than $500,000. If $500,000 or less, then it must be sent at least quarterly.
24
Q
A customer is long five stock index futures contracts at 65.05. He liquidates when the price is 67.35. Commissions are $50 round-turn. The contract has an index of 250. His profit is:
a. $525
b. $575
c. $2,625
d. $2,875
A
c. $2,625
The customer’s profit is $2,625, calculated as follows:
25
A spread trader anticipates a bull market over the next three months and puts on a bull spread in the stock index futures market. The trader has:
a. Sold the deferred and bought the nearby
b. Bought the deferred and bought the nearby
c. Bought the deferred and sold the nearby
d. Sold the deferred and sold the nearby
**c. Bought the deferred and sold the nearby**
In a bull market for stock index futures where prices are rising, the deferred months should rise faster than the nearby months and thus the spread should widen.
26
A broker may transfer funds from a client's regulated commodity account into a stock account of the client if the client has signed the Supplemental Commodity Customer's Agreement Form.
a. True
b. False
**a. True**
A member firm is required to segregate the funds of customers that relate to commodity futures. It may not mix the funds with those pertaining to securities or anything else. The customer must give the member firm specific instructions, in writing, if he wants funds transferred from his commodity futures account to his securities account. If the customer wants the broker to be able to transfer funds automatically, he must give the broker a signed supplemental agreement also called a transfer authorization form.
27
The ratio by which the price of an option moves relative to the underlying futures contract is known as the:
a. Spread
b. Beta
c. Basis
d. Delta
**d. Delta**
The delta factor compares the price movement of an option contract with price movements of the underlying future.
28
A meat packer establishes a long hedge in hogs. He buys futures at $18.80. per cwt. His commission costs are $.11 per cwt and interest is $.05 per cwt. His total cost for futures is therefore $18.96 per cwt. When the hedge is removed, futures are $19.46 and cash is $19.35. Taking into consideration the hedge, what is the packer's net cost for his hogs:
a. $18.45
b. $18.55
c. $18.65
d. $18.85
**d. $18.85**
In this question, the meat packer buys futures in order to fix his cost for the actuals that he intends to buy at a later date. When the hedge is placed, the price of futures is $18.80. The hedger has additional costs of 11 cents for commission and 5 cents for interest on the money he borrowed to buy futures. Therefore, his total cost for the futures is $18.96.
When the hedge is lifted, the cash price for the hogs is $19.35 and the futures price is $19.46. The hedge is lifted by the meat packer reversing his cash and futures positions. As he was short cash hogs, he will buy them at $19.46. The packer's profit on the futures was 50 cents (selling price of $19.46 minus cost of $18.96). His net cost for the cash hogs was the cash price minus the profit on the futures, and is therefore $18.85 ($19.35 minus $.50). The following table shows the net result of the hedge.
Short cash hogs Buy cash hogs at $19.35 Buys futures at $18.96 Sells futures at $19.46 Profit .50 Cash price of hogs: $19.35 Profit on futures: .50 Net price received: $18.85
29
A customer is long December Gold at $480.50. He places a stop limit order at $465.00. When the stop is elected and the order is executed, the fill can be at all of the following prices EXCEPT:
a. $464.50
b. $465.00
c. $465.50
d. $480.50
**a. $464.50**
Since the customer is long the contract, the order placed is to sell at $465.00 stop limit. A stop limit will be activated (triggered) when the price drops to $465.00. If this should occur, the order becomes a limit order to sell at $465.00. In a limit order the client will accept no less than $465.00 when the order is executed.
30
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).
a. True
b. False
**a. True**
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.
31
An individual initiates a short position in a contract on which the initial margin is 12 cents per bushel and the maintenance margin is 10 cents per bushel. The selling price is 2.53 1/4. The customer would be called for additional margin if the price of the contract:
a. Advances above 2.55 1/4
b. Declines below 2.51 1/4
c. Changes by 2% or more
d. Changes by 5% or more
**a. Advances above 2.55 1/4**
If an individual initiates a short position and the price increases, he will experience a loss and be called for additional margin if the price advances above $2.55 1/4. Selling Price $2.53 1/4 Initial minus Maintenance Margin + .02 Total: $2.55 1/4
32
A client buys a June Value Line futures contract which settles at 123.65. The next day it closes at 124.80. The contract size is 500 times the dollar value of the index. The dollar value of the change is:
a. $5
b. $25
c. $575
d. $625
**c. $575**
To find the dollar value, take 124.80 and subtract 123.65 = 1.15. Then multiply 1.15 by 500 and the dollar change is $575.
33
The CPO is not required to maintain confirmation statements received from the FCM.
a. True
b. False
**b. False**
This is false. A CPO must maintain records of trades performed by the FCM on behalf of the pool. Such records are used in computing performance results for disclosure purposes.
34
A Treasury bond trader who thinks interest rates will rise should:
a. Buy calls
b. Buy puts
c. Sell puts
d. Write covered puts
**b. Buy puts**
Bond prices have an inverse relationship to interest rates. In this situation, if interest rates are going up, bond prices will decline. The trader should therefore buy puts.
35
An account carried by one FCM for another FCM in which the transactions of two or more customers are combined and carried in the name of the originating broker rather than designated separately is called:
a. A house account
b. A segregated account
c. A customer's regulated account
d. An omnibus account
**d. An omnibus account**
An omnibus account is an account that a non-clearing firm maintains with a clearing firm. The non-clearing firm will maintain all of the required records and will enter orders with the clearing firm in a single omnibus account rather than in an account where the name of each customer is designated.
36
In June, Central City Corporation (CC) plans to offer $30 million of 20-year bonds in November. Presently, CBT long-term U.S. T-bond futures are as follows:
September:89-28
December: 90-08
March: 90-16
June: 90-23
To hedge, he would go:
a. Long 300 March bond futures
b. Short 300 December bond futures
c. Short 30 March bond futures
d. Long 20 December bond futures
**b. Short 300 December bond futures**
He will short 300 December Bond futures contracts.
Total Dollar Volume of Bonds / T-Bond Contract Size = Number of contracts
30,000,000/100,000 = 300
37
In June, Central City Corporation (CC) plans to offer $30 million of 20-year bonds in November. Presently, CBT long-term U.S. T-bond futures are as follows:
September: 89-28
December: 90-08
March: 90-16
June: 90-23
Comparable bonds of North City Corporation (NC) are at 87-29. The CC treasurer is worried that interest rates may increase and he decides to hedge using T-bond futures. The T-bond futures contract size is $100,000.
The issue is fully sold by November 15 at an average price of 83-12 and on that date the futures position is offset at 84-31. Due to the hedge and the change in basis, CC has:
a. Provided protection against an increase in interest cost amounting to $22,500
b. Provided protection against an increase in interest cost amounting to $225,000
c. Been affected by an increase in interest cost amounting to $22,500
d. Been affected by an increase in interest cost amounting to $225,000
```
**b. Provided protection against an increase in interest cost amounting to $225,000**
##
```
38
In June, Central City Corporation (CC) plans to offer $30 million of 20-year bonds in November. Presently, CBT long-term U.S. T-bond futures are as follows:
September: 89-28
December: 90-08
March: 90-16
June: 90-23
Comparable bonds of North City Corporation (NC) are at 87-29. The CC treasurer is worried that interest rates may increase and he decides to hedge using T-bond futures. The T-bond futures contract size is $100,000.
The issue is fully sold by November 15 at an average price of 83-12 and on that date the futures position is offset at 84-31. As a result of the hedge, the final rate at which the issue was priced was:
a. 78-03
b. 82-00
c. 83-12
d. 88-21
**d. 88-21**
The final rate at which the issue was priced was 88 21/32.
Nov Cash: 83 12/32
+ Futures Profit: 5 9/32 = 88 21/32
39
According to NFA rules and CFTC regulations, an NFA member or an associated person of an NFA member has an obligation to verify a customer's income and net worth.
a. True
b. False
**b. False**
This is false. There is no requirement that information supplied by the customer must be verified. Good business practice would be to verify such information.
40
When an individual purchases a futures contract, actual ownership of the cash commodity is accomplished:
a. When he deposits the initial margin
b. When he offsets his position
c. When he deposits an amount equal to 50% of the value of the cash commodity over and above the initial margin requirement
d. When the actual commodity is delivered and he pays for it
**d. When the actual commodity is delivered and he pays for it**
A purchase of a futures contract is not a purchase of the cash commodity. It is a contingent liability to purchase the cash commodity only when and if it is delivered by a seller. Actual ownership occurs only when the cash commodity is delivered by the seller and the buyer pays for the commodity.
41
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:
a. In-the-money call
b. In-the-money put
c. At-the-money call
d. At-the-money put
**d. At-the-money put**
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.
42
Commodity Pool Operators may receive funds in their own name.
a. True
b. False
**b. False**
A commodity pool operator must receive customer funds in the name of the pool in which the customer is participating.
43
The following information concerns COMEX gold spreads.
July 465.50
August 465.60
September 466.10
November 468.20
December 468.80
February 469.20
Which of the following will probably be the most profitable spread if it is expected that the spread will narrow?
a. Sell July and buy August
b. Buy September and sell November
c. Buy July and sell August
d. Buy February and sell December
**b. Buy September and sell November**
When a spread narrows, the difference between the near and the deferred month price will decrease. In a normal market, the deferred month will be more expensive so the investor should buy the near month and sell the deferred month (choices b and c).
To maximize his gain the investor should select the spread which is widest. The July-August spread is .10 (465.60 - 465.50), while the September-November spread is 2.10 (468.20 - 466.10).
44
Which of the following is least important in determining interest rates?
a. Fiscal policy
b. Unemployment rates
c. Monetary policy
d. Supply of money
**b. Unemployment rates**
Fiscal policy, monetary policy and money supply are fundamentally important in determining interest rates.
45
A miller buys a futures contract of wheat at $3.04 and takes delivery. The contract size is 5,000 bushels. On the day of delivery, the settlement price for wheat is $3.42. The miller would have a total cost for the wheat of:
a. $17,100
b. $15,800
c. $15,200
d. None of the above
**c. $15,200**
The miller's cost for the 5,000 bushels is the price at which he bought the futures. 5,000 bushels at $3.04 per bushel totals $15,200.
46
If a CTA handles a managed account, it is the CTA's responsibility to insure that his clients receive monthly account statements.
a. True
b. False
**b. False**
Any "managed account" handled by a CTA will be carried on a fully disclosed basis by an FCM. It is the responsibility of the FCM (not the CTA) to send statements of account to the client.
47
A hedger is said to be "short the basis" when:
a. He recognizes that prices are low and establishes a long futures hedge to protect against a subsequent expected price rise
b. He has sold the cash commodity but has no inventory, and so he establishes a protective long futures hedge
c. He converts a futures position into a cash position through an exchange for physicals transaction
d. He has the cash commodity in inventory and wishes to protect himself against a price advance
**b. He has sold the cash commodity but has no inventory, and so he establishes a protective long futures hedge**
The term "short the basis" means short the cash commodity. An individual who has entered into a firm commitment to deliver the cash commodity at the current price, but who does not own the cash commodity, will establish a buying hedge. He will then be short the cash and long the futures.
Choice (a) appears to be correct. However, it says that the hedger recognizes that prices are low, and this is the reason that he hedges by buying futures. This is not correct. Someone who is short the basis will hedge to protect himself whether he thinks the price is low or he thinks the price is high. If the long hedger only hedged when he thought the cash price was low, he would be subjecting himself to large risks and would be assuming the role of a speculator.
48
When an option is exercised, it is done by the:
a. Option buyer
b. Option seller
c. Commission house
d. Clearing house
```
**a. Option buyer**
The holder (or buyer) of the option has the right to exercise the contract.
```
49
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.
50
Mr. Thomas took a short position of 8 contracts of New York Commodity Exchange silver at 751 .5 and later covered his position by offsetting at 717.0. Commissions were $30 per contract. The contract size is 5,000 troy ozs. What is the result of his trade?
a. Profit of $1,356
b. Profit of $13,560
c. Loss of $13,800
d. Loss of $1,380
```
**The result of the trade is a profit of $13,560. This is determined as follows:**
##
```
51
During the delivery month, the basis must approach zero, which means that the price of cash and the price of futures must converge, because:
a. If there is a difference between the price of cash and the price of futures, traders will buy the lower-priced item and sell the higher-priced item, thereby causing the difference to disappear and the basis to approach zero
b. The price of the cash commodity will always rise to the price of futures during the delivery month
c. The price of the futures reflects carrying charges
d. The statement is incorrect
**a. If there is a difference between the price of cash and the price of futures, traders will buy the lower-priced item and sell the higher-priced item, thereby causing the difference to disappear and the basis to approach zero**
The price of the cash commodity and the price of futures must converge during the delivery month. This is because the cash commodity can always be delivered against the futures. Any variations in the prices will cause arbitrageurs to take advantage of the discrepancy.
For example, let's assume that cash is at $3.10 and futures are at $3.00 immediately prior to expiration. In this case, traders will sell cash at $3.10, buy futures at $3.00 and stand for delivery. When the cash commodity is delivered on the futures contract, they will use the cash commodity just acquired to make delivery on the cash sale. If cash were at $3.00 and futures at $3.10, traders would buy cash and sell futures. They would deliver the cash against the futures. In both instances, there would be a guaranteed profit of 10 cents, less delivery costs.
52
NFA members must maintain their books and records in accordance with generally accepted accounting principles.
a. True
b. False
**a. True**
This is true. The NFA requires that books be kept according to generally accepted accounting principles.
53
The Federal Reserve will exert the greatest influence on the price of Treasury bills through:
a. Increasing and decreasing margin requirements
b. Increasing and decreasing the discount rate
c. The purchase and sale of Treasury bills in the open market
d. Increasing and decreasing the reserve requirement of member banks
**c. The purchase and sale of Treasury bills in the open market**
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.
54
To liquidate a long position when a futures contract reaches a certain price above the existing price, a customer would use a:
a. Sell stop order
b. Buy stop order
c. Sell limit order
d. Fill or kill order
**c. Sell limit order**
The customer has established a long position by buying futures. Let's assume that he buys the contract at $4.00. He wants to liquidate the position when the price rises to $4.10 in order to take his profit. He will therefore enter a sell limit order to sell at $4.10. The sell limit order is always entered above the current market.
The buy stop order is also entered above the current market. However, the buy stop order is entered to liquidate a short position, not a long position. For example, a customer might have sold a contract short at $4.00 because he anticipates a price decline. However, to protect himself against a price rise, he might enter a buy stop at $4.10. If the price rises to $4.10, the stop will be elected and the broker will buy the contract, enabling the trader to cover his short position. The buy stop order is therefore used to hedge a short position.
The sell stop order is entered below the market and is used to liquidate a long position when it reaches a price below the market. For example, an individual might go long a contract at $4.00. To protect himself against a major loss if the market declines, he will enter a sell stop order to sell at $3.90.
The fill or kill order could be either to buy or sell and therefore could be entered either below or above the market. It is an order to be executed immediately or canceled.
55
The CPO disclosure document must disclose at least quarterly the number of outstanding units.
a. True
b. False
**a. True**
The CPO disclosure document must disclose at least quarterly the number of outstanding units.
56
If the limit on a particular commodity traded on the Chicago Board of Trade is 10 cents and the daily price limit is expanded, the expanded daily price limit would:
a. Remain at 10 cents
b. Be raised to 15 cents
c. Be raised to 20 cents
d. Be reduced to 5 cents
**b. Be raised to 15 cents**
If three different delivery months settle up or down the limit, the trading limit will be raised to the original limit x 150% (10 cents x 150% = 15 cents).
57
A customer sells 9 gold calls. The premium quoted is 2.50. The contract size is 100 troy ozs. The total premium he receives is:
a. $250.00
b. $2,250.00
c. $5,625.00
d. $56,250.00
```
**b. $2,250.00**
## The customer will receive a total premium of $2,250, calculated as follows: Sell contracts @ 2.50 x 100 ounces per contract $ 250 premium per contract x 9 contracts total premium $ 2,250
```
58
CPOs and CTAs that charge up-front fees must include these fees in the presentation of the breakeven point.
a. True
b. False
**a. True**
Commissions and other fees must be deducted when computing the breakeven point. The breakeven point is defined as the trading profit required to recover the initial investment if redeemed after one year.
59
The transfer consent form is part of the:
a. Risk disclosure document
b. Supplemental agreement
c. Account form
d. Account agreement
**b. Supplemental agreement**
The transfer consent form is part of the supplemental commodity customer agreement.
60
When prices advance or decline to the daily price limit:
a. Trading may continue through the limit
b. All trading must stop
c. Trades may be made at or below the top limit and at or above the bottom limit
d. None of the above
**c. Trades may be made at or below the top limit and at or above the bottom limit**
If a contract trades up the limit, trading may not occur at a price above the limit, but trading is not suspended. Trades could be made at the limit or lower. In like manner, if a contract trades down the limit, trading may not occur at a price below the limit, but trades could be made at the limit or higher.
Let's look at an example. A commodity closes at $4.25. The daily price limit is 10 cents up or down. The following day, trades occur at successively higher prices, and finally reaches $4.35. No trades could now be made above this price. However, if an offer were made at $4.35 or less, a trade could occur on this offer. If the commodity traded down to $4.15, no trades could occur below $4.15, but trading could continue at a price of $4.15 or higher.
61
New APs should recommend spread positions because they are less risky than simple "outright" long or short positions.
a. True
b. False
**b. False**
There are times when a spread position may not be less risky than a simple long or short position. Furthermore, a risk disclosure must indicate this fact.
62
A customer assumes a long position in a futures contract on which original margin is 30 cents and maintenance margin is 20 cents. The contract consists of 10,000 units at a price of $7.00. The contract subsequently declines to $6.95. In this case, the customer:
a. Will be called for $500 additional margin
b. Will be called for $1,000 additional margin
c. Will not be called for additional margin until the price drops to $6.50
d. Will not be called for additional margin until the price drops below $6.90
**d. Will not be called for additional margin until the price drops below $6.90**
The customer would not be called for additional margin until the price drops below $6.90. This is determined as follows:
.30 Original Margin
-.20 Maintenance Margin
----------------
.10
The contract price of $7.00 less .10 (difference between original and maintenance margin) equals $6.90.
63
A market if touched order to buy becomes a market order when the contract trades at or below the order price.
a. True
b. False
**a. True**
A market if touched order is similar to a limit order, but differs from a limit order in that, if there is a trade at the order price, the order then becomes a market order and must be executed at the best price available. Let's examine a buy MIT order and a buy limit order to see how they are similar and also how they differ.
A broker receives two orders at the same time. One is a limit order to buy a contract at 36.50 and the other is a MIT order to buy a contract at 36.50. The current price of the contract is 36.55. Note that both the limit order and the MIT order are entered to buy below the market. If they were sell orders, they would be entered to sell above the market.
The broker enters the trading pit and waits for an offer at the limit price of 36.50. A seller enters the pit and offers two contracts at 36.50. Our broker will attempt to buy both contracts to fill his limit and MIT orders. However, another broker in the pit buys the contracts instead. Another broker immediately enters the pit and offers a contract at 36.52. Nothing will be done on the limit order as the broker cannot fill the order at the limit price of 36.50. However, the MIT order became a market order once the contract traded at the limit price. The broker will therefore buy the contract offered at 36.52 to fill the MIT order.
64
A corporate treasurer expects to have money to invest in T-bonds in several months. The current interest rates are high and expected to decline. He would therefore:
a. Buy a call
b. Buy a call and buy futures
c. Buy a put
d. Buy a put and sell futures
**a. Buy a call**
In this situation if interest rates decline, bond prices increase. The investor would, therefore, buy a call.
65
Hedgers are exempt from position reporting levels.
a. True
b. False
**b. False**
When a hedger reaches the reporting level, he must report his position daily. Bona fide hedgers are exempt from speculation position limits.
66
Demand elasticity is best described as:
a. A change in the price will result in a change in the amount of the commodity that is produced
b. The sensitivity of the quantity demanded for a given price change
c. A shortage of the cash commodity will result in greater production in the future
d. The amount of the commodity that is in storage exceeds the amount that is currently being purchased
**b. The sensitivity of the quantity demanded for a given price change**
There is an inverse relationship between the price of a commodity and quantity demanded for the commodity. As the price falls, the quantity demanded increases. The degree to which the quantity demanded responds to a price change is called demand elasticity.
67
In order for a market in a futures contract to be successful, all of the following are necessary EXCEPT:
a. There must be adequate and well-diversified supply and demand for the commodity
b. The commodity must be one for which grading standards can be established
c. The commodity must be free of excessive government controls over prices and production
d. The commodity must be storable and non-perishable for a long period of time
**d. The commodity must be storable and non-perishable for a long period of time**
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.
68
If an FCM guarantees an IB, the FCM is responsible for the action of the IB and is subject to disciplinary action for any violation committed by the IB.
a. True
b. False
**a. True**
An FCM who guarantees an IB is responsible for the actions of that IB and is subject to disciplinary action for any violations committed by that IB.
69
An investor expecting higher interest rates and lower bond prices buys a September 66 T-bond call at a premium of $1,900 and sells a September 60 T-bond call at a premium of $6,200. In June, the September futures price is 66-00. If the futures price at expiration is 60-00 or lower, the maximum profit would be:
a. $1,900
b. $4,300
c. $6,000
d. $10,300
**b. $4,300**
At expiration, both options expire unexercised. The maximum profit, therefore, would be the difference in the premiums.
short investor received $6,200
long investor paid -1,900
profit $4,300
70
If an FCM or IB fees are determined on a round turn or per trade basis, the customer needs to receive a detailed explanation in writing.
a. True
b. False
**b. False**
If FCM or IB fees are determined on a round turn or per trade basis, the customer does not need a fee explanation in writing. When fees are determined under any other method, a detailed written explanation must be provided to the customer.
71
```
##
Interest on margin money is .03 and commissions is .12. If a hog processor, who is short the basis, places a hedge August 10 and buys hogs May 31, what was his actual cost for the hogs purchased?
```
a. 39.50
b. 39.65
c. 40.15
d. 42.65
**b. 39.65**
The hog processor would establish the following hedge: ##
72
A hedger is generally required to deposit less margin than a speculator for all of the following reasons EXCEPT:
a. It is easier for the brokerage firm to check the financial responsibility of the hedge customer than the speculator
b. The hedger generally takes a larger position than the speculator
c. The hedger has a cash position in the actuals, and therefore his financial risk due to price fluctuation is less
d. The hedger is better able to perform on the contract by making or taking delivery if necessary
**b. The hedger generally takes a larger position than the speculator**
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. Therefore, choices (a), (c) and (d) describe reasons why the hedger is generally required to deposit less margin than the speculator. The fact that the hedger takes a larger position than the speculator has no significance in the granting of lower margin.
73
On commodity futures exchanges, a call market is one in which:
a. Hedgers trade their cash and futures positions outside the trading pit
b. Orders are crossed in the trading pit
c. Stock options are traded
d. Trading occurs successively in the different delivery months for a brief period of time
**d. Trading occurs successively in the different delivery months for a brief period of time**
A call market is one in which trading occurs in rotation for each individual contract and is usually done at the opening of trading. After each contract month has been individually opened, trading will occur simultaneously in all contracts.
74
Stock index futures prices are at 401.00. The size of the contract is 250 times the index. The value of the portfolio is $750,000. If your customer wishes to hedge his portfolio, how many contracts would be needed?
a. 1 contract
b. 6 contracts
c. 7 contracts
d. 8 contracts
**c. 7 contracts**
The value of each contract is 250 x value of index (401.00) or $100,250. The portfolio to be hedged is worth $750,000. To determine the number of contracts used to hedge divide the value of the portfolio by the value of the futures contract $750,000 divided by $100,250 = 7.48 contracts. Since the fractional part is less than .50 we use 7 contracts.
75
A customer fails to meet a margin call. In this case, the broker:
a. May loan the customer the amount due, but is required to charge interest
b. May liquidate all or part of the customer's position to meet the amount of the call
c. May not take any action unless the member firm contacts the customer to notify him that the margin deposit is late
d. Will liquidate the customer's position and keep the entire proceeds in the account
**b. May liquidate all or part of the customer's position to meet the amount of the call**
If a customer fails to meet a margin call, the broker may liquidate all or part of the customer's position to meet the call.
76
Options that are at-the-money have more time value than options that are out-of-the-money.
a. True
b. False
**a. True**
Options that are at-the-money have more time value than options that are out-of-the-money.
77
A customer buys eleven pork belly contracts at 46.25. He liquidates when July pork bellies are at 44.50. Commissions are $30 round-turn. The size is 40,000 lbs. The total loss is:
a. $7,370
b. $7,700
c. $8,030
d. $70,330
**c. $8,030**
The customer's total loss is $8,030.00, calculated as follows:
buy 11 contracts @ 46.25
sell @ 44.50
loss of 1.75 cents per pound
x 40,000 pounds per contract =
loss of $700 per contract
+ 30 commissions
total loss of $730 per contract
x 11 contracts
total loss of $8,030
78
A customer whose account is serviced on a nondiscretionary basis, gives a Registered Commodity Representative an order to sell corn around $3.30 to $3.31. Additional documentation is required for the order to be accepted.
a. True
b. False
**a. True**
The customer is entering a discretionary order by giving the Registered Commodity Representative (RCR) the authority to execute a trade without a firm price. Without written discretionary authorization, the RCR cannot accept the order to liquidate the position around $3.30. If the instructions were to sell at the market, or at a price of $3.31, the order could be accepted.
79
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.
80
A cash forward contract is different than a futures contract because the cash forward contract is:
I. A personal transaction between the buyer and the seller
II. Not for a standard amount of the commodity, but rather is for a specific amount and quality of the cash commodity
III. Not negotiated by open outcry in the trading pits and is not subject to the rules of a futures exchange
a. I only
b. I and II only
c. II and III only
d. I, II, and III
**d. I, II, and III**
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.
81
A customer deposits the required initial margin of $1,000. The maintenance margin is $800. The margin in his account declines to $775. The registered commodity representative will notify the customer that:
a. He must deposit $25 to increase his margin to the required maintenance level
b. His contracts will liquidate immediately at a loss
c. He must deposit $225 to increase his margin to the initial margin level
d. He must deposit 20% of the initial margin
**c. He must deposit $225 to increase his margin to the initial margin level**
If equity in an account drops below the maintenance level, the customer will be required to deposit additional margin to raise the equity to the initial margin level.
82
A CPO must submit a copy of its proposed disclosure document to the NFA at least 21 days prior to its intended use.
a. True
b. False
**a. True**
A copy of a CPO's proposed disclosure document must be submitted to the NFA at least 21 days prior to its intended use.
83
A guarantee agreement between an IB and an FCM has a specific termination date.
a. True
b. False
**b. False**
A guarantee agreement between an IB and FCM has no specific termination date.
84
A T-bond premium of 2-16 is worth:
a. $2,160
b. $2,250
c. $2,500
d. $4,500
**b. $2,250**
The T-bond option premium is determined as follows:
2 (each point is $1,000): $2,000
16/64 (each 1/64 equals $15.63): 250
$2,250
85
A settlement between a respondent and the NFA may be settled in a manner that neither admits nor denies the allegation contained in the complaint.
a. True
b. False
**a. True**
This is true. The NFA may settle a disciplinary matter with a respondent that neither admits nor denies the allegations contained in the complaint.
86
An individual purchases two corn contracts and deposits $2,000 margin. The contract size is 5,000 bushels. This represents 20 cents per bushel. The price of corn increases by 16 cents and the individual sells the two contracts. His commission cost for the two contracts totals $60. What is his net profit margin on the transaction?
a. 80%
b. 77%
c. 74%
d. 72%
**b. 77%**
The size of a corn contract is 5,000 bushels. If the margin is 20 cents per bushel, the total margin deposit is $1,000. The price of corn rises by 16 cents, which is a profit of $800 per contract (16 cents times 5,000 bushels). As the commission on one contract is $30, the net profit is $770. The margin of profit is determined by dividing the net profit by the margin deposit. $770 divided by $1,000 = 77%.
87
It is necessary to be able to deliver the cash commodity against a futures contract because:
a. Most hedgers make or take delivery on their futures contracts
b. Government regulation requires that all exchanges have delivery facilities
c. Without the ability to make or take delivery, there would be no economic relationship between the price of cash and futures and, therefore, no logical economic need for a futures market
d. The price of the cash commodity would fluctuate greatly if there were no futures market
**c. Without the ability to make or take delivery, there would be no economic relationship between the price of cash and futures and, therefore, no logical economic need for a futures market**
If one could not make or take delivery against a futures contract, there would be no economic relationship between the price of cash and futures and, therefore, no logical economic need for a futures market.
88
All disciplinary action taken by the CFTC or self-regulatory organization against an FCM or IB engaged in the sale of options must be reported to the member's DSRO.
a. True
b. False
**a. True**
This is true. Disciplinary actions must be reported to the member's DSRO.
89
A customer sells a T-bill call at 1.50. The dollar amount of the premium he receives is:
a. $1,781.25
b. $2,343.75
c. $3,750.00
d. $4,687.50
**c. $3,750.00**
T-bill options are quoted in basis points. A quote on a T-bill of 1.50 represents 150 basis points. Each basis point is worth $25, thus the premium would be 150 x $25 or $3,750.
90
In three months, your client is going to receive $2 million dollars from the sale of his business and use this money to invest in a new business venture. He plans to invest the money in Treasury bills and likes the current yield on the three-month T-bills. He is also anticipating lower interest rates. Which of the following should he do to take advantage of the current yield?
a. Buy three-month T-bill futures
b. Sell three-month T-bill futures
c. Buy three-month T-bill futures and take delivery
d. Sell three-month T-bill futures and take delivery
**a. Buy three-month T-bill futures**
At this time, since the current T-bill yield is favorable, he would be locking in an opportunity to profit because interest rates are declining and, therefore, the price of the T-bills will rise.
91
A CTA that acts as an independent advisor to a commodity pool is not excluded from incorporating the expenses charged by the CPO in his performance history.
a. True
b. False
**b. False**
A CTA that acts as an independent advisor to a commodity pool is excluded from incorporating the expenses charged by the CPO in his performance history.
92
A portfolio manager goes long 5 September Value Line Index futures at 129.50. The Value Line Index is trading at 127.60. What is the value of the portfolio manager's futures position if the futures contract has a component of $500?
a. $64,750
b. $65,375
c. $323,750
d. $326,875
**c. $323,750**
To find the value, take the index future 129.50 x $500 x number of contracts. The value of the futures position is 129.50 x $500 x 5 = $323,750. The actual value of the underlying index is 127.60 x 500 x 5 = $319,000.
93
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.
94
An AP may be associated with more than one FCM.
a. True
b. False
**a. True**
An AP may be associated with more than one firm with both firms' acknowledgment.
95
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. $2,156.25**
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).
2.15625% of $100,000 = $2,156.25
or
2 points @ $1,000 = $2,000.00
+10 - 1/64 point @ 15.625 = 156.25
$2,156.25
96
A supplier of No. 2 Heating Oil enters into a contract in August to sell 4,200,000 gallons in December. To protect against a possible loss, he hedges by selling an equivalent futures contract. The August cash price is 35 cents and the futures price is 40 cents. In December, the cash price is 30 cents and the futures price is 31 cents. The contract size for No. 2 Heating Oil is 42,000 U.S. gallons. The total profit is:
a. $168,000 gain
b. $210,000 gain
c. $378,000 gain
d. $420,000 gain
**a. $168,000 gain**
The supplier is currently long the cash oil. Therefore, he will sell futures. The results of the hedge appear as follows:
Cash:
Long 35
Sell 30
Loss 5
Futures:
Sell at 40
Buy at 31
Profit 9
The net result of the hedge is a profit of 4 cents per gallon. As there are 4,200,000 gallons involved in the transaction, the total profit is $168,000.
97
An FCM may consider an account to be a "hedge account" only if:
a. The account is one that handles the actual cash commodity in the conduct of its business
b. The account owns a membership on the exchange
c. The account places orders of a specified minimum size that varies with the different exchanges
d. All of the above
**a. The account is one that handles the actual cash commodity in the conduct of its business**
A hedger is always a member of the business community who either has the actual commodity in inventory and, therefore, takes a futures position on the short side, or has a commitment to deliver the commodity at a fixed price but does not own the actual commodity and will, therefore, take a futures position on the long side.
98
A CPO must run any pool he operates as a separate entity from his own business.
a. True
b. False
**a. True**
This is true. All pools operated by a CPO must be established as a separate entity from the operator.
99
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.
100
On the Chicago Board of Trade, the margin requirement for Treasury bond futures is $2,000 initial and $1,500 maintenance. The margin requirement to sell a call or a put option on T-bonds is the premium plus the greater of:
1. The underlying futures margin minus one-half the amount (if any) that the option is out-of-the-money or
2. One-half the amount of the underlying futures margin
An individual writes a March 82 naked put at 2-32 when March T-bond futures are trading at 80-00. The option margin requirement is:
a. $1,500
b. $2,000
c. $2,500
d. $4,500
**d. $4,500**
The options margin for an in-the-money option is determined as follows:
Option premium 2-32 (2 x 1,000) + (32 x 15.63) = $2,500
The current futures margin = $2,000
Margin = $4,500
101
According to NFA Rules, even if an IB is not involved with placing any orders for a customer, he is still required to keep a complete record of trades.
a. True
b. False
**b. False**
This is false. IBs must act on a fully disclosed basis, therefore, it is the responsibility of the FCM carrying the account to maintain these records for clients who do not place their orders through the IB. Good business practice, however, would be for the IB to maintain a record as well.
102
A customer is long T-bond futures at 88-20. The value of the contract is:
a. $8,312.50
b. $8,625.00
c. $88,312.50
d. $88,625.00
**T-bond futures are quoted in 1/32nds of a point. A quote of 88-20, represents 88 20/32% of par ($100,000 per contract).
88 points @ $1,000 = $88,000
20 (32nds) @ $31.25 = 625
$88,625
or 88.625% of $100,000 = $88,625**
BLANKANSWEREXPLANATION
103
A report has been issued indicating that the coffee crop is 10% lower than the crop for the preceding year. Available stocks of coffee in the U.S. are 15% less than the preceding year. U.S. per capita income has increased by 8%. Based upon this information, the effect on the price of coffee would be:
a. Very bearish
b. Somewhat bearish
c. Bullish
d. None of the factors listed would influence the price of coffee
**c. Bullish**
Since the coffee crop and available stocks are lower, and U.S. per capita income has increased, this would result in a demand (bullish) effect on coffee.
104
If the position of a hedge account is at the position reporting level as established by the CFTC or the exchange, the account must report all activities that occur:
a. Daily
b. Monthly
c. Semiannually
d. Annually
**a. Daily**
When an account, whether hedge or speculator, reaches the reporting level as established by the CFTC, the account must report all activities on a daily basis.
105
An investor anticipates that interest rates during the next three months will slightly decline. He then buys a December 84 T-bond call and pays a premium of $2,700 and writes a September 86 T-bond call and receives a premium of $1,900. If interest rates were to sharply increase or decrease, the maximum loss to the investor would be:
a. Nothing
b. $800
c. $1,900
d. Unlimited
**b. $800**
There would be a maximum loss of $800 as follows:
Long option premium = $2,700
Short option premium = $1,900
New Debit = $800
106
A customer is long 2 Comex gold contracts at $435.50. The market is now $440.75. To protect his gain, he places a stop order at $439.00. The stop is filled at $438.75. Commissions are $40 per contract. The contract size is 100 troy ozs. What is his profit?
a. $285
b. $325
c. $530
d. $570
**d. $570**
The customer's profit is determined as follows:
Long 435.50 x 100 (Contract size) = $43,550
Sells 438.75 x 100 = 43,875
Profit = $325
No. of Contracts x 2
$650
Commissions @ $40 per Contract - 80
$570
107
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.
108
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.
109
An investor who believes gold prices are due for a sharp move but unsure as to the direction (up or down) of that move, can strategically:
a. Buy June gold futures and sell June gold futures
b. Buy June gold calls and sell June gold puts (both at the same strike price)
c. Buy June gold calls and buy June gold puts (both at the same strike price)
d. Sell June gold calls and sell June gold puts (both at the same strike price)
**c. Buy June gold calls and buy June gold puts (both at the same strike price)**
This is an example of a long straddle. The investor believes the underlying futures contract is going to make a sizable move, but is not sure in which direction. Therefore, by purchasing both a put and a call, the investor can potentially make money in either direction.
110
An intramarket spread involves the purchase and sale of the same commodity on two different exchanges in the same or different delivery months.
a. True
b. False
**b. False**
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.
111
A market situation where the supply of a commodity available for sale exceeds the amount of demand for the commodity would indicate:
a. Buying pressure
b. Selling pressure
c. A resistance area
d. A congestion area
**b. Selling pressure**
Selling pressure occurs when there is an excess of supply of a commodity over the demand. This causes downward pressure on the price of the commodity because sellers of the commodity will be forced to lower their offers in order to attract buyers.
112
An individual has a profit of 0-22 on two GNMA contracts. What is the total profit?
a. $68
b. $138
c. $688
d. $1,375
**d. $1,375**
1/32nd of a point equals $31.25. A profit of 22/32 would be $687.50. As there are two contracts involved, the total profit is $1,375.
113
CFTC commissioners may not engage in the trading of commodity futures.
a. True
b. False
**a. True**
CFTC commissioners may not engage in commodity futures transactions.
114
If a customer wants a guarantee that he will not lose more than a specified amount, you could recommend that he place a stop order, which will insure an execution at the stop price.
a. True
b. False
**b. False**
A stop order will not guarantee that the order will be executed at a specified price. A stop order becomes a market order when a particular price level is reached.
115
Heating oil demand, on a seasonal basis, is most inelastic for which type of users?
a. Industrial
b. Residential
c. Transportation
d. Utilities
**b. Residential**
The term "demand inelasticity" means that changes in price do not cause changes in the amount purchased. Residential users of heating oil generally must use the same amount during the winter season, regardless of price.
116
The CFTC may revoke the registration of an employed AP because of past violations.
a. True
b. False
**a. True**
The CFTC may revoke the registration of an employed AP because of past violations.
117
A U.S. exporter sells railroad engines to a company in Great Britain. The financing is in British pounds. He would hedge against currency fluctuations by:
a. Buying U.S. T-bill futures
b. Selling U.S. T-bill futures
c. Buying British pound futures
d. Selling British pound futures
**d. Selling British pound futures**
An exporter will establish a short hedge to protect against a decline in the British pound currency by selling British pound futures.
118
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.
119
When a futures contract is offset, delivery is made immediately.
a. True
b. False
**b. False**
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 on the same exchange, 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 to his offsetting transaction. If a long does not offset his position before the close of trading, he is required to make delivery in accordance with the rules of the exchange.
120
Funds deposited by a customer in a commodity account must be segregated.
a. True
b. False
**a. True**
The CFTC requires that all funds of a customer that relate to commodity futures must be segregated. The funds may not be mixed with those relating to securities, the broker's own funds, or any other funds.
