Series 3A Flashcards
Discretionary accounts must be renewed by the customer: a. Every six months b. Every 12 months c. At the discretion of the member firm d. Never
d. Never Discretionary accounts need not be renewed by the customer.
Unless a time limit is specified, an order automatically expires at the end of the day. a. True b. False
a. True Unless otherwise specified, all orders are assumed to be day orders and are canceled at the end of the trading session if they have not been executed. If a customer does not want the order to be canceled, he will instruct the broker to keep it in effect. The broker will then enter a good until canceled (GTC) notation on the order before it is sent to the floor broker. This type of order remains in effect until it is executed, or the customer cancels the order, or the contract month expires.
When futures prices are higher than the cash price, the market would be: a. Inverted b. Reverse c. Discount d. Premium
d. Premium If the price of futures is higher than the price of the cash commodity, and the price of distant futures is higher than the price of near futures, the market is called a premium market or a carrying charge market. The terms inverted market and discount market both refer to a market where the price of cash is higher than the price of futures, and the price of near futures is higher than the price of distant futures.
Each day the clearing house determines the margin requirements of the speculator and hedge customers of all brokerage firms. a. True b. False
b. False The clearing house determines the amount of margin that is owed to the clearing house by the clearing member firm at the end of each day. The clearing member firm is required to deposit any additional margin that is required before the opening of trading the next day. If there is excess equity in the member firm’s account at the clearing house, the member firm could withdraw the excess. This question is not stating that the clearing house determines the margin due from member firms. Instead, it is saying that the clearing house determines the amount of margin due from customers of member firms. The member firm is responsible for determining and collecting the amount of margin that customers must deposit, not the clearing house.
An individual who buys a futures contract against a cash forward sale is a: a. Spreader b. Scalper c. Hedger d. Speculator
c. Hedger An individual who buys a futures contract against a cash forward sale is known as a hedger. The term cash forward sale refers to a cash market transaction in which the buyer and the seller negotiate for the sale of a specified amount of a commodity to be delivered on a specified date in the future. The price might be agreed upon at the time of the sale, or the buyer and seller might agree that the price is to be determined at the time of delivery. If the seller of the commodity does not own it at the time of the sale, and the price is determined as of the time the transaction is negotiated, he will be concerned about a price rise. He would therefore hedge by buying futures.
A GNMA futures contract is least similar to which of the following contracts? a. T-notes b. T-bonds c. Municipal Bonds d. T-bills
d. T-bills GNMA, T-notes, T-bonds and municipal bonds all have long-term maturities. T-bills have short-term maturity.
If a customer dies, an associated person should cancel all open orders. a.True b. False
b. False If a customer dies, the member firm should cancel all open orders.
An elevator, warehouse or depository is designated as regular for delivery by: a. The CFTC b. The Exchange c. The U.S. Department of Agriculture d. The U.S. Department of Commerce
b. The Exchange The exchange determines which grain elevators, warehouses or other depositories are regular for delivery, which means those from which the commodity may be delivered by a futures seller to a futures buyer.
The minimum margin that a member firm must collect from its customers is determined by: a. The CFTC b. The floor committee of the exchange c. The board of directors of the exchange d. The member firm
c. The board of directors of the exchange An individual who buys a futures contract against a cash forward sale is known as a hedger. The term cash forward sale refers to a cash market transaction in which the buyer and the seller negotiate for the sale of a specified amount of a commodity.
A stop order to sell would be used to liquidate a long in a falling market? a. True b. False
a. True A stop order to sell is placed below the market to liquidate a long position in a falling market. It is used to attempt to limit the loss on a long position.
An elevator operator who purchases grain and hedges generally plans to deliver the grain on each futures contract that the hedger sells. a. True b. False
b. False A grain elevator operator who has purchased grain will hedge by selling futures. His intention in selling futures is to protect himself against a price decline on his inventory. Although he has the option of delivering on his futures contract, his intention at the time he placed the hedge was only to protect his cash position, not to use the futures market as a means of selling his cash grain.
The FCM’s APs, partners or officers are required to learn the essential facts about the firm’s customers and must supervise the amount of trading and the nature of trading in each account that the member firm maintains. a. True b. False
a. True The APs, the manager of the office and the principals of the firm are required to use due diligence to know the customer and insure that transactions for the customer are suitable based on the customer’s financial means and investment objectives.
When there appears to be adequate nearby cash stocks of a commodity with available storage, the futures market would be: a. Inverted b. Normal c. Flat d. Characterized by low open interest
b. Normal A normal market is one in which the cash price is lower than the price of futures, and the price of near futures is lower than the price of distant futures. This type of market will occur when there are adequate supplies of the cash commodity and adequate storage facilities. In this case, buyers will not be particularly anxious to acquire the cash commodity, tending to reduce demand. However, farmers who have brought their crop to market will be under pressure to sell it in order to raise money to repay loans and to prepare for the next planting season. There will therefore be pressure on supply that is not matched by a corresponding demand, and the price of cash will tend to drop. As the crop year proceeds, the initial large supply will be consumed. The price of the commodity will tend to increase as users who did not acquire the commodity before will enter orders to buy it. These purchases will be made from individuals who bought the commodity and stored it. The higher price that will be paid for the commodity will reflect the carrying charges, which are the costs that were incurred by those individuals who stored the commodity.
An exporter of soybean oil, confident that the price of soybeans, the demand for soybean oil, and currency exchange rates will remain stable, would be most concerned with: a. Increases in the cost of soybeans b. Decreases in the demand for soybean oil leading to falling prices c. Fluctuations in the foreign exchange rates in the countries where the product is sold d. Increases in shipping rates
d.Increases in shipping rates Given that the exporter is confident that the price of soybeans, the demand for soybean oil, and currency exchange rates will remain stable, he would still be concerned that the cost of shipping could increase and thus diminish his profit. In order to protect himself from an increase in shipping costs, he could purchase freight futures.
If the exchange changes the margin requirement, all traders whose equity is below the new maintenance margin level will always be required to deposit additional margin to immediately raise the equity to the new initial margin level. a. True b. False
a.True When the exchange changes the margin requirement, accounts that are below the new maintenance level must deposit additional margin to immediately raise the equity to the new initial margin level.
The rules of the Chicago Board of Trade allow any RCR to exercise discretion over a customer’s account. a. True b. False
b.False The Chicago Board of Trade does not allow an RCR to exercise discretion over a customer’s account unless he has had at least two years of experience and has been continuously registered during that period.
The size of the open interest of commodity futures contracts is NOT limited to the available supply of the cash commodity. a. True b. False
a.True Open interest is the total number of contracts that have been established in a commodity that have not yet been closed out. There is no direct relationship between the open interest and the available supply of the commodity.
A stop order to buy would be used to offset a short position in a rising market. a. True b. False
a.True A stop order to buy is placed above the market price to offset a short position in a rising market. It is used to attempt to limit the loss on a short position.
Your client is long 3 March live cattle contracts at 45.30 cents. He later offsets at 48.40 cents. The contract size is 40,000 lbs. Ignoring commission, his realized gain is: a. $3,720 b. $3,550 c. $1,240 d. $1,050
a. $3,720 Your client has a gain of $3,720 determined as follows:
If you hear that a market for a grain is “5 cents under”, you would assume: a. That the nearest futures month is trading 5 cents less than the next futures month b. That the price of cash grain is 5 cents less than its normal price at this time of the year c. That the price of cash grain is 5 cents less than the price of the nearest futures month d. That the price of the nearest futures month is 5 cents less than the price of the cash grain
c.That the price of cash grain is 5 cents less than the price of the nearest futures month The price for grain is frequently quoted under a basis method rather than a flat price method. The basis method quotes the cash price as it relates to the futures price. The flat price method quotes the price as a dollar amount. For example, let’s assume the cash price is $4.50 and the price of the nearest futures month is $4.55. Under the basis method, the price would be stated as “5 cents under”. This is because the price of cash is 5 cents under the price of futures. Under the flat price method, the price of cash would be quoted as $4.50.
The price of a futures contract bought or sold is determined by: a. The exchange b. Prearranged agreements between floor brokers c. The floor broker on the exchange trading floor d. Open bids and offers on the exchange floor
d. Open bids and offers on the exchange floor All orders in futures contracts are transacted on the floor of the exchange in the trading pits. The floor brokers must announce their bids and offers by open outcry. The price of the contract is determined by the highest bid and the lowest offer at any particular time. There are no prearranged agreements on the exchange floor between brokers or between anyone else, with the single exception of the ex-pit trades, which is a special type of trade in which hedgers exchange their cash and futures positions by private negotiation.
Records of IBs, FCMs, CTAs and CPOs must be kept seven years. a. True b. False
b. False This is false. CFTC rules require records to be kept for five years.
The sale of September wheat in Chicago and the purchase of September wheat in Kansas City would be an: a. Intermarket spread b. Interdelivery spread c. Intramarket spread d. None of the above
a. Intermarket spread An intermarket spread is the purchase of a commodity in one market (in this case, Kansas City) and the sale of the same commodity in another market (in this case, Chicago). The terms “intramarket spread” and “interdelivery spread” both refer to the same thing. This is the purchase and sale of the same commodity on the same exchange in different delivery months. For example, the purchase of September wheat on the Chicago Board of Trade and the sale of December wheat on the Chicago Board of Trade would be an example of an intramarket or interdelivery spread.
If the price of a commodity becomes extremely volatile, margin is increased and leverage is decreased. a. True b. False
a. True This is true. Margin requirements are increased if the market price of the commodity becomes volatile.
An individual has described himself as a fundamental analyst. This means that he is primarily concerned with: a. Point and figure charts b. The direction of price changes, changes in volume and changes in open interest as indicated on charts c. Supply and demand factors relating to the commodity plus basic economic and governmental factors d. All of the above
c. Supply and demand factors relating to the commodity plus basic economic and governmental factors A fundamental analyst is interested in such factors as supply and demand for the commodity, basic economic data, governmental actions, weather conditions and the like. Technical analysts are interested in such factors as charts and trading volume.
A hedger is computing the basis on which he will sell his cash commodity. The hedger will compute the basis that he will offer: a. By noting the current price of the commodity and adding 50% to allow him a profit b. By computing the difference between the price of the cash commodity and the price of the futures contract that was purchased or sold c. By assuming that prices will not change and therefore disregarding all factors other than transportation d. By charging the price of futures at the nearest contract market
b. By computing the difference between the price of the cash commodity and the price of the futures contract that was purchased or sold The basis is the difference between the price of the cash commodity and the price of the futures contract that was purchased or sold. The cash market, in relation to the futures market for the same commodity, varies from time to time because of transportation costs, interest rates, available storage space, and supply and demand. In a normal (premium) market, the price of the cash commodity is under the futures price. For example: ##ADD IMAGE
A trader assumes two long contracts in sugar at a price of 8.45 cents. The commission on each contract is $62. The trader liquidates his position when the price of sugar has advanced to 9.45 cents. The contract size is 112,000 lbs. The trader would have a net profit of: a. $2,240 b. $2,116 c. $2,206 d. $1,986
b. $2,116 The trader would make a profit of $.01 per lb. The size of the contract is 112,000 lbs. The profit per contract is $1,120. The customer has two contracts. $1,120 x two contracts = $2,240. The commission is $62 per contract, for a total of $124. The net profit is $2,240 - $124 = $2,116. Remember to take into consideration the number of contracts involved when determining your answer.
The maximum number of contracts, either long or short, in any one futures month or in all futures months combined which may be held open or be controlled by any one person, as prescribed by the CFTC, is: a. The speculative position limit b. The trading limit c. A limit placed on speculators and hedgers d. A limit placed on hedgers only
a. The speculative position limit The CFTC has established position limits and trading limits for certain regulated commodities. These limits apply to long positions, short positions and spread positions established on one or more exchanges. The trading limit is the maximum number of contracts that a trader may enter into in any single trading session, while the position limit is the maximum number of contracts that he may hold at any one time. Trading limits and position limits apply to speculators only. They do not apply to bona fide hedgers.
An order to sell at “market on opening” would require that it be executed on the first price of the day only. a. True b. False
b. False An order marked to sell (or buy) “market on opening” need not be done at the first price of the day only. It would be acceptable if the order were done within the opening range of prices for the commodity.
A futures contract is a legally binding contract, but does not always require the original buyer or seller to make or take delivery. a. True b. False
a. True When one enters into a futures contract, he is legally bound to perform on the terms of the contract. If one is long, he is legally bound to accept delivery of the commodity if he is long after the first delivery day. If one is short the contract, he is legally bound to make delivery of the commodity during the delivery month. However, one may easily eliminate this liability by offsetting the contract before the delivery month. A long will sell an equivalent amount of contracts and thus shift his liability to another long. A short will buy an equivalent amount of contracts and shift his liability to another seller. Therefore, the original long and short do not have to perform on the contract if they offset their positions.
The term “supply elasticity” refers to a situation in which producers of a commodity will increase the amount produced as the price advances. a. True b. False
a. True A commodity is said to be “supply elastic” when changes in price cause changes in the amount produced. As price rises, more is produced; as prices fall, less is produced. A commodity is said to be “demand elastic” when changes in price cause changes in the amount purchased. As price rises, less is purchased; as prices fall, more is purchased.
A businessman who produces chocolate candy would protect himself against a rise in the price of the products he will purchase through: a. A short hedge in cocoa futures b. A short hedge in sugar futures c. A long hedge in cocoa futures d. None of the above
c. A long hedge in cocoa futures A user of the cash commodity who is concerned about a price increase would establish a long hedge (buy futures).
If a commodity pool operator has traded commodity interests for two years, he must disclose: a. The actual performance for the past year b. The actual performance for the entire operating history plus other pools operated by the CPO c. Projection figures for the next 12 months d. Testimonials from previous clients
b. The actual performance for the entire operating history plus other pools operated by the CPO A commodity pool being solicited that has been in existence for less than three years must disclose its entire operating history. In addition, the CPO must disclose the performance history of any other pools operated by the CPO or trading manager for the preceding five years, or for the life of the pool, whichever is less.
A trader purchases one contract of soybean oil at 15.50 per hundred pounds (15.5 cents per pound). The contract size is 60,000 lbs. If he deposits margin of $750: a. His margin deposit would be approximately 9% of the value of the soybean oil b. His margin deposit would be approximately 8% of the value of the soybean oil c. His margin deposit would be approximately 6% of the value of the soybean oil d. His margin deposit would be approximately 5% of the value of the soybean oil
b. His margin deposit would be approximately 8% of the value of the soybean oil The value of the margin deposit is determined as follows: ##ADD IMAGE
A spread could be defined as: a. The purchase of one futures contract and the sale of another futures contract for commodities that are different but that can be used interchangeably b. The purchase of one futures contract and the sale of another futures contract on the same exchange, but in different delivery months c. The purchase of one futures contract and the sale of another futures contract on two different exchanges d. All of the above are examples of spreads
d. All of the above All are definitions of spreads. Choice (a) indicates an intercommodity spread, which is the purchase and sale of different but economically related commodity futures. Choice (b) is an intramarket spread, which is the sale of the same commodity futures on the same exchange, with a difference in the delivery months for the purchase and sale. Choice (c) is an intermarket spread, which is the purchase of a commodity future on one exchange and the sale of the same commodity future on another exchange.
The actual transfer of ownership of a commodity occurs at the time the order is executed. a. True b. False
b. False The actual transfer of ownership of a commodity occurs at delivery.
A person would be “long the basis” if he: a. Has sold a commodity for delivery in the future and has placed a long hedge b. Has a commodity in his inventory that is unhedged c. Owns the cash commodity and has placed a short hedge d. Owns the cash commodity and has placed a long hedge
c. Owns the cash commodity and has placed a short hedge A person is “long the basis” if he has the cash commodity in inventory and he has sold futures.
If a member firm wishes to open an account where an individual is exercising power of attorney over another individual’s account, the member firm must obtain a copy of the power of attorney and notification if the agent is sharing in the profits: a. Because the exchanges require notification of any participation in the profits and require that monthly statements be sent to the customer b. Because the CFTC must approve such accounts before they are opened c. Because such accounts are prohibited by the rules of the exchanges and therefore may not be opened d. Because the agent may not receive more than 50% of the profits
a. Because the exchanges require notification of any participation in the profits and require that monthly statements be sent to the customer If an individual is sharing in an account with a customer and is exercising power of attorney over the account, the member firm must obtain a copy of the power of attorney and must send monthly statements to the participants in the account.
A trader who is long July corn at $1.55 places a stop order to sell at $1.50. This insures that he will not lose more than 5 cents a bushel. a. True b. False
b. False A stop order to sell is an order that is placed below the current market price. It is entered to protect a profit or to minimize a loss. Once the contract sells at or below the price designated in the order, it becomes a market order and will be executed at the best price available at that time. In this question, the trader enters a sell stop order at $1.50. He is instructing his broker to sell the contract if the price drops to $1.50 or less. This is an example of the sell stop order entered to minimize a loss. Once the commodity reaches (or is offered at) $1.50, the order becomes a market order to sell at the best price. This will help to minimize a loss but does not ensure a loss of no more than 5 cents.
A chartist who notes an ascending triangle formation in a particular futures contract would probably surmise that the price would decline if there is a breakout. a. True b. False
b. False An ascending triangle is a chart formation that indicates that the price of a commodity future is rising. If there is a breakout in an ascending triangle, this is an indication that the price will advance.
Cash grain prices normally are at a premium to futures when: a. The harvest is at its peak b. There is a current shortage of the commodity c. Supply and demand for the grain are in balance d. There is a current oversupply of the commodity
b. There is a current shortage of the commodity If the price of cash is at a premium to the price of futures, this type of market would be called an inverted market. An inverted market comes about when there is a shortage of the cash commodity. Users of the cash commodity will bid up the price on whatever is available because they need it now to keep their businesses in operation. They will also buy near futures with the intention of taking delivery in order to obtain the actuals. This combination of buying cash and near futures will cause the price to rise. Distant futures will not be subject to the same pressures and therefore will not receive the same buying support. Therefore, the price of cash and the price of near futures will rise above the price of more distant futures.
A farmer who has a crop growing in the ground and who sells futures would be assuming the role of a hedger. a. True b. False
a. True A farmer who has a crop growing in the ground might wish to establish his selling price even before the crop is harvested. He could do this by selling futures. Let’s look at an example to see how this could be accomplished. A farmer is growing 50,000 bushels of wheat. He would like to realize $3.00 a bushel. The price of futures in Chicago is currently $3.10. The farmer hedges by selling 50,000 bushels in Chicago. When the crop is harvested, the price has dropped to $2.80 a bushel for cash wheat. However, the price of futures has also dropped, to $2.90 a bushel. The farmer will sell the futures contract at a price of $2.90 a bushel. The farmer will sell his cash wheat at the going price of $2.80, and lift his hedge by buying futures at $2.90. He will have achieved his price objective of $3.00 a bushel because the profit on futures, when added to the cash price he received, totals $3.00. The following diagram shows the net result of the hedge. ##IMAGE
The NFA designates exchanges as contract markets. a. True b. False
b. False This is false. The CFTC designates exchanges as contract markets.
A customer has a long position on which the margin requirement is $1,000. He decides to switch to a later delivery month and instructs his account executive to sell his existing position and at the same time establish a new position of equivalent size in the later delivery month. In this case, the existing margin on deposit will cover his requirement on the new position, and no additional cash need be deposited. a. True b. False
a. True If a customer switches a contract from one month to another month, the margin on his existing contract may be used to meet the margin requirement on the new contract.
A spreader who has purchased December corn and sold March corn on the same exchange has established: a. An intermarket spread b. An intercommodity spread c. A commodity-products spread d. An intramarket spread
d. An intramarket spread The purchase of a commodity in one month and the sale of the same commodity in another month on the same exchange is called both an “intramarket spread” and an “interdelivery spread.” Both terms are used to describe the same type of spread. An intermarket spread is the purchase of a commodity on one exchange and the sale of the same commodity in the same or different delivery months on a different exchange. An intercommodity spread is the purchase of one commodity and the sale of a different commodity that is related (such as corn and oats, which are substitutes for each other as livestock feed) on the same or on different exchanges. A commodity-products spread is the purchase of a commodity and the sale of products derived from the commodity, such as the purchase of soybeans and the sale of soybean oil and meal. The spread could also be established by selling the commodity and buying the products.
A customer shorts 6 Nasdaq 100 index futures contracts at 1250. The index multiplier is 100 and the initial margin requirement is $11,000 per contract. If the index closes at 1240.50, what is the customer’s total equity? a. $60,030 b. $65,050 c. $66,950 d. $71,700
d. $71,700 The client deposited $66,000 ($11,000 x 6 contracts) in initial margin. Since the customer shorted the futures contracts and the index value decreased, the equity in the account will increase. ##IMAGE
An FCM may consider an account to be in 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 In order to be considered a hedger, the account must be a producer or user of the cash commodity, such as a farmer, miller or importer.
IBs and FCMs are required to keep records of only those option complaints in excess of $1,000 because these must be reported to the NFA. a. True b. False
b. False All option complaints must be kept. If they are verbal complaints, a written record of the complaint must be made.