Practice Test 4 Flashcards
1
Q
An independent IB must maintain adjusted net capital equal to or in excess of $35,000.
a. True
b. False
A
b. False
An independent IB must maintain adjusted net capital equal to or in excess of $45,000.
2
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
When a hedger establishes a futures position opposite to his cash position, he would be most concerned with changes in the basis.
3
Q
Stop orders are which of the following types of orders?
a. Closing
b. Market
c. Protecting
d. Contingency
A
d. Contingency
Stop orders are considered contingency orders. A condition in the market must occur before the order is executed.
4
Q
If futures trade at the daily limit:
a. Trading stops for that day
b. Only closing transactions are allowed
c. Only buy orders are accepted
d. None of the above
A
d. None of the above
If futures trade at the daily limit, trading continues. Trades will take place at the limit up price or below or at the limit down price or above, until the regularly scheduled end of the trading session.
5
Q
A long hedger in T-bonds who wanted to protect his futures position against an adverse move would:
a. Buy a call
b. Sell a call
c. Buy a put
d. Sell a put
A
c. Buy a put
A long hedger in T-bonds would buy a put to protect against an adverse move of his long futures position.
6
Q
Information contained in the CPO’s disclosure document may be furnished to the public up to 12 months after the date appearing on the cover page.
a. True
b. False
A
a. True
This is true. CPO Disclosure Documents may not be more than 12 months old.
7
Q
The reason that the basis approaches zero as delivery in the futures is permitted is because:
a. The cash price usually rises as delivery approaches
b. As long as a difference exists between cash and futures, traders will buy the lower and sell the higher until the difference is eliminated
c. Futures reflect carrying charges
d. Cash will approach futures when there is an oversupply
A
b. As long as a difference exists between cash and futures, traders will buy the lower and sell the higher until the difference is eliminated
The phrase “basis approaches zero” simply means that the price of cash and the price of futures will be the same. “Basis” means the difference between the cash price and the futures price. During the delivery month, the price of cash and the price of futures must approach each other. If they did not coincide, trade users would take advantage of this disparity in the prices of cash and futures and, by doing so, would cause the price to reach a normal equilibrium. The following examples will show why this would occur.
Let’s assume that during the delivery month, the price of futures is $3.25 and the price of cash is $3.00. In this case, farmers would see that the price of futures is substantially higher than the price they could receive by selling their product in the cash market. Rather than sell for cash, they would sell futures with the intention of delivering on their contracts, thereby realizing a price of $3.25. The fact that farmers sell futures would cause the price of futures to decline. At the same time, users of the cash commodity would be unable to obtain it and would therefore have to raise their bids, causing the price of cash to rise. After a short time, cash and futures would reach an equilibrium price.
What if the price of futures was substantially less than the price of cash? Let’s assume that the price of futures is $3.00 and the price of cash is $3.25. In this case, users of the commodity could be expected to buy near futures for $3.00 with the intention of taking delivery. This would cause the price of futures to rise. At the same time, farmers would have to lower their offers in order to sell their commodity. In this way, the price of cash and the price of futures would again reach an equilibrium level.
8
Q
A Commodity Pool Operator does not need to provide risk disclosure documents to participants of the pool if the pool has not started trading.
a. True
b. False
A
b. False
A customer must be provided with a risk disclosure document prior to participating in a commodity pool.
9
Q
Churning is day trading in a customer’s account.
a. True
b. False
A
b. False
Churning is trading an account to generate commissions for the benefit of the broker.
10
Q
If fees are determined on a per-trade or round-turn basis, a customer must receive a detailed explanation in writing.
a. True
b. False
A
b. False
This is false. If fees are based on any method other than per trade or round turn, the customer must receive an explanation in writing.
11
Q
The prices for wheat futures appear as follows:
March 3.78
May 3.80 1/2
July 3.83
A customer goes long two March-July spreads. When the spread is liquidated, March wheat is 3.79 and July wheat is 3.85. The wheat contract is 5,000 bushels. His profit is:
a. Nothing
b. $100
c. $300
d. $500
A
b. $100
The results of the spread are as follows:
March:
Sell 3.78
Buy 3.79
Loss 1
July:
Buy 3.83 Spread 5 cents
Sell 3.85 Spread 6 cents
Profit 2
The net result of the spread is a profit of 1 cent. There is a loss on the March contract of 1 cent per bushel ($50 per contract). This is offset by a profit on the July contract of 2 cents per bushel ($100 per contract). Therefore, the net profit on one spread is $50. As two spreads were established, the total profit is $100.
12
Q
A mortgage investor will have surplus funds in four months. He now wants to tie down the current GNMA yield. He does not want to wait four months since the yield may decline. He wants to hedge with GNMA futures. He would:
a. Go long in the futures market and short in the cash market
b. Go long in the futures market
c. Go short in the futures market and long in the cash market
d. Go short in the futures market
A
b. Go long in the futures market
This investor is short the cash commodity (GNMA) and is concerned that prices will rise (“yield may decline”). An investor would hedge by buying futures (“long hedge”).
13
Q
Which of the following shows a strengthening market?
a. Cash increases more than futures
b. Cash decreases more than futures
c. Futures increase more than cash
d. Futures decrease less than cash
A
a. Cash increases more than futures
All questions consider a normal market unless otherwise stated. A strengthening market is when the basis becomes more positive or less negative. Thus if the price of the cash commodity increases more than the price of futures the basis would narrow or move closer to a positive basis.
14
Q
Generally accepted accounting principles must be used in preparing the actual performance record of a commodity pool.
a. True
b. False
A
a. True
When preparing the actual performance record of a commodity pool, generally accepted accounting principles must be used.
15
Q
A customer takes on a bull 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 profit potential is:
a. $875.00
b. $937.50
c. $3,062.50
d. $3,125.00
A
b. $937.50
Bull call spreads are debit spreads. Therefore, the investor bought (is long) the call at 5-24, and sold (is short) the call at 2-20, for a net debit of 3-04 (3 4/64 or $3,062.50). The maximum profit potential on a debit spread is the difference in the strike prices (88-84 or 4 points or $4,000) minus the net debit ($3,062.50). Maximum profit is $937.50.
16
Q
The initial speculative margin on wheat is $500 per contract (10 cents per bushel). The maintenance margin is $300 (6 cents per bushel). A customer goes short 30,000 bushels of wheat at 3.40 per bushel. How much initial margin is required?
a. $500
b. $1,800
c. $3,000
d. $10,200
A
c. $3,000
The initial margin required is determined as follows:
30,000 bushels of wheat
x 10 cents margin per bushel
$3,000 margin required
17
Q
At compliance hearings, “Formal Rules of Evidence” apply.
a. True
b. False
A
b. False
Formal rules of evidence do not apply at compliance hearings.
18
Q
A customer has a spread position in pork bellies. He is short July at 38.50 and long December at 52.50. He liquidates his spread when July is at 46.25 and December is at 63.75. The size of the contract is 40,000 lbs. What is his profit or loss, excluding commissions?
a. $1,400 profit
b. $1,400 loss
c. $140,000 profit
d. $140,000 loss
A
**a. $1,400 profit** ##
19
Q
The National Futures Association requires, for a discretionary account, that the associated person handling the account has been continuously registered for a minimum of two years and has worked in such registered capacity for that period of time.
a. True
b. False
A
a. True
The National Futures Association requires that all associated persons have been registered continuously for two years and have worked in such registered capacity for that period of time.
20
Q
The following table lists the price of cash hogs and the price of hog futures on the dates indicated:
##
A meat packer anticipates purchasing hogs in early August. Concerned with a price rise, he establishes a long hedge by buying futures on May 6th when the price of futures is 41.20. The commission and interest costs are 15 cents. The net price of the futures is 41.35. On August 6th, the meat packer purchases the cash hogs and offsets his futures position through a sale. Based upon these transactions, what is the packer’s net cost for the cash hogs?
a. $39.85
b. $40.00
c. $40.15
d. $40.30
A
BLANKANSWER
The net cost to the packer for the cash hogs is $40.00 determined as follows:
Cash:
May 6 39.95
Aug 6 49.55
-9.60
Futures:
Buy 41.20
Sell 50.90
+9.70
On August 6, the packer buys the cash hogs for 49.55 per cwt. By hedging in the futures market, he profits on his futures position of 9.70 per cwt. The 49.55 he pays for the hogs, minus the 9.70 profit as a result of the futures hedge, yields a cost of 39.85 to the packer (49.55 - 9.70). Commissions and interest cost the packer .15 per cwt., thus the net cost is 40.00 per cwt.
21
Q
On the Chicago Board of Trade, the margin requirement for Treasury bond futures is $3,500 initial and $3,000 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
A customer sells a March 90 put at 2-18 when the futures market is 88-25. The margin required on this short option is:
a. $5,171.87
b. $5,453.12
c. $5,781.25
d. $6,062.50
A
c. $5,781.25
T-bond options are quoted in 1/64ths of a point. A T-bond premium of 2-18, represents 2 18/64 or 2.28125% of 100,000 par value, which equals $2,281.25.
A March 90 put is in-the-money if the futures price is 88-25. Thus the margin requirement is the premium plus futures margin (since it is in-the-money nothing is deducted), or $2,281.25 + $3,500.00 = $5,781.25.
22
Q
Which of the following pertains to the risk disclosure statement?
It is sent to all customers, whether they are speculators or hedgers.
It must be signed by the customer.
It must contain a statement similar to the following: “spread positions may not be safer than long or short positions.”
a. I only
b. I and II only
c. I and III only
d. I, II and III
A
d. I, II and III
Risk disclosure statements must be sent to all customers, whether speculators or hedgers, when they open an account. The statement must disclose that spread positions may not be safer than long or short positions. The reason for this statement is to alert customers that, although spreads are generally safer than long or short positions, they are by no means free from risk. The statement must be signed by the customer and returned to the member firm.
23
Q
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
A
c. $1,782.50
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.
or
buy @ 88 16/32 $88,500.00
sell @ 90 10/32 $90,312.50
$1,812.50
-30.00 commissions
net profit $1,782.50
24
Q
April T-bill futures are trading at 93.79. Ms. Kogon buys an April 94 T-bill put and pays $825 for the option. The time value portion of the option premium is:
a. $187.50
b. $300.00
c. $328.13
d. $525.00
A
b. $300.00
Option premiums are comprised of two components, intrinsic value and time value. Intrinsic value is the in-the-money amount, in this case, the put is in-the-money by 21 basis points ( x $25 = $525). The time value is therefore the premium of $825 less the intrinsic value of $525, or $300 time value.
25
A settlement between a respondent and the NFA may be settled in a manner that neither admits nor denies the allegations contained in the complaint.
a. True
b. False
**a. True**
The statement is true. A settlement between a respondent and the NFA may be settled in a manner that neither admits nor denies the allegations contained in the complaint.
26
An FCM may not charge a customer margin in excess of exchange minimums.
a. True
b. False
**b. False**
An FCM must charge a customer margin that is at least equal to the exchange minimum.
27
In November, a corporation issues bonds at 88-22. The corporation intends to issue another $20,000,000 of bonds in April. The bonds will have a 20 year maturity. The corporation hedges its offering. Treasury bond futures prices are as follows:
December 88-24
March 88-26
June 88-29
September 89-01
When the hedge is lifted, the bonds are issued at 86-10. The futures position is covered at 86-14. 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. $17,231,250
b. $17,678,126
c. $17,737,500
d. $17,756,250
**d. $17,756,250**
The corporation plans on selling bonds in April and is concerned that bond prices will be lower by April. Therefore, the corporation sells futures to hedge its position.
##
28
NFA members are not required to provide ongoing Training Programs addressing anti-money laundering rules since they are exempt under USA PATRIOT Act.
a. True
b. False
**b. False**
This is false. Under NFA Rule 2-9, NFA members are required to establish and implement policies and procedures as required under the USA PATRIOT Act. One of the provisions is to provide ongoing training concerning AML to all appropriate personnel of the member. Other provisions require a member to have a customer identification program, an AML Compliance Program, and to file a report if a customer engages in a cash transaction that exceeds $10,000.
29
The market for a futures contract appears as follows:
March $3.85
May $3.83
July $3.80
September $3.76
This type of market would be called:
a. A carrying-charge market
b. A normal market
c. An inverted market
d. A premium market
**c. An inverted market**
This market is called an inverted market since the nearer months are selling at higher prices than the deferred months.
30
A customer believes interest rates will rise. Which of the following positions could the customer take in order to profit from this prospective move?
I. Buy a T-bill call
II. Buy a T-bill put
III. Buy a T-bill future
IV. Sell a T-bill future
a. I and II
b. I and III
c. II and IV
d. III and IV
**c. II and IV**
An investor expecting a rise in interest rates anticipates bond (and bill) prices to drop. To take advantage of a price decline, the investor could buy a put or sell the futures.
31
A customer places an order with his RCR to buy two contracts of gold at 480.50. When the AP places the order, the market is at 482.60. Later, the RCR notices on his trading screen that the market is trading $480.10 and the term "fast market" appears on the screen. The AP can immediately call the customer and confirm the order as executed.
a. True
b. False
**b. False**
A fast market condition means that a limit order may not be able to be executed at the specified limit price. Before confirming the order as executed the RCR must check with the floor broker to determine if there has been an execution for the order.
32
Registered Commodity Pool Operators or Registered Commodity Trading Advisors are allowed to represent that they have been approved by the Commission after they have passed the qualifications examination.
a. True
b. False
**b. False**
Registered Commodity Pool Operators or Commodity Trading Advisors are prohibited from representing that they have been recommended, sponsored, or approved by the Commission.
33
The following prices relate to Comex gold spreads:
January $385.50
February $385.60
March $386.10
April $388.20
May $388.80
June $389.20
Which of the following will generally be the most profitable spread if it is expected that the spread will narrow?
a. Sell January and buy February
b. Buy January and sell February
c. Buy March and sell April
d. Sell May and buy June
**c. Buy March and sell April**
The differential in price is highest between March and April. Therefore, the spreader will buy March and sell April.
34
Mr. Legla is long 5 contracts of coffee at 136.72. He enters an order to sell 5 contracts at 135.20 stop. The broker reports the order is filled at 135.18. The contract size is 37,500 lbs. and commissions are $30 round-turn per contract. The result of the transaction, including any adjustments made by the broker, is a:
a. $3,000.00 profit
b. $3,000.00 loss
c. $3,037.50 profit
d. $3,037.50 loss
**d. $3,037.50 loss**
The profit or loss would be computed as follows:
customer is long at 136.72 cents
sell stop filled at -135.18 cents
loss per lb. 1.54 cents
contract size x 37,500 lbs.
loss per contract 577.50
commission + 30.00
607.50
x 5 contracts
loss $3,037.50
Since the customer placed a stop order rather than a stop limit order, there is no adjustment of the sale proceeds.
35
A soybean oil exporter must quote a price for soybean oil four months in advance. The price quoted is based on the July soybean oil futures price. July futures are trading at 21.35 per cwt. The exporter wants a profit margin of 2.50 per cwt. and includes this in the quote. He then hedges his risk in the futures market. Before delivery, prices rise due to an increase in demand and supply shortages. The current price of oil is 27.67 per cwt. and July futures are 27.45. The hedge is lifted. The net cost of the soybean oil to the exporter is:
a. 21.35
b. 21.57
c. 23.85
d. 25.17
**b. 21.57**
The exporter is short the soybean oil currently and will hedge by purchasing July futures at 21.35.
The current cash price of the oil is 27.67.
##
The exporter quoted a sale price of 23.85 (21.35 + 2.50 profit), but this is not relevant to this question.
36
If a customer is long 10 call options with a delta of .40, which of the following would neutralize this position?
a. Buying 40 futures contracts
b. Buying 20 put options with a delta of .20
c. Selling 4 futures contracts
d. Selling 20 put options with a delta of .20
**c. Selling 4 futures contracts**
In order to neutralize an option position which is 40% as volatile as the underlying contract (delta = .40), it is necessary to use 40% as many futures contracts (10 option contracts x 40% = 4 futures contracts). To neutralize long calls it is necessary to short the futures, therefore sell 4 futures contracts.
37
The value of a pool is in excess of $600,000. The participants must receive statements:
a. Monthly
b. Quarterly
c. Semiannually
d. Annually
**a. Monthly**
Commodity pools in excess of $500,000 at the beginning of the fiscal year must receive monthly statements.
38
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. $343.75 loss**
The customer will have a $343.75 loss, calculated as follows:
##
39
A commodity options confirmation statement shall include the customer's account identification number, a separate listing of the amount of the premium and all other commissions, the option series, and the expiration date.
a. True
b. False
**a. True**
This statement is true. A commodity options confirmation statement shall include the customer's account identification number, a separate listing of the amount of the premium and all other commissions, the option series, and the expiration date.
40
A client is long 450,000 bushels of wheat that is margined at the exchange minimum of $40,500. The equity in the customer's account is $75,600. The maintenance margin requirement is $350 per contract. What is the maximum amount that the customer may withdraw?
a. $9,000
b. $35,100
c. $44,100
d. He may not withdraw any money
**b. $35,100**
The maximum that the customer may withdraw is the difference between the equity in the customer's account and the exchange minimum initial requirement.
75,600 equity
- 40,500 exchange minimum (initial)
$35,100 excess of initial requirement
41
In a normal market, the difference between near and deferred futures contract months is called:
a. Basis
b. Crush
c. Reverse crush
d. Carrying charge
**d. Carrying charge**
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.
42
A businessman who uses the cash commodity in the manufacture of his product buys futures in excess of the CFTC speculative position limits. The amount of futures that he purchases corresponds with the amount of the commodity that he uses in his business. In this case, there is no violation of CFTC position limits because it is a bona fide hedge.
a. True
b. False
**a. True**
A hedger who buys or sells futures contracts in an amount that corresponds to his cash position is not subject to CFTC position limits.
43
A customer buys a T-bond call at 2-10. He sells the call at 4-05. His profit is:
a. $1,921.88
b. $2,843.75
c. $4,875.00
d. $5,078.25
**a. $1,921.88**
T-bond calls are quoted in 1/64ths of a point. The customer buys at 2-10 or 2 10/64 and later sells at 4-05 or 4 5/64 for a profit of 1 59/64 or 1.92188% of par ($100,000) or $1,921.88.
44
An investment company holds 10 million dollars of 7 1/4% Treasury bonds maturing in 2010. The manager wishes to hedge with T-bond futures. The futures contract reflects an 8% coupon. To adjust the difference between 7 1/4% and 8% bonds, a conversion factor of .9229 is used. The number of futures or options that the manager would use to have a weighted hedge is:
a. 9 contracts
b. 10 contracts
c. 92 contracts
d. 100 contracts
**c. 92 contracts**
If the investment held 8% bonds they would hedge 100 contracts. ($10,000,000 divided by $100,000 = 100 contracts.) To adjust the difference in coupons multiply 100 contracts by the conversion factors of .9229. 100 x .9229 = 92 contracts.
45
A CPO operator must disclose the potential size of a commodity pool to a prospective participant.
a. True
b. False
**a. True**
The CPO must disclose the potential size of a commodity pool and a prospective participant.
46
The prices for the wheat futures market appear as follows:
March $3.78
June $3.83
September $3.85
December $3.87
A trader determines that the spread between March and June, at 5 cents, is too narrow and he expects the spread to widen. In this case, he should:
a. Buy March
b. Sell March and buy June
c. Buy June and buy March
d. Sell June and sell March
**b. Sell March and buy June**
If a spreader anticipates that a spread will widen, he will buy the higher-priced contract and sell the lower-priced contract.
47
Which of the following orders is not permitted on the Chicago Board of Trade?
a. Limit
b. Stop limit
c. Limit spread
d. Stop spread
**d. Stop spread**
Stop spread and combination stop spread orders are not permitted on the CBT.
48
After an IB places an order he has received from his customer with the carrying FCM, the IB need not keep his order ticket because the FCM is required to keep the order ticket he prepares when the order is received from the IB.
a. True
b. False
**b. False**
This is false. An IB which accepts an order from a client must keep a copy of the order ticket.
49
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. $4,875.00**
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.
50
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. $758,100**
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.
51
A MIT order to sell is activated when the market trades at or below the price entered.
a. True
b. False
**b. False**
An MIT order to sell becomes a market order when the commodity trades or is bid at or above the price entered.
52
An exchange may prohibit an individual from employment with a member firm of the exchange for violation of equitable principles of trade.
a. True
b. False
**a. True**
The exchange may bar an individual from association with a clearing member firm of the exchange for violation of equitable principles of trade.
53
An individual purchases 2 corn contracts and deposits $2,000 margin. This represents 20 cents per bushel. The price of corn increases by 16 cents and the individual sells the 2 contracts. His commission cost for the 2 contracts totals $60. The contract size for corn is 5,000 bu. What is his net profit margin on the transaction?
a. 80%
b. 77%
c. 74%
d. 72%
**b. 77%**
The net profit margin is determined as follows:
5,000 Contract Size for Corn
x .16 Price Increase
$800 Profit on One Contract
x 2 No. of Contracts
$1,600 Profit on Two Contracts
- 60 Commission on Two Contracts
$1,540 Net Profit
Net Profit % = Profit ($1,540) / Margin ($2,000)
= 77%
54
A U.S. firm has contracted to pay 250 million yen for automobile parts from a firm in Japan within three months. The U.S. firm is concerned that the Japanese yen will appreciate in value and intends to hedge by purchasing 20 futures contracts. The Japanese yen contract size is 12,500,000 yen. The current value of the yen in the cash market is .004076 and the futures market is .004128. Three months later that cash market is .004372 and the futures market is .004418. If the U.S. firm did not hedge, the additional cost would be:
a. No additional cost
b. $3,552
c. $74,000
d. $1,093,000
**c. $74,000**
You need only consider the cash market to answer this question. The Japanese yen has increased in value by .000296 (.004372 - .004076). As there are 250,000,000 yen in 20 contracts, the additional cost, had the firm not hedged, would have been $74,000.
55
The term "pyramiding" refers to the use of unrealized profits in already-existing positions to use as margin on the purchase of additional contracts.
a. True
b. False
**a. True**
The term "pyramiding" refers to the use of unrealized profits on existing positions to use as margin on new positions.
56
A FCM must furnish to each customer holding an option which has expired or been exercised, a written confirmation statement not later than the:
a. Same day
b. Next business day
c. Fifth business day
d. Seventh business day
**b. Next business day**
A written confirmation must be sent to customers holding an expired or exercised option no later than the following business day.
57
Settlement on options is based on the:
a. Strike price
b. Underlying futures
c. Premium
d. Price of futures
**c. Premium**
The settlement of options is based on the option premium.
58
If a customer enters a sell stop limit order at 227, he should expect a sale at:
a. 227 only
b. 227 or better
c. 227 or below
d. Any price as long as it is an immediate execution
**b. 227 or better**
Sell stop limit orders become limit orders when activated and are executed at the limit price (227) or better.
59
A CPO may combine all his pools for purposes of disclosure.
a. True
b. False
**b. False**
A CPO may not combine all his pools for purposes of disclosure.
60
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:
a. Must immediately deposit an additional $500
b. Must immediately deposit an additional $1,125
c. Would be required to liquidate his position
d. Need not deposit any additional margin
**d. Need not deposit any additional margin**
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.
61
A hedger is said to be "long the basis" when:
a. He has a short futures hedge against unsold inventory
b. He has a long futures hedge against unsold inventory
c. He has sold grain for delivery "on track, country station"
d. He has purchased a spot commodity but has not yet placed a short futures hedge against it
**a. He has a short futures hedge against unsold inventory**
The term "long the basis" is only used in reference to an individual who owns the cash commodity and has placed a selling hedge. If an individual has a cash position in inventory, but has not placed a selling hedge, we would not say that he is long the basis.
In choice (a), the individual is long the cash commodity in the form of unsold inventory, and has established a selling hedge. In choice (d), the individual is also long the cash commodity, but he has not hedged his position.
Choice (b) is completely incorrect. If one has unsold inventory, he will establish a selling hedge (sale of futures), not a long or buying hedge.
62
The buyer of a commodity option pays a premium which results in a debit to his account. This would be known as a debit transaction. Debit transactions are paid:
a. The same day of the transaction
b. The day after the transaction
c. When the option is exercised
d. Within five business days of the transaction
**a. The same day of the transaction**
Options must be paid in full at time of purchase.
63
A CPO must include a breakeven calculation in the beginning of the Risk Disclosure Document
a. True
b. False
**a. True**
This is true. The breakeven point must be disclosed in the beginning of the CPO Disclosure Document.
64
The Floor Committee of an exchange would be concerned with:
a. A side agreement between two brokers in the execution of an order
b. A customer who is dissatisfied with the execution of his order by a member firm's floor broker
c. Insuring that brokers collect the necessary margin from customers
d. All of the above
**a. A side agreement between two brokers in the execution of an order**
The Floor Committee is concerned with the transaction of orders on the exchange floor. All executions must be done by open outcry. Private agreements between brokers is not allowed.
65
A trader buys a contract of corn on the Chicago Board of Trade. His purchase price is $1.50. He sells the contract two months later at $1.56. Commission is $30 and his initial margin deposit is 12 cents a bushel. The contract size is 5,000 bu. The trader realized a net profit on his margin of:
a. 50%
b. 45%
c. 35%
d. 25%
**b. 45%**
The net profit on his margin is determined as follows:
Step 1:
Buys @ 1.50
Sells @ 1.56 Profit .06
Contract size 5,000 x .06 = $300
Step 2:
Contract Size 5,000 Margin x .12 $600
Step 3:
Profit $300
Less Commission - 30 = $270
% of Net Profit = Net Profit ($270) / Margin ($600) = 45%
66
An AP must verify a customer's income and net worth.
a. True
b. False
**b. False**
There is no requirement on the part of the AP to verify a customer's income and net worth. Good business practice would be to verify such information.
67
A customer writes a put option. The market rallies. The customer's potential for profit could have been reduced had he sold a covered put option.
a. True
b. False
**a. True**
This is true. A put is considered covered if the writer is short the underlying future. If the market rallies the put will expire and the writer will collect the premium. However, since the writer is covered, this profit is offset by the loss on the short future position.
68
An American car dealer imports automobiles from a German manufacturer. The order calls for delivery of the cars in August. The current exchange rate is .9199 for each Euro. The order is valued at $15,750,000. The futures prices are as follows:
June .9261
September .9324
December .9388
The size of the futures contract is 125,000 Euros. The importer hedges using the futures market and establishes a basis of .0125. Later, when the hedge is lifted, the hedger's basis is .0100. As a result of the hedge, the price of the Euro for the American importer when he buys the cars is:
a. .9099
b. .9199
c. .9224
d. .9299
**c. .9224**
The importer will need to have Euros to pay for the cars when delivered in August. Since he is short the foreign currency he will hedge by buying futures. As delivery will be made in August he will hedge using the September contract and create a long hedge with a basis of .0125. In a normal market (deferred month greater than near) a long hedge will lose if the basis narrows. The basis is .0100, when the hedge is lifted. The basis has narrowed .0025 (.0125 - .0100) resulting in a loss on the hedge of .0025 per Euro. The importer could have purchased Euros originally at .9199. Instead he chose to hedge which resulted in a loss. The importer's ultimate cost to acquire Euros, therefore, is .9199 plus the .0025 loss on the hedge or .9224.
69
CPOs that charge up-front fees must disclose this fact to the customer but this fact does not have to be in the disclosure document.
a. True
b. False
**b. False**
This is false. The breakeven point must be disclosed in the beginning of the CPO Disclosure Document.
70
If a customer entered a sell stop order at 227 and the order was elected, he should expect:
a. A sale at 227
b. A sale at 227 or better
c. A sale at 227 or below
d. An immediate execution at the best available price
**d. An immediate execution at the best available price**
Stop orders become market orders when activated and are executed immediately at the best available price.
71
Mr. Green, your customer, is short 3 October three-month Treasury bill contracts at 96.33. He covers at 95.57. Ignoring commissions, the profit or loss on this trade is:
a. Loss of $5,700
b. Profit of $5,700
c. Loss of $1,900
d. Profit of $1,900
**b. Profit of $5,700**
Your customer has a profit of $5,700, calculated as follows:
Short @ 96.33
Covers @ 95.57
Profit (Basis Points) .76
Note: Each basis point equals $25
76 x 25 = 1,900
No. of Contracts x 3
Profit = $5,700
72
An increase in which of the following items would NOT influence the carrying charges for wheat:
a. Insurance
b. Wages paid to grain elevator employees
c. Interest rates
d. Wheat prices
**d. Wheat prices**
Carrying charges include insurance, storage costs and interest paid for funds that have been borrowed to carry the cash commodity.
73
CPOs must include in the disclosure document at least quarterly, all withdrawals, redemptions and additions to the pool.
a. True
b. False
**a. True**
This statement is true. CPOs must include in the disclosure document at least quarterly, all withdrawals, redemptions and additions to the pool.
74
A farmer intends to market 400,000 pounds of hogs. The current price of hogs is 42.90 and April futures are 44.10. The farmer hedges his risk in the futures market by establishing a basis of 1.20 under. The contract size for hogs on the CME is 30,000 lbs. In April, the price of hogs has decreased to 42.00 and the futures position is offset at 42.70. As a result of the hedge, the income received on the 400,000 pounds of hogs marketed by the farmer is:
a. $173,460
b. $173,600
c. $1,734,600
d. $1,736,000
**a. $173,460**
The hog farmer needs to hedge his long position of 400,000 pounds. Since the contract size is 30,000, he will not be able to perfectly hedge his entire long position. The closest he can come to the 400,000 pounds is 13 contracts (at 30,000 pounds per contract) or 390,000 pounds. The hog farmer will sell 13 contracts at 44.10.
short 13 contracts @ 44.10
buy @ 42.70
gain of 1.40 cents per pound
x 30,000 pounds/contract
gain of $420 per contract
x 13 contracts
Total gain on futures = $5,460
Total received from sale equals:
$168,000 proceeds of sale of cash hogs (400,000 pounds x 42 cents/pound)
+ $5,460 profit on futures
$173,460
75
If an investor is short a put option on a financial futures and is exercised against, he would be assigned a:
a. Long futures position
b. Short futures position
c. Long actuals position
d. Short actuals position
**a. Long futures position**
Anyone who writes or is short a put option on a financial futures must be prepared to be assigned a long futures position if the buyer exercises the option.
76
Sell stop limit orders:
a. Guarantee execution
b. Guarantee execution at the stop limit price
c. Guarantee execution once the market trades at or through the stop price
d. Do not guarantee execution
**d. Do not guarantee execution**
Sell stop limit orders become sell limit orders when activated. Limit orders must be executed at the limit price or better and do not guarantee an execution unless the broker is able to get the limit price or better.
77
According to Rule 2-30 (Know Your Customer), the customer refuses to disclose any additional information about himself. Which of the following statements is correct?
a. The account may be opened if it is approved by another RCR.
b. The account may be opened if it is approved by an NFA official.
c. The account may be opened if it is approved by the branch office manager.
d. The account may not be opened.
**c. The account may be opened if it is approved by the branch office manager.**
Rule 1.35 states that every customer must give his true name, address and occupation. Rule 2-30 states that if a customer refuses to give background information, an account may be opened by the RCR if the customer's refusal to give information is noted and the account is approved by the branch office manager.
78
A customer deposits $7,000 margin and buys a stock index futures contract at 212.40. The contract has a value of 500 times the index. At the close, the market settles at 213.25. The equity in the account is:
a. $425
b. $7,000
c. $7,425
d. $9,125
**c. $7,425**
The equity in the account is $7,425.00, calculated as follows:
Equity = original deposit plus profit (or less loss) on position
B @ 212.40
S @ 213.25
profit = .85 x 500 = $425
Equity = $7,000 margin + 425
Total Equity = $7,425.00
79
A market in which small increases in price are met by increased selling and small decreases in price are met in increased buying would best describe:
a. A support price
b. A resistance price
c. A congestion area
d. A liquidating market
**c. A congestion area**
A congestion area is marked by a relatively narrow range of prices in which the futures contract has traded for a period of time. The top price range is called a resistance area and the bottom price range is called a support area. The congestion area is one in which the futures, when they reach the resistance area on the top side, are met with increased selling that prevents further price advance. When the futures reach the support area on the down side, increased buying retards a further price decline.
80
An AP has opened a discretionary account with a client. Which of the following is NOT a requirement?
a. The account must be under the supervision of a partner or officer of the member firm.
b. The customer must receive a confirmation after any purchase or sale.
c. The customer must be notified each time the account executive plans to take a new position.
d. The customer must give the account executive written authority to exercise discretion in the account.
**c. The customer must be notified each time the account executive plans to take a new position.**
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.
81
If the price of a near delivery month is $3.60 and the price of the next delivery month is $3.63, the difference in price is called:
a. The carrying charge
b. The load
c. The basis
d. The differential
**a. The carrying charge**
The difference in price between a near month and a deferred month reflects the carrying charges for the commodity.
82
In order to execute an intramarket spread, there must be more than one exchange that trades in the commodity.
a. True
b. False
**b. False**
An intramarket spread is the sale of a futures contract in one delivery month and the sale of the same futures contract in another delivery month on the same exchange.
83
APs should recommend to traders that they trade spreads because they have less risk.
a. True
b. False
**b. False**
This is false. Spread positions on commodities are not necessarily less risky than individual commodity positions.
84
The July sugar futures contract is trading at 8.42. The July 7.50 call option carries a premium 1.24. The time value of the option premium is:
a. .32
b. .92
c. 1.24
d. 2.16
**a. .32**
To determine the time value of an option premium, you must first find the intrinsic value. The intrinsic value of a call option is found by subtracting the strike price of an in-the-money option from the price in the futures market (8.42 market - 7.50 strike price = .92 intrinsic value). The time value of the option premium is equal to the total premium less the intrinsic value (1.24 premium - .92 intrinsic value = .32 time value).
85
A speculator has a long position of 3 January GNMA futures contracts at 97-08. He liquidates at 98-02. Ignoring commissions, his gain or loss is:
a. $812.50 loss
b. $812.50 gain
c. $2,437.50 loss
d. $2,437.50 gain
**d. $2,437.50 gain**
The speculator has a profit of $2,437.50, calculated as follows:
Long @ 97 8/32
Sell (Cover) @ 98 2/32
Gain 26/32
Note: Each point equals $31.25
$31.25 x 26 = $812.50
No. of Contracts x 3
$2,437.50
86
A decision by the Arbitration Committee may be appealed to the Appeals Committee.
a. True
b. False
**b. False**
Arbitration decisions may not be appealed.
87
A sugar exporter agrees to deliver sugar at 8.40 cents in three months. He hedges by buying sugar futures at 9.75 cents. When the time comes to make delivery, the hedger purchases the cash sugar at 10.65 and sells his futures at 11.45. The net price he received on the sale, taking account of his futures hedge, was:
a. 8.40
b. 10.10
c. 10.60
d. 11.45
**b. 10.10**
In order to protect himself against a price rise, the exporter buys sugar futures at 9.75. When the time approaches for him to export the sugar, he buys cash sugar and makes delivery at the agreed price of 8.40. He then sells his sugar futures at 11.45. His profit on sugar futures is 1.7 cents per pound (sale at 11.45 minus cost of 9.75). If we add the profit of 1.7 cents to the selling price he received of 8.40, his net selling price is 10.10 cents.
88
In an omnibus account, a purchase and sale statement is sent to the non-clearing member, not the non-clearing member's customer.
a. True
b. False
**a. True**
There are two types of accounts that a non-clearing member firm can maintain with a clearing member firm. One of these is called an "omnibus account." In this type of account, the non-clearing firm will maintain its own detailed records in regard to the customer. It will transact orders through the clearing firm, but it will not disclose the names of the customers. The non-clearing firm will be responsible for maintaining all required records, collecting margin and the like. Since the clearing firm does not know the name of the non-clearing firm's customers, it would of course not be able to send the statements to the customer directly. Instead, it will send statements to the non-clearing firm, which in turn will send statements to its customers.
The other type of account that a non-clearing firm can maintain with a clearing firm is called a "disclosed account." In this type of account, the non-clearing firm will give all of the information regarding the account to the clearing firm, and the latter will maintain all of the necessary records. In this case, the clearing firm would have a record of the names of each customer and would send the statements directly to the customer.
89
The responsibility for the collection of margin from customers is assigned to the associated person who is servicing the account.
a. True
b. False
**a. True**
Member firms usually assign the responsibility of contacting customers from whom margin is due to the account executive (AP) who is handling the account.
90
The price of soybeans is $5.50 per bushel. Margin is 35 cents per bushel. The customer deposited total margin of $5,250. The contract size is 5,000 bushels. The price of soybeans increases by 3%. Based upon the margin deposit, the amount of profit or loss realized by the customer would be:
a. 10.79%
b. 15.70%
c. 16.10%
d. 47.10%
**d. 47.10%**
The original price of the beans was $5.50 per bushel. The price increased by 3% to $5.665 per bushel, or a $.165 gain. As a percent of the margin deposit of $.35, this represents a 47.1% profit (.165/.35).
91
An investor buys one December 78 T-bond call at 2-24 ($2,375). The December T-bond futures contract is trading at 80-00. The premium would have:
I. An intrinsic value of $2,000
II. An in-the-money value of $2,375
III. A time value of $375
IV. An out-of-the money value of $2,000
a. I only
b. I and II only
c. I and III only
d. III and IV only
**c. I and III only**
In this situation, the call has an intrinsic value of 2 (80-78) or $2,000 (2 x $1,000). The option that has an intrinsic value is said to be in-the-money and it is the difference between the exercise price and the current market price. This option also has a time value of 24/64 or $375 (24 x 15.63). The time value is that portion of an option's premium in excess of its intrinsic value.
92
Which of the following is true regarding discretionary accounts?
a. They must be renewed by the member firm.
b. They must be renewed by the customer.
c. They must be renewed by the NFA .
d. They need not ever be renewed.
**d. They need not ever be renewed.**
Discretionary accounts need not ever be renewed once they are established.
93
A trader has a regulated futures account and a securities account at an FCM. The trader receives a margin call in his securities account. There is excess equity in his regulated futures account. The member firm in this case:
I. Could transfer the money from the regulated futures account to the securities account if the customer gave specific instructions that this could be done
II. Could not transfer money from the regulated futures account to the securities account even if the customer requested that this be done
III. Could make the transfer only by obtaining written consent from the customer each time such a transfer is to be made
IV. Could make the transfer if the customer has signed an agreement that authorizes the firm to make such transfers from the regulated futures account to the securities account
a. I and II
b. I and IV
c. II and III
d. III and IV
**d. III and IV**
The transfer could be made if a transfer and consent form or supplemental agreement was completed by the customer.
94
When a long stands for delivery on a futures contract, transfer of ownership of the commodity is accomplished when:
a. 50% of the cash value of the contract has been deposited by the buyer
b. The commodity position is offset
c. The seller sends the clearing house a Notice of Intention to Deliver which is passed on to the buyer, and the buyer pays for the commodity
d. The buyer notifies the clearing house of his intention to accept delivery, which is then passed on to an eligible seller
**c. The seller sends the clearing house a Notice of Intention to Deliver which is passed on to the buyer, and the buyer pays for the commodity**
When a short decides to make delivery to a long, he will forward a Notice of Intention to Deliver to the clearing house of the exchange. The clearing house will send the notice to the brokerage firm with an eligible long position. Depending upon the clearing house, this might be the brokerage firm with the oldest net long position, or the oldest long position, or the largest long position. The clearing house will notify the seller of the identity of the buyer, and the seller will transfer title to the actuals by means of a warehouse receipt or similar certificate. The buyer must then present the seller with payment for the actuals. Once this has occurred, title will then be transferred from the seller to the buyer.
95
If prices are dropping while the open interest is increasing, this would indicate:
a. That new short sellers are entering the market
b. That new buyers are aggressively purchasing the contract
c. That both existing longs and existing shorts are offsetting their positions
d. That existing shorts are buying aggressively to liquidate their positions
**a. That new short sellers are entering the market**
If open interest is increasing, this would indicate that new buyers and sellers are entering the market. If prices are declining, this means that new sellers are more aggressive than new buyers.
96
A lumber dealer enters an order with a mill to purchase lumber for delivery in three months, with the price of the lumber to be based on the price on the day of delivery. The dealer hedges by buying futures. The price of futures is $184 and the price of cash is $190. On the day the cash lumber is delivered, the price of cash lumber is $196 and the price of futures is $200. The hedge is lifted and the result is a:
a. $6 profit
b. $6 loss
c. $10 profit
d. $10 loss
**c. $10 profit**
The lumber dealer has established the hedge as follows:
Cash Market:
Date established $190
Date delivered $196
-$6
Futures Market:
Buy $184
Sell $200
+$16
Result of the hedge is +$10 profit.
97
A customer may open up an option account without opening a futures account.
a. True
b. False
**b. False**
This is false. In order to trade options on futures, the client must open a futures account.
98
The phrase "liquidating market" usually indicates:
a. Longs selling their holdings with a reduction in the open interest
b. Stop orders are being touched off and executed
c. Shorts are covering their positions
d. Open interest is rising
**a. Longs selling their holdings with a reduction in the open interest**
A liquidating market is one in which the open interest is decreasing at the same time that prices are declining. Open interest decreases when existing longs and existing shorts both leave the market by offsetting their positions at a greater rate than new longs and new shorts entering the market. If the price is decreasing at the same time existing longs and shorts are exiting the market, it is because the longs are more anxious to leave the market and are therefore selling their positions at progressively lower prices.
99
A customer buys three stock index futures contracts with a component of 250 at 403.60. He deposits margin of $10,000 per contract. At the close, the market settles at 400.75. The equity in the account is:
a. $2,137.50
b. $12,137.50
c. $27,862.50
d. $32,137.50
**c. $27,862.50**
The customer initially deposited $10,000 per contract or $30,000. The value of the long futures declined resulting in a loss.
long 3 contracts @ 403.60
new market @ 400.75
loss of 2.85 per contract
x 250.00 value of contract
loss of $712.50 per contract
x 3 contracts
total loss of $2,137.50
Equity in the account is $30,000 (initial deposit) minus $2,137.50 (loss in market value) or $27,862.50.
100
The following table lists the price of cash hogs and the price of hog futures on the dates indicated.
Futures Price Cash Hog Price
May 6 41.20 39.95
June 7 42.60 41.41
July 5 48.00 48.45
August 6 50.90 49.55
September 3 49.30 47.85
October 1 49.75 48.75
November 5 50.20 49.00
December 3 51.45 49.95
A meat packer anticipates that he will be purchasing hogs in the early part of August. He is concerned with a price rise and therefore, he establishes a long hedge by buying futures. The hedge is established on May 6th when the price of futures is 41.20. In addition, the packer has commission and interest costs of 15 cents. The net price of the futures is therefore, 41.35. On August 6th, the meat packer purchases the cash hogs and offsets his futures position through a sale. Based upon these transactions, what is the net cost to the packer for the cash hogs?
a. 39.85
b. 40.00
c. 40.15
d. 40.30
**b. 40.00**
We may disregard the cash price when the futures are purchased. The meat packer is anticipating that he will be buying hogs in the future and wishes to protect himself against a rise in price. He will therefore buy futures. His futures purchase is at 41.35. When it is time to buy the cash hogs, the price of cash hogs is 49.55 per cwt. This is the price that the meat packer will pay. When he buys the cash hogs, he will sell his futures at 50.90. His profit on the futures is 9.55 per cwt. Subtracting the profit on futures from the cash price of the hogs (49.55 minus 9.55) indicates a net cost of 40.00 per cwt for the cash hogs.
101
If a customer has an account with an FCM and trades in U.S. sugar futures and London sugar futures, the FCM may combine the margin relating to the U.S. sugar futures with that relating to the London sugar futures.
a. True
b. False
**b. False**
Funds relating to U.S. commodity futures must be segregated from those relating to foreign commodity futures.
102
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:
a. Must immediately deposit an additional $1,500
b. Need not deposit any additional margin on his existing position, but would be subject to the new margin requirement if he took a new position
c. Would have to deposit an additional $900
d. Would be required to liquidate his position
**a. Must immediately deposit an additional $1,500**
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.
103
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:
a. Buy June T-bill futures
b. Sell June T-bill futures
c. Buy six-month T-bills
d. Sell six-month T-bills
**b. Sell June T-bill futures**
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.
104
Which of the following is a gold straddle?
a. Long a December 440 gold call
Short a December 440 gold put
b. Long a December 440 gold call
Long a December 440 gold put
c. Long a December 440 gold call
Long a December 460 gold put
d. Long a December 440 gold call
Short a December 460 gold put
**b. Long a December 440 gold call Long a December 440 gold put**
A straddle is defined as either buying or selling a put and a call with identical strike prices and expirations. Long a December 440 call and long a December 440 put is considered a straddle.
105
A customer is introduced to an FCM by an introducing broker. The FCM keeps a copy of the Risk Disclosure Acknowledgment in his file. Therefore, the IB does not need to keep the Risk Disclosure Acknowledgement in his file.
a. True
b. False
**b. False**
This is false. An IB must provide a Risk Disclosure Document to the client at or before the account is opened. The IB must maintain a copy of the acknowledgment in his files.
106
The actual transfer of ownership of a commodity occurs at the time the order is executed.
a. True
b. False
**b. False**
This is false. Transfer of ownership occurs when the commodity is delivered.
107
A commodity pool operator is exempt from registering as a CPO if the value of the pool is under $250,000 and there are no more than 14 participants in the pool.
a. True
b. False
**a. True**
This is true. A commodity pool operator need not register if:
1. The CPO operates pools which in total is less than $400,000 and there are no more than 15 non-affiliated participants per pool, or
2. The CPO operates only one pool, does not advertise, and receives no compensation for his efforts (other than reimbursement for administrative expenses).
108
A customer believes interest rates will rise and takes the appropriate position of 5 contracts in the T-bill futures. His position established at a price of 94.65. He liquidates when the price is at 95.33. Round-turn commissions are $40. His net profit or loss is:
a. $8,300 gain
b. $8,700 loss
c. $10,425 gain
d. $10,825 loss
**b. $8,700 loss**
The customer believes interest rates are going up, therefore he anticipates bond (bill) prices to decline. To take advantage of this he would short futures.
long 5 contracts @ 94.65
buy @ 95.33
loss .68 (68 basis points per contract)
x $25 value of contract
gain of $1,700 per contract
+ $40 commissions
net gain of $1,740 per contract
x 5 contracts
total loss $8,700
109
The term "basis" is the difference between the cash price and the futures price.
a. True
b. False
**a. True**
The term "basis" has a number of meanings. When talking about the basis in general, it is always assumed to mean the difference between the current cash price and the current price of the nearest futures month. When talking about a particular individual's basis, this would refer to the difference between that individual's cash price and the price of the futures month in which he hedged, which may not necessarily be the nearest futures month.
110
CFTC speculative position limits do not apply to bona fide hedgers.
a. True
b. False
**a. True**
CFTC limits in regard to trading and position size apply to speculators only. They do not apply to bona fide hedgers who are taking futures positions that match the size of their cash positions.
111
A large amount of speculators in a futures market:
a. Eliminates price fluctuations in the cash market
b. Has no effect on fluctuations in the cash market
c. Tends to reduce magnitude of price fluctuations
d. Tends to reduce frequency of price fluctuations
**c. Tends to reduce magnitude of price fluctuations**
A market in which there is a large number of speculators is a market that will have a relatively large number of bids and offers. The larger the number of bids and offers, the more continuous the market will be. A continuous market is one in which price changes are small between successive transactions. A large number of buyers and sellers in a market means that there will be competition to make the best bid and the best offer in order to buy or sell the commodity. This competition will tend to narrow the spread between the bids and offers, and thus lead to smaller fluctuations in the price of the commodity.
112
Deltas increase for calls as the market rises.
a. True
b. False
**a. True**
This is true. The delta factor measures the price movement of an option in relation to the price movement of the underlying future. In-the-money options have delta factors closer to 1.00. Out-of-the-money options have delta factors closer to 0.00. As the market increases, call options become deeper in-the-money and the delta factor would increase to 1.00.
113
According to the rules of the Chicago Mercantile Exchange, if the daily price limits are expanded, margins are automatically expanded.
a. True
b. False
**b. False**
This is false. This is a Chicago Board of Trade rule.
114
Congestion is where the price trades above the support level and below the resistance level.
a. True
b. False
**a. True**
Congestion is when the market is trading above the support and below the resistance. There is no breakout in either direction.
115
If a firm is an NFA member, it may receive customer funds in its name.
a. True
b. False
**b. False**
Only firms that are FCMs may receive funds in their name.
116
An American manufacturing company is doing business with a Japanese firm and has been traditionally trading in Japanese yen. To protect the American firm from the continuing devaluation of the yen the firm should:
a. Pay in U.S. dollars
b. Sell yen in the futures market
c. Buy yen in the futures market
d. Sell yen in the futures market and buy T-bills
**b. Sell yen in the futures market**
The American manufacturer is concerned with a devaluation of the Japanese yen. He will therefore sell yen futures.
117
A "give up" is an order executed by one broker for the customer of another broker.
a. True
b. False
**a. True**
A "give up" is an order executed by one broker for the customer of another broker.
118
The seller, or short, in a futures contract decides on delivery.
a. True
b. False
**a. True**
The seller determines delivery of a futures contract in all commodities except foreign currency contracts.
119
Which of the following describes the intrinsic value of an option?
a. The amount of time until expiration
b. The option premium price
c. The amount by which an option is in-the-money
d. The difference between an option's strike price and the price of the underlying futures contract
**c. The amount by which an option is in-the-money**
Intrinsic value is simply the amount the option is in-the-money. Out-of-the-money options have no intrinsic value.
120
A commodity pool has operated for four years. The CPO must disclose the entire performance history when preparing the disclosure document.
a. True
b. False
**a. True**
If a commodity pool operator has been in operation for more than five years, only the actual performance for the most recent five years must be presented in the disclosure document. If the pool operator has been in operation for less than five years but more than three years, the actual performance for its entire operating history must be discussed.
