Series 3D

Question 1

An independent IB must maintain adjusted net capital equal to or in excess of $35,000. a. True b. False

Answer 1

b. False An independent IB must maintain adjusted net capital equal to or in excess of $45,000.

Question 2

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

Answer 2

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.

Question 3

Stop orders are which of the following types of orders? a. Closing b. Market c. Protecting d. Contingency

Answer 3

d. Contingency Stop orders are considered contingency orders. A condition in the market must occur before the order is executed.

Question 4

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

Answer 4

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.

Question 5

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

Answer 5

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.

Question 6

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

Answer 6

a. True This is true. CPO Disclosure Documents may not be more than 12 months old.

Question 7

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

Answer 7

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.

Question 8

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

Answer 8

b. False A customer must be provided with a risk disclosure document prior to participating in a commodity pool.

Question 9

Churning is day trading in a customer’s account. a. True b. False

Answer 9

b. False Churning is trading an account to generate commissions for the benefit of the broker.

Question 10

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

Answer 10

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.

Question 11

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

Answer 11

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 centsSell 3.85 Spread 6 centsProfit 2The 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.

Question 12

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

Answer 12

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”).

Question 13

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

Answer 13

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.

Question 14

Generally accepted accounting principles must be used in preparing the actual performance record of a commodity pool. a. True b. False

Answer 14

a. True When preparing the actual performance record of a commodity pool, generally accepted accounting principles must be used.

Question 15

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

Answer 15

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.

Question 16

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

Answer 16

c. $3,000 The initial margin required is determined as follows:30,000 bushels of wheatx 10 cents margin per bushel$3,000 margin required

Question 17

At compliance hearings, “Formal Rules of Evidence” apply. a. True b. False

Answer 17

b. False Formal rules of evidence do not apply at compliance hearings.

Question 18

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

Answer 18

a. $1,400 profit ##

Question 19

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

Answer 19

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.

Question 20

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

Answer 20

BLANKANSWER The net cost to the packer for the cash hogs is $40.00 determined as follows:Cash: May 6 39.95Aug 6 49.55 -9.60 Futures:Buy 41.20Sell 50.90+9.70On 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.

Question 21

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

Answer 21

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.

Question 22

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

Answer 22

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.

Question 23

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

Answer 23

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.orbuy @ 88 16/32 $88,500.00 sell @ 90 10/32 $90,312.50 $1,812.50 -30.00 commissionsnet profit $1,782.50

Question 24

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

Answer 24

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.

Question 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

Answer 25

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.

Question 26

An FCM may not charge a customer margin in excess of exchange minimums. a. True b. False

Answer 26

b. False An FCM must charge a customer margin that is at least equal to the exchange minimum.

Question 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

Answer 27

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.##

Question 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

Answer 28

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.

Question 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

Answer 29

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

Question 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

Answer 30

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.

Question 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

Answer 31

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.

Question 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

Answer 32

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.

Question 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

Answer 33

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.

Question 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

Answer 34

d. $3,037.50 loss The profit or loss would be computed as follows:customer is long at 136.72 centssell stop filled at -135.18 centsloss per lb. 1.54 centscontract size x 37,500 lbs.loss per contract 577.50 commission + 30.00 607.50 x 5 contractsloss $3,037.50 Since the customer placed a stop order rather than a stop limit order, there is no adjustment of the sale proceeds.

Question 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

Answer 35

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.

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

Answer 36

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.

Question 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

Answer 37

a. Monthly Commodity pools in excess of $500,000 at the beginning of the fiscal year must receive monthly statements.

Question 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

Answer 38

d. $343.75 loss The customer will have a $343.75 loss, calculated as follows:##

Question 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

Answer 39

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.

Question 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

Answer 40

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

Question 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

Answer 41

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.

Question 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

Answer 42

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.

Question 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

Answer 43

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.

Question 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

Answer 44

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.

Question 45

A CPO operator must disclose the potential size of a commodity pool to a prospective participant. a. True b. False

Answer 45

a. True The CPO must disclose the potential size of a commodity pool and a prospective participant.

Question 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

Answer 46

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.

Question 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

Answer 47

d. Stop spread Stop spread and combination stop spread orders are not permitted on the CBT.

Question 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

Answer 48

b. False This is false. An IB which accepts an order from a client must keep a copy of the order ticket.

Question 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

Answer 49

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.

Question 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

Answer 50

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.

Question 51

A MIT order to sell is activated when the market trades at or below the price entered. a. True b. False

Answer 51

b. False An MIT order to sell becomes a market order when the commodity trades or is bid at or above the price entered.

Question 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

Answer 52

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.

Question 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%

Answer 53

b. 77% The net profit margin is determined as follows:5,000 Contract Size for Cornx .16 Price Increase$800 Profit on One Contractx 2 No. of Contracts$1,600 Profit on Two Contracts- 60 Commission on Two Contracts$1,540 Net ProfitNet Profit % = Profit ($1,540) / Margin ($2,000)= 77%

Question 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

Answer 54

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.

Question 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

Answer 55

a. True The term “pyramiding” refers to the use of unrealized profits on existing positions to use as margin on new positions.

Question 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

Answer 56

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.

Question 57

Settlement on options is based on the: a. Strike price b. Underlying futures c. Premium d. Price of futures

Answer 57

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

Question 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

Answer 58

b. 227 or better Sell stop limit orders become limit orders when activated and are executed at the limit price (227) or better.

Question 59

A CPO may combine all his pools for purposes of disclosure. a. True b. False

Answer 59

b. False A CPO may not combine all his pools for purposes of disclosure.

Question 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

Answer 60

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.

Question 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

Answer 61

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.

Question 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

Answer 62

a. The same day of the transaction Options must be paid in full at time of purchase.

Question 63

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

Answer 63

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

Question 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

Answer 64

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.

Question 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%

Answer 65

b. 45% The net profit on his margin is determined as follows:Step 1:Buys @ 1.50Sells @ 1.56Profit .06Contract size 5,000 x .06 = $300Step 2:Contract Size 5,000Margin x .12$600Step 3:Profit $300 Less Commission - 30 = $270% of Net Profit = Net Profit ($270) / Margin ($600) = 45%

Question 66

An AP must verify a customer’s income and net worth. a. True b. False

Answer 66

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.

Question 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

Answer 67

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.

Question 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

Answer 68

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.

Question 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

Answer 69

b. False This is false. The breakeven point must be disclosed in the beginning of the CPO Disclosure Document.

Question 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

Answer 70

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.

Question 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

Answer 71

b. Profit of $5,700 Your customer has a profit of $5,700, calculated as follows:Short @ 96.33Covers @ 95.57Profit (Basis Points) .76Note: Each basis point equals $2576 x 25 = 1,900 No. of Contracts x 3Profit = $5,700

Question 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

Answer 72

d. Wheat prices Carrying charges include insurance, storage costs and interest paid for funds that have been borrowed to carry the cash commodity.

Question 73

CPOs must include in the disclosure document at least quarterly, all withdrawals, redemptions and additions to the pool. a. True b. False

Answer 73

a. True This statement is true. CPOs must include in the disclosure document at least quarterly, all withdrawals, redemptions and additions to the pool.

Question 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

Answer 74

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 @ 44.10buy @ 42.70 gain of 1.40 cents per poundx 30,000 pounds/contractgain of $420 per contractx 13 contractsTotal 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

Question 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

Answer 75

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.

Question 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

Answer 76

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.

Question 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.

Answer 77

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.

Question 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

Answer 78

c. $7,425 The equity in the account is $7,425.00, calculated as follows:Equity = original deposit plus profit(or less loss) on positionB @ 212.40S @ 213.25profit = .85 x 500 = $425Equity = $7,000 margin + 425Total Equity = $7,425.00

Question 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

Answer 79

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.

Question 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.

Answer 80

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.

Question 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

Answer 81

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

Question 82

In order to execute an intramarket spread, there must be more than one exchange that trades in the commodity. a. True b. False

Answer 82

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.

Question 83

APs should recommend to traders that they trade spreads because they have less risk. a. True b. False

Answer 83

b. False This is false. Spread positions on commodities are not necessarily less risky than individual commodity positions.

Question 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

Answer 84

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).

Question 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

Answer 85

d. $2,437.50 gain The speculator has a profit of $2,437.50, calculated as follows:Long @ 97 8/32Sell (Cover) @ 98 2/32Gain 26/32Note: Each point equals $31.25$31.25 x 26 = $812.50No. of Contracts x 3$2,437.50

Question 86

A decision by the Arbitration Committee may be appealed to the Appeals Committee. a. True b. False

Answer 86

b. False Arbitration decisions may not be appealed.

Question 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

Answer 87

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.

Question 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

Answer 88

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.

Question 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

Answer 89

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.

Question 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%

Answer 90

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).

Question 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

Answer 91

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.

Question 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.

Answer 92

d. They need not ever be renewed. Discretionary accounts need not ever be renewed once they are established.

Question 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

Answer 93

d. III and IV The transfer could be made if a transfer and consent form or supplemental agreement was completed by the customer.

Question 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

Answer 94

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.

Question 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

Answer 95

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.

Question 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

Answer 96

c. $10 profit The lumber dealer has established the hedge as follows:Cash Market:Date established $190Date delivered $196-$6Futures Market:Buy $184Sell $200+$16Result of the hedge is +$10 profit.

Question 97

A customer may open up an option account without opening a futures account. a. True b. False

Answer 97

b. False This is false. In order to trade options on futures, the client must open a futures account.

Question 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

Answer 98

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.

Question 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

Answer 99

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 contractloss of $712.50 per contract x 3 contractstotal 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.

Question 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

Answer 100

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.

Question 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

Answer 101

b. False Funds relating to U.S. commodity futures must be segregated from those relating to foreign commodity futures.

Question 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

Answer 102

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.

Question 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

Answer 103

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.

Question 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

Answer 104

b. Long a December 440 gold callLong 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.

Question 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

Answer 105

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.

Question 106

The actual transfer of ownership of a commodity occurs at the time the order is executed. a. True b. False

Answer 106

b. False This is false. Transfer of ownership occurs when the commodity is delivered.

Question 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

Answer 107

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, or2. The CPO operates only one pool, does not advertise, and receives no compensation for his efforts (other than reimbursement for administrative expenses).

Question 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

Answer 108

b. $8,700 lossThe 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 contractgain of $1,700 per contract+ $40 commissionsnet gain of $1,740 per contractx 5 contractstotal loss $8,700

Question 109

The term “basis” is the difference between the cash price and the futures price. a. True b. False

Answer 109

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.

Question 110

CFTC speculative position limits do not apply to bona fide hedgers. a. True b. False

Answer 110

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.

Question 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

Answer 111

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.

Question 112

Deltas increase for calls as the market rises. a. True b. False

Answer 112

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.

Question 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

Answer 113

b. False This is false. This is a Chicago Board of Trade rule.

Question 114

Congestion is where the price trades above the support level and below the resistance level. a. True b. False

Answer 114

a. True Congestion is when the market is trading above the support and below the resistance. There is no breakout in either direction.

Question 115

If a firm is an NFA member, it may receive customer funds in its name. a. True b. False

Answer 115

b. False Only firms that are FCMs may receive funds in their name.

Question 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

Answer 116

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.

Question 117

A “give up” is an order executed by one broker for the customer of another broker. a. True b. False

Answer 117

a. True A “give up” is an order executed by one broker for the customer of another broker.

Question 118

The seller, or short, in a futures contract decides on delivery. a. True b. False

Answer 118

a. TrueThe seller determines delivery of a futures contract in all commodities except foreign currency contracts.

Question 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

Answer 119

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.

Question 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

Answer 120

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.