Series 3E

Question 1

A bona fide speculator may exceed position limits if approved by the CFTC. a. True b. False

Answer 1

b. False A bona fide hedger may exceed position limits. Speculators may not exceed position limits.

Question 2

The authority to regulate margin on futures contracts is exercised by the: a. CFTC b. Exchanges c. NFA d. Futures commission merchant

Answer 2

b. Exchanges Exchanges set margin requirements on futures contracts.

Question 3

Fundamental analysis is concerned with supply factors while technical analysis is concerned with economic factors. a. True b. False

Answer 3

b. False Fundamental analysis is concerned with both supply and economic factors. Technical analysis is concerned with charting price changes.

Question 4

A bank intends to sell mortgages to investors in four months. To hedge, the bank should: a. Sell GNMA certificates b. Buy GNMA futures c. Sell GNMA futures d. Buy GNMA futures and sell GNMA certificates

Answer 4

c. Sell GNMA futures A mortgage lender faces price risk if interest rates rise and a borrower’s loan terms have been set before the loan has been sold to investors. The bank would hedge by selling GNMA futures.

Question 5

The NFA’s Compliance Director needs court approval to subpoena documents from an NFA member. a. True b. False

Answer 5

b. False The NFA’s Compliance Director can subpoena documents without court approval.

Question 6

Transportation is a factor in the carrying charge. a. True b. False

Answer 6

b. False The carrying charge is made up of interest, storage and insurance. Transportation is not a factor in the carrying charge.

Question 7

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

Answer 7

b. False A market if touched (MIT) order is started when the futures contract trades, or is bid, at or above the order price.

Question 8

The Environmental Protection Agency approves a stricter gasoline volatility standard. This causes the unleaded gasoline futures contract on the New York Mercantile Exchange to invert. The June-July spread is trading $.0240 bid/offered at $.0245. A customer enters an order to buy 5 July-sell 5 June spread positions at the market. The order is filled at $.0240. When the customer liquidates his spreads, the spread is still inverted and trading $.0110 bid/offered at $.0115. The spreads are liquidated at $.0115. The unleaded gasoline futures contract size is 42,000 gallons. The profit or loss as a result of this trade is: a. $525 profit b. $525 loss c. $2,625 profit d. $2,625 loss

Answer 8

c. $2,625 profit The market is inverted. The price of June is .0240 over the price of July.JuneSell .0240 Buy .0115 Profit .0125 Contract Size x 42,000 gallonsProfit $525 per contract# of Contracts x 5 Profit $2,625 JulyBuy .0000Sell .0000

Question 9

A CPO may not commingle funds of a pool that he operates with funds of any other pool or with his own funds. a. True b. False

Answer 9

a. True A CPO may not commingle funds of a pool that he operates with funds of any other pool or with his own funds.

Question 10

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

Answer 10

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

Question 11

To hedge a short GNMA cash position against a decrease in interest rates one should: a. Buy GNMA futures b. Sell GNMA futures c. Buy GNMA futures and sell cash GNMAs d. Sell GNMA futures and buy cash GNMAs

Answer 11

a. Buy GNMA futures A person who is short GNMAs and satisfied with the current yield on GNMAs, is concerned that interest rates will decline prior to his funds becoming available to purchase GNMAs. To hedge this short cash position, he should buy GNMA futures.

Question 12

When a call option is exercised, the writer receives a: a. Long futures position b. Short futures position c. Notice to take delivery of the commodity d. Notice to make delivery of the commodity

Answer 12

b. Short futures position When a call option is exercised by the buyer, the writer (seller) is assigned a short futures position at the strike price.

Question 13

An oil company that refines crude oil and buys it through cash forward contracts would need to hedge against declining prices of petroleum products. The most effective hedge would be to: a. Buy crude oil futures b. Sell crude oil futures c. Buy heating oil futures d. Sell heating oil futures

Answer 13

d. Sell heating oil futures The oil company has locked in the price of crude oil through cash forward contracts and needs to protect against declining prices of petroleum products. The most effective hedge is to sell heating oil futures.

Question 14

A strengthening basis would occur when the cash price remains unchanged and the futures price falls. a. True b. False

Answer 14

a. True A strengthening basis would occur when the basis becomes more positive. If the cash price remains unchanged and the futures price falls, the basis becomes more positive.

Question 15

When a NFA member is under investigation by the compliance staff of the NFA, he may resign from membership. a. True b. False

Answer 15

b. False A NFA member cannot resign from membership if he has been charged with a violation or is under investigation by the NFA.

Question 16

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

Answer 16

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

Question 17

A firm that is long the basis establishes a hedge using 5 sugar futures contracts. When the hedge is placed, the firm’s basis is .30 cents under. When the hedge is lifted, the basis is .24 cents under. The futures contract size is 112,000 pounds. The change in basis means the company will have a: a. $33,600.00 gain b. $33,600.00 loss c. $336.00 gain d. $336.00 loss

Answer 17

c. $336.00 gain A firm that is long the basis owns the cash product and has placed a selling hedge in the futures market. Since the basis is under (cash is lower than futures), the futures price is higher (over) the cash price. The question tells us that the hedge is established when futures are .30 cents over cash and lifted when futures are .24 cents over cash.Cash | Futures.00 SOLD .30 cents.00 BUY .24 cents.00 GAIN .06 centsSo, futures are sold for .30 cents, and then purchased at .24 cents. The result of the hedge is .06 cents profit..06 cents (or .0006) x 112,000 lbs. = $67.20 per contract x 5 contracts = $336.00 gain

Question 18

Margin for soybean meal futures is $10 per ton. Soybean meal trades on the Chicago Board of Trade. The price quoted is per ton. A customer places a market order to sell 9 August soybean meal futures contracts. The market is trading $218.70 bid/offered at $218.75. The order is filled at $218.70. When the customer is ready to liquidate his position, the effects of the previous year’s drought and an increase in current demand has caused the price of soybean meal to rally. The position is liquidated at $221.40. Round-turn commissions are $70. The soybean meal futures contract is 100 tons. The resulting percentage of profit or loss, including commissions, on the margin deposited is: a. 14% b. 25% c. 27% d. 34%

Answer 18

d. 34% The percentage loss, including commissions, on the margin deposited is 34%, calculated as follows:Sell $218.70 Buy $221.40Loss 2.70 per tonCommission + .70 ($70 round-turn commission / 100 tons)Total Loss $3.40 per tonTotal Loss $3.40 divided by $10 margin per ton = 34%.

Question 19

A customer is long foreign currency calls. A weakening of the dollar will produce a profit. a. True b. False

Answer 19

a. True A trader long foreign currency calls wants the dollar to weaken. This will cause the value of the foreign currency to increase. A trader buys a call option when he expects a price increase.

Question 20

According to Rule 2-30, NFA members soliciting customer accounts must determine what additional risk disclosure information is appropriate for their customers. a. True b. False

Answer 20

a. TrueNFA members soliciting a customer’s account must decide what additional risk disclosure information is appropriate to fully inform a customer of the risks associated with futures trading.

Question 21

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 21

d. 47.10% The price of soybeans increases $.165 ($5.50 x .03). As a percent of the margin deposit of $.35, this represents a 47.1% profit:.165 / .350 = 47.1%

Question 22

A portfolio is valued at $3,500,000. The S&P 500 futures contract is trading 862.45 (contract value equals 250 x the index price). The number of contracts needed to hedge the portfolio is: a. 8 b. 16 c. 4,058 d. 14,000

Answer 22

b. 16 If the S&P 500 is trading at 862.45, each contract provides a hedge of $215,612.50 (862.45 x 250 = $215,612.50). If the portfolio is valued at $3,500,000, it would take sixteen contracts to hedge ($3,500,000 divided by $215,612.50 = 16.2 contracts). 16.2 contracts = 16 contracts to hedge because you always round down.

Question 23

A cotton farmer estimates his yield at 450,000 lbs. The cash price of cotton when he places his hedge is 58.79 cents/lb. He hedges by using 9 July cotton futures contracts. The futures hedge is established at a price of 61.05 cents/lb. When the hedge is lifted, the farmer sells his cotton in the cash market at 56.94 cents/lb. and his futures position is covered at 58.98 cents/lb. The net price per pound the farmer receives as a result of the hedge is: a. 56.94 cents/lb. b. 58.57 cents/lb. c. 58.79 cents/lb. d. 59.01 cents/lb.

Answer 23

d. 59.01 cents/lb. The net price per pound is 59.01 cents, calculated as follows:##

Question 24

The time value of an option increases as the option moves in the money. a. True b. False

Answer 24

b. False The intrinsic value of an option increases as the option moves in the money.

Question 25

Rule 2-30, the “Know Your Customer Rule,” requires all of the following information about a customer EXCEPT: a. Annual income b. Age c. Investment experience d. Educational background

Answer 25

d. Educational background The “Know Your Customer Rule” requires that the AP obtain the customer’s annual income, age and investment experience.

Question 26

Which of the following is a bull call spread? a. Buy one 88 call/sell one 90 put b. Buy one 88 call/sell one 90 call c. Buy one 90 call/sell one 88 call d. Buy one 90 call/sell one 90 put

Answer 26

b. Buy one 88 call/sell one 90 call Buying a lower strike price call and selling a higher strike price call is a bull call spread.

Question 27

NFA members must have a plan in place that enables them to operate their business in the event of a disaster. a. True b. False

Answer 27

a. True The NFA adopted Rule 2-38 that requires members to have in place, a plan that enables them to operate their business with minimal disruption to customers in the event of a disaster. This is called a disaster recovery plan.

Question 28

A customer buys three December Canadian dollar futures contracts. The position is established at .8340. The contract size is 100,000 dollars. When the position is liquidated, the position is offset at .8418. Total commissions are $150. The profit as a result of this trade is: a. $2,190 b. $2,340 c. $23,250 d. $23,400

Answer 28

a. $2,190 The profit is $2,190, calculated as follows:Buy .8340Sell .8418Profit .0078Contract size x 100,000Profit $780# of Contracts x 3Total Profit $2,340Total Commissions - 150Net Profit $2,190

Question 29

A Commodity Pool Operator must distribute an account statement monthly, for pools with net assets of more than $200,000. a. True b. False

Answer 29

b. False The account statement must be distributed at least monthly to pool participants in the case of pools with net assets of more than $500,000. If net assets are $500,000 or less, then it must be sent at least quarterly.

Question 30

Under Rule 2-30, the “Know Your Customer Rule,” the only adequate risk disclosure information for certain customers is that futures trading is too risky for them. a. True b. False

Answer 30

a. True Not all customers are suited to trade commodities. For those customers not suited to trade commodities, the only adequate risk disclosure information is that futures trading is too risky for them.

Question 31

A customer assumes a long position in a futures contract on which original margin is 30 cents and maintenance margin is 20 cents. The contract consists of 5,000 units at a price of $8.10. The contract subsequently declines to $8.05. In this case, the customer will: a. Be called for $500 additional margin b. Be called for $1,000 additional margin c. Not be called for additional margin until the price drops to $7.60 d. Not be called for additional margin until the price drops below $8.00

Answer 31

d. Not be called for additional margin until the price drops below $8.00 The customer will not be called for additional margin until the price drops below $8.00. This is determined as follows:Initial .30Maintenance .20The difference between initial and maintenance margin is .10. The futures price is $8.10 less .10 equals $8.00.

Question 32

Exchange rules state that changes in margin requirements shall be effective on: a. Transactions executed prior to the margin change b. Transactions executed subsequent to the margin change c. Certain specified transactions only d. All transactions

Answer 32

d. All transactions Changes in margin requirements are effective on all transactions.

Question 33

A buying hedge is used to lock in the sale price of the cash commodity and a selling hedge is used to lock in the purchase price of the cash commodity. a. True b. False

Answer 33

b. False A buying hedge is used to lock in the purchase price of the cash commodity and a selling hedge is used to lock in the selling price of the cash commodity.

Question 34

The seller of a put option receives a short futures position when the option is exercised. a. True b. False

Answer 34

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

Question 35

The CFTC regulates all futures trading except broad-based stock index futures and options. These are regulated by the SEC. a. True b. False

Answer 35

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

Question 36

If the basis strengthens, the long hedger will have a profit. a. True b. False

Answer 36

b. False If the basis strengthens, the long hedger will have a loss. A strengthening basis is when the basis becomes more positive. A long hedger has bought futures because he is short the basis. We can create a theoretical situation to solve this problem:Cash Futures0 BUY 20 SELL 10 LOSS 1The basis changed from 2 under to 1 under. This is a strengthening basis.Note: Markets are considered normal unless otherwise stated in the question.

Question 37

Ms. Rice takes a long position of 14 contracts of heating oil at a price of .4530. She deposits margin of $2,000 per contract. The position is offset at .4880. Round-turn commission is $65. The contract size is 42,000 gallons. The percentage of profit based on the margin deposited is: a. 7.03% b. 70.25% c. 73.50% d. 142.35%

Answer 37

b. 70.25% The percentage of profit based on the margin deposited is 70.25%, calculated as follows:Buy $ .4530 Sell $ .4880 Profit $ .0350 Contract size 42,000 gallonsProfit $ 1,470 Round-turn commission - 65Net profit per contract $1,405 Net profit per contract / margin per contract = % profit on margin deposit$1,405 / $2,000 = 70.25%

Question 38

A customer anticipates a weakening of the dollar and goes long the British pound futures contract. The September contract is trading 1.6574 bid/offered at 1.6575. The customer places an order to buy seven contracts at 1.6580 stop. The order is elected and filled at 1.6582. The contract size is 62,500 pounds. Round-turn commissions are $35. When the position is liquidated, the customer receives a fill at 1.7822. The resulting profit from the trade including any necessary adjustment due is: a. $54,250.00 b. $54,005.00 c. $7,727.50 d. $7,715.00

Answer 38

b. $54,005.00 The profit is $54,005, calculated as follows:Long 1.6582 Sell 1.7822 Profit .1240 Contract size x 62,500 lbs.Profit $ 7,750 Commission - 35 (round-turn)Net Profit $7,715 (per contract)# of Contracts x 7 Net Profit $54,005

Question 39

A pension fund manager has a portfolio valued at $650,000 which consists primarily of blue chip stocks. The manager uses the MMI to hedge. Each index point equals $250. The futures position is established when the MMI is at 408.65. Later, the MMI is at 385.30 and the portfolio is worth $620,000. The hedge provided a: a. Profit of $35,025 on the futures and a $30,000 loss on the cash portfolio position b. Loss of $35,025 on the futures and a gain of $30,000 on the cash portfolio position c. Profit of $40,862.50 on the futures and a $30,000 loss on the cash portfolio position d. Loss of $40,862.50 on the futures and a gain of $30,000 on the cash portfolio position

Answer 39

a. Profit of $35,025 on the futures and a $30,000 loss on the cash portfolio position The hedge provided a profit of $35,025 on the futures and a $30,000 loss on the cash position, calculated as follows:Step 1MMI 408.65Componentx 250.00 Value of futures contract $102,162.50 Step 2$650,000 = 6.36 contracts$102,162.50Step 36 contracts are used to hedgeStep 4Cash | Futures $650,000 Sell 408.65620,000 Buy 385.30Loss $30,000 Gain 23.35 x 250.00 $5,837.50 per contractx 6 contractsGain $35,025.00 Step 5Summary:Loss of $30,000 on cash portfolioGain of $35,025 on futures hedge

Question 40

The first disciplinary action against an AP who has violated CFTC regulations is: a. A fine b. Suspension c. Revocation d. A cease-and-desist order

Answer 40

d. A cease-and-desist order The first action taken after a violation has been determined is to issue a cease-and-desist order.

Question 41

According to exchange rules, an order to sell wheat at around 3.50 1/2 is a type of discretionary order and is not permitted. a. True b. False

Answer 41

a. True “Around” orders are a type of discretionary order and are not permitted.

Question 42

Inflation rates are as follows: Germany 6%, Switzerland 4%, United States 5%, Japan 8%, Great Britain 5%. Which of the following is an appropriate trading strategy if this trend is expected to continue? a. Sell Swiss franc calls b. Buy Japanese yen calls c. Buy Euro calls d. Sell British pound calls

Answer 42

d. Sell British pound calls If the inflation rate remained the same, the value of British pounds will remain stable against the U.S. dollar. Selling British pound calls would be the appropriate trading strategy.

Question 43

An American exporter receives payment in a foreign currency. The hedger is concerned that the dollar will strengthen against the foreign currency. The most effective hedge against an exchange rate loss would be to buy foreign currency futures. a. True b. False

Answer 43

b. False An American exporter who receives payment in a foreign currency is concerned that the dollar will strengthen (increase in value) against the foreign currency. To hedge, the exporter would sell foreign currency futures or buy put options on foreign currency futures.

Question 44

The time value of an option decreases at an accelerating rate as the option approaches expiration. a. True b. False

Answer 44

a. True The time value of an option decreases at an accelerating rate as the option approaches expiration.

Question 45

According to Rule 2-30, the “Know Your Customer Rule,” if a customer refuses to disclose required information, an account may be opened if the customer’s refusal is noted and the account is approved by the branch office manager. Such a record need not be made in the case of a non-U.S. customer. a. True b. False

Answer 45

a. True A record need not be kept for a non-U.S. customer who refuses to disclose required information.

Question 46

A homebuilder creates a hedge against an increase in lumber prices with eight contracts. The hedge was established with a basis of 3.20 under. When the hedge is lifted, the basis is 2.45 under. The lumber contract is 150,000 board ft. and the price is quoted in dollars per 1,000 board ft. The result of the hedge is: a. A profit of $900 b. A loss of $900 c. A profit of $9,000 d. A loss of $9,000

Answer 46

b. A loss of $900 The homebuilder is concerned with rising lumber costs and will buy futures to hedge. He is short the basis and has established a long hedge. He established the hedge with futures at $3.20 per 1,000 board ft. over the price of cash and lifted the hedge with futures $2.45 per 1,000 board ft. over the price of cash. The problem is solved as follows:Cash | Futures 0 Buy $3.20 0 Sell 2.45 0 Loss .75 per 1,000 board ft.Contract size x 150.00 board ft.Loss $112.50 per contract x 8 contractsLoss as a result of hedge $900.00

Question 47

A customer buys a September 86 T-bond put and pays a premium of 2-14 when the September futures are at 85-18. The time value in the option premium is: a. $218.75 b. $437.50 c. $1781.25 d. $2000.00

Answer 47

c. $1781.25 The time value in the option premium is $1,781.25, calculated as follows:Strike price of put 86-00/32Minus September futures - 85-18/32 Equals intrinsic value 14/32Minimum tick x $31.25$437.50 Option premium = 2-14/64Option premium = $2,000 + (14 x $15.625)Option premium = $2,218.75 Option premium $2,218.75Minus intrinsic value - 437.50Equals time value $1,781.25Note: T-bond futures trade in 1/32nd ($31.25)Options on T-bond futures trade in 1/64th ($15.625)

Question 48

A customer anticipates a strengthening dollar and goes short six June Swiss franc futures contracts at .5930. The contract size is 125,000 francs. When the position is liquidated, the market is trading .6130 bid/offered at .6131. The customer places a limit order to buy at .6131 and is filled at .6131. Commissions are $25 round-turn. The profit or loss as a result of this trade is a: a. Loss of $15,225 b. Profit of $14,925 c. Loss of $2,537.50 d. Profit of $2,487.50

Answer 48

a. Loss of $15,225 The loss as a result of the trade is $15,225, calculated as follows:Sell .5930 Buy .6131 Loss .0201 Contract size x 125,000.00 Swiss francsLoss $2,512.50 Commission + 25.00 Loss $2,537.50 (per contract)# of Contracts x 6 Total Loss $15,225.00

Question 49

A Commodity Pool Operator must include in his disclosure document: a. Business background for three years b. Any civil or criminal action in the past three years c. Performance history for five years d. The cautionary statement, “The CFTC has not passed upon the merits of participating in this pool nor has the Commission passed on the adequacy or accuracy of this disclosure document.”

Answer 49

d. The cautionary statement, “The CFTC has not passed upon the merits of participating in this pool nor has the Commission passed on the adequacy or accuracy of this disclosure document.” A Commodity Pool Operator must include the cautionary statement given in his disclosure document.

Question 50

Promotional material that mentions the possibility of profits in futures trading does not need to state the possibility of the risk of loss since a customer must sign a risk disclosure statement prior to trading commodities. a. True b. False

Answer 50

b. False Promotional material that mentions the possibility of profits must be accompanied by an equally prominent statement of the risk of loss.

Question 51

Buying futures, buying calls and selling puts is known as a conversion. a. True b. False

Answer 51

b. False A conversion is buying futures, selling calls and buying puts.

Question 52

A customer believes interest rates will decrease and takes the appropriate position of five contracts in the September T-bill futures contract. The position is established at a price of 94.20. He liquidates the position when the price is 93.25. Total commission is $300. The net profit or loss on the trade is a: a. $11,575.00 profit b. $11,575.00 loss c. $11,875.00 profit d. $12,175.00 loss

Answer 52

d. $12,175.00 loss The net loss is $12,175, calculated as follows:Buy T-bills 94.20 Sell T-bills 93.25 Loss .95 basis pointsx 25 minimum tickLoss per contract $2,375.00x 5 contractsLoss on 5 contracts $11,875.00 Total Commission + 300.00 Total loss $12,175.00

Question 53

General Motors intends to issue $50,000,000 in commercial paper in six months. The current commercial paper rate is 9.37%. The three-month T-bill rate is 8.66%. To hedge against an increase in interest rates, the Treasurer of GM should: a. Buy T-bill futures and sell T-bills in the cash market b. Sell T-bill futures and buy T-bills in the cash market c. Sell T-bill futures d. Buy T-bill futures

Answer 53

c. Sell T-bill futures To hedge against an increase in interest rates, one should sell T-bill futures or buy put options on T-bill futures.

Question 54

A customer buys three December 88 T-bond calls at 1-28. If the December futures price is 92-16 when the option is exercised, the trader’s profit is: a. $7,200.00 b. $7,875.00 c. $9,187.50 d. $11,437.50

Answer 54

c. $9,187.50 The trader’s profit is $9,187.50, calculated as follows:Market Price 92-16/32 Strike price 88-00/32 Intrinsic Value 4-16/32 % of $100,000or($4,500 x $1,000) + (16 x $31.25)$4,000 + $500$4,500Option Premium = 1-28/64 or $1,000 + (28 x 15.625)Option Premium = $1,437.50$4,500 - $1,437.50 = $3,062x 3 contracts$9,187.50

Question 55

A Commodity Trading Advisor’s disclosure document must include only the CTA’s commodity business background. Any other businesses the CTA was involved in would be irrelevant. a. True b. False

Answer 55

b. False The CTA must disclose his business background for five years. If the CTA’s business background includes business other than commodities, they must be disclosed.

Question 56

A long hedger is short the basis and a short hedger is long the basis. a. True b. False

Answer 56

a. True A long hedger is short the basis and a short hedger is long the basis.

Question 57

Open interest is the total number of long and short contracts that have not been liquidated. a. True b. False

Answer 57

b. False Since each contract consists of a buy and a sell, it would be incorrect to add buys and sells together to determine open interest. Open interest would be the number of long or short contracts that have not been liquidated.

Question 58

There is a direct correlation between risk and leverage. a. True b. False

Answer 58

a. True There is a direct correlation between risk and leverage. If leverage is increased, risk is increased.

Question 59

A customer expects the Consumer Price Index to indicate that the inflation rate has slowed and that the economy is cooling. He expects the yield on bonds to decrease and takes a position of five contracts in the September T-bond futures contract. The position is established at 88-24. When the position is liquidated, T-bonds are at 90-20. Round-turn commissions are $40. The profit or loss as a result of this trade is a: a. $1,835.00 profit b. $1,915.00 loss c. $9,175.00 profit d. $9,575.00 loss

Answer 59

c. $9,175.00 profit The profit as a result of the trade is $9,175, calculated as follows:Sell 90-20/32Buy 88-24/32Profit 1-28/32% of $100,000= 1 x $1,000 + (28 x $31.25) Profit = $1,875 Commission - 40 Net Profit $1,835 per contract# of Contracts x 5 Net Profit $9,175

Question 60

If the CFTC determines that an associated person has violated the CEA, the CFTC has authority to seek injunctive relief in federal court. a. True b. False

Answer 60

a. True The CFTC may go directly to court to prevent someone from violating the Commodity Exchange Act (CEA).

Question 61

Which of the following is equivalent to a short futures position? a. Long two puts b. Short a call and short a put c. Short a call and long a put d. Long a call and short a put

Answer 61

c. Short a call and long a put The equivalent of a short futures position is a synthetic short futures position. A synthetic short futures position is a long put option and a short call option.

Question 62

A CPO is exempt from registration with the NFA. The AP of this firm must register with the NFA. a. True b. False

Answer 62

b. False If the firm is exempt from registration, the employees (APs) are exempt from registration.

Question 63

A customer has a large blue chip stock portfolio. He anticipates a market decline and would like to hedge $800,000 of the portfolio using the Major Market Index (MMI). Each index point equals $250. The futures price is currently 440.65. Which of the following would be the best hedging strategy? a. Buy 7 MMI futures contracts b. Sell 7 MMI futures contracts c. Buy 8 MMI futures contracts d. Sell 8 MMI futures contracts

Answer 63

b. Sell 7 MMI futures contracts The best hedging strategy is to sell 7 MMI futures contracts. Remember that you round down so as not to expose the customer to the risk associated with being short futures.$440.65 futures price x 250.00 contract size$110,162.50 value of futures contract $800,000 (portfolio) / $110,162.50 (value of futures contract) = 7.26 contracts

Question 64

A customer anticipates a change in interest rates and buys four September 91.50 T-bill calls paying .38, when the September T-bill futures contract is trading 91.48. In August, the futures price is 92.37. If the customer exercised his option, his profit would be: a. $812.50 b. $1,225.00 c. $4,900.00 d. $5,100.00

Answer 64

c. $4,900.00 The profit would be $4,900, calculated as follows:Market Price 92.37Strike Price 91.50Intrinsic Value .87 Basis PointsOption Premium - .38 Basis Points.49 Basis Points ProfitMinimum Tick x $25 Profit per contract $1,225x 4 ContractsProfit $4,900 on 4 contracts

Question 65

The NFA board of directors can take an action against a member, requiring that the firm immediately cease doing business, prior to holding a hearing on the matter. a. True b. False

Answer 65

a. True The NFA president, with concurrences from the board of directors, can initiate a member responsibility action with or without a hearing. The most extreme action that may be taken would be to require the firm to immediately cease doing business.

Question 66

Corn is trading $2.40 per bushel. The current interest rate is 10%. Storage costs are 3.2 cents per month. The monthly carrying charge is: a. 3.2 cents b. 5.2 cents c. 6.2 cents d. 27.2 cents

Answer 66

b. 5.2 cents The carrying charge is interest, storage and insurance. The question asks the monthly carrying based on an interest rate of 10% and storage costs of 3.2 cents per month.interest rate x cash price / 12 months = monthly interest(10% x $2.40) / 12 = 2 cents monthly intereststorage cost 3.2 centsmonthly interest 2.0 centsmonthly carrying charge 5.2 cents

Question 67

Promotional material includes standardized oral presentations. a. True b. False

Answer 67

a. True Promotional material includes standardized oral presentations.

Question 68

In March, a customer believes that short-term interest rates will move higher. He believes that short-term rates will go over long-term rates which will cause the yield curve to invert. He decides to enter a T-bond spread order on the CBT. The order is for ten spreads. The spread position is established at a differential of 0-16. The June leg is reported sold at a price of 87-30. The September leg is reported bought at 87-14. The spread is liquidated at a differential of 0-02. The June leg is covered at 89-28. The September leg is liquidated at 89-26. The profit as a result of this trade is: a. $350.00 b. $437.50 c. $3,500.00 d. $4,375.00

Answer 68

d. $4,375.00 The profit as a result of the trade is $4,375, calculated as follows:June | September Buy 89-28 Sell 89-26Sell 87-30 Buy 87-14Loss 1-30/32 Profit 2-12/32Net Profit of 0-14/32% of $100,000or 14 x $31.25 = $437.50 x 10 contracts $4,375.00 Profit

Question 69

A CPO who acts as the Commodity Trading Advisor to a pool that he operates must register as a CTA. a. True b. False

Answer 69

b. False A CPO who acts as the CTA to a pool that he operates is exempt from registering as a CTA.

Question 70

An NFA member may be fined up to $250,000 per violation by the Regional Conduct Committee. a. True b. False

Answer 70

a. True An NFA member may be fined up to $250,000 per violation by the Regional Conduct Committee.

Question 71

Fed funds are the overnight borrowing of reserves by banks from other banks. a. True b. False

Answer 71

a. True Fed funds are the overnight borrowing of reserves by banks from other banks.

Question 72

If applicable, position reports must be submitted: a. Annually b. Monthly c. Weekly d. Daily

Answer 72

d. Daily If a trader (hedger or speculator) equals or exceeds the position reporting level, the required report must be submitted daily.

Question 73

In April, a corporation issues bonds with a price equal to 88-14. The corporation intends to issue another $25,000,000 of bonds in July. The bonds will have an 18-year maturity. The corporation hedges its offering using the futures market. Treasury bond futures prices are as follows: June 89-21 Sept 89-19 Dec 89-17 Mar 89-15 When the hedge is lifted, the bonds are issued at a price equal to 87-30. The futures position is offset at 88-26. Including the result of the hedge, the bonds are issued at: a. 87-05 b. 88-23 c. 88-25 d. 89-07

Answer 73

b. 88-23 The bonds are issued at 88-23, calculated as follows:##

Question 74

The September 89.75 eurodollar call option is trading .58 when the September futures contract is trading 89.92. Which of the following indicates the intrinsic and time value of the option contract? a. No intrinsic value and $1,450 time value b. $265.63 intrinsic value and $640.63 time value c. $1,025 intrinsic value and $425 time value d. $425 intrinsic value and $1,025.00 time value

Answer 74

d. $425 intrinsic value and $1,025.00 time value There is intrinsic value of $425 and time value of $1,025, calculated as follows:Market Price 89.92Strike Price 89.75Intrinsic Value 17 Basis PointsOption Premium - Intrinsic Value = Time Value58 Basis Points - 17 Basis Points = 41 Basis Pointsx $25 (Minimum Tick) x $25 (Minimum Tick)$425 Intrinsic Value; $1,025 Time Value

Question 75

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

Answer 75

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

Question 76

Your customer has the following butterfly call spread position: Long 1 March 90.25 Eurodollar call Short 2 March 90.50 Eurodollar calls Long 1 March 90.75 Eurodollar call At expiration, where would the price of the underlying futures contract have to be for the customer to realize his maximum profit? a. 90.75 b. 90.50 c. 90.25 d. 90.00

Answer 76

b. 90.50 For a customer to realize the maximum profit potential in a butterfly call spread, the underlying futures contract price should be at the center strike price of the spread (90.50).

Question 77

A customer instructs his broker to enter the following order on the CBT: Buy 8 Sept corn – Sell 8 Dec corn Dec 9 point premium stop This order may not be placed on the CBT. a. True b. False

Answer 77

a. True Stop spread and combination stop spread orders may not be placed on the Chicago Board of Trade (CBT).

Question 78

A customer monitoring the weather in the Midwest anticipates above average rainfall in the next week. He places an order to sell eight contracts of August soybeans at 611 1/4 cents. The contract size is 5,000 bushels. The customer’s order is filled at 611 1/4 cents and he establishes a short position of eight contracts. The rainfall for the next week is below normal. The customer places an order to buy eight contracts of August soybeans at the market. The order is filled at 625 1/2 cents. Round-turn commissions are $45. The profit or loss as a result of this trade is a: a. $667.50 gain b. $757.50 loss c. $5,350.00 gain d. $6,060.00 loss

Answer 78

d. $6,060.00 loss The loss as a result of this trade is $6,060, calculated as follows:Buy 625 1/2 centsSell 611 1/4 centsLoss 14 1/4 centsContract size x 5,000.00 bushelsLoss $712.50 Commission + 45.00 (round turn)Loss $757.50 per contract# of Contracts x 8Total Loss $6,060.00

Question 79

To establish a credit spread a trader would: Buy a 240 call Buy a 250 call Write a 250 call Write a 240 call a. I and II b. I and IV c. II and III d. II and IV

Answer 79

d. II and IV The trader must establish a bear call spread. A bear call spread is a credit spread which involves selling a lower strike price call option and buying a higher strike price call option. The lower the strike price of a call option, the higher the option premium.

Question 80

An FCM is responsible for all of the following EXCEPT: a. Prohibiting floor brokers from trading for their own accounts b. Maintaining records for five years c. Segregating customer funds d. Reporting activity for traders whose positions exceed the reporting level

Answer 80

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

Question 81

The live cattle futures contract can be used to hedge fed steers but not fed heifers. a. True b. False

Answer 81

b. False The live cattle futures contract can be used to hedge steers (males) or heifers (females) but only steers may be delivered against a live cattle futures contract.

Question 82

Which of the following would be a short straddle on gold? a. Long February, short April b. Long April, short February c. Long a call and short a put d. Short a call and short a put

Answer 82

d. Short a call and short a put A short straddle is selling a call option and selling a put option at the same strike price and the same expiration date.

Question 83

A homebuilder makes an agreement with a lumber 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. When the homebuilder places his hedge, the cash price of lumber is $180.80/1,000 board ft. and July lumber futures on the CME are trading $186.90/1,000 board ft. When the homebuilder lifts his hedge, the futures position is liquidated at $192.60/1,000 board ft. and lumber at the mill is trading $186.10/1,000 board ft. Considering both the changes in the cash and futures prices, the cost of the lumber to the homebuilder is: a. $180.40/1,000 board ft. b. $181.20/1,000 board ft. c. $186.10/1,000 board ft. d. $191.80/1,000 board ft.

Answer 83

BLANKANSWER The cost of the lumber to the homebuilder is $180.40/1,000 board ft., calculated as follows:Cash | FuturesActual price 186.10 | Buy 186.90Minus futures profit -5.70 | Sell 192.60Cost as a Resultof the Hedge 180.40 | Profit 5.70

Question 84

A customer believes interest rates are going to increase and enters a bear call spread in the T-bond option contract. The strike prices of the options are 88 and 90. The option premiums are 1-18 and 0-28. What is the customer’s maximum risk? a. $ 687.50 b. $ 843.75 c. $1,156.25 d. $1,312.50

Answer 84

c. $1,156.25 The maximum risk is $1,156.25, calculated as follows:Sell 88 Credit 1-18/64Buy 90 Debit 0-28/64Net Credit 0-54/64% of $100,000or54 x $15.625 Net Credit = $843.75Maximum Risk = Difference in Strike Prices - Net Credit = (90-88) - $843.75 = $2,000 - $843.75Maximum Risk = $1,156.25

Question 85

Since the cost of an option cannot be determined until the option is purchased, the Option Risk Disclosure Document does not have to state the elements of its cost. a. True b. False

Answer 85

b. False The Option Risk Disclosure Document must state the elements that make up its cost (intrinsic value and time value).

Question 86

There is no physical delivery in a eurodollar time deposit futures contract. It has a cash settlement. a. True b. False

Answer 86

a. TrueThe eurodollar futures contract has a cash settlement. There is no physical delivery.

Question 87

Sugar futures prices are as follows: Oct 11.40 March 10.71 May 10.40 July 10.19 Oct 9.99 This type of market is known as a(n): a. Premium market b. Normal market c. Carrying charge market d. Inverted market

Answer 87

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

Question 88

A customer will have $400,000 to invest in the stock market when his T-bills mature in 45 days. When they mature, he intends to use the proceeds to buy $400,000 of blue chip stocks. Currently, the Major Market Index is trading 507.30 bid/offered at 507.40. The customer believes the market is heading sharply higher and places an order to buy 3 December Major Market Index futures contracts at 507.30. The contract size is 250 times the index price. The margin requirement per contract is $4,000 initial and $2,500 maintenance. The customer deposits the required margin in his account. The customer’s order is filled and a long position of three contracts is established at 507.30. That night, the settlement price for the December futures contract is 505.80. The current equity in the customer’s account is: a. $3,625 b. $6,375 c. $10,875 d. $13,125

Answer 88

c. $10,875 The current equity in the customer’s account is $10,875, calculated as follows:Buy 507.30 Settlement Price 505.80 Unrealized Loss 1.50 Contract Size x $250.00 Unrealized Loss 375.00 per contract# of Contracts x 3 Total Unrealized Loss $1,125.00 Margin $4,000.00 per contract# of Contracts x 3 Total Margin 12,000.00Total Unrealized Loss - $1,125.00 Current Equity $10,875.00

Question 89

A CTA is exempt from registration with the CFTC if he writes a newsletter but does not handle any managed accounts. a. True b. False

Answer 89

b. False A CTA who writes a newsletter must register with the CFTC.

Question 90

Options customers with discretionary accounts must be provided with an explanation of the nature and risks of the strategies to be used for the account. a. True b. False

Answer 90

a. True An explanation of the nature and risks of strategies must be given to options customers with discretionary accounts.

Question 91

In a normal futures market with annual interest rates at 8%, monthly storage charges at one cent per bushel, a cash price of $2.20 per bushel and a December corn futures contract at $2.23 per bushel, one would expect the March futures contract to be priced at: a. 225 1/2 b. 226 c. 228 d. 230 3/8

Answer 91

d. 230 3/8 The March futures contract would be priced at 230 3/8, calculated as follows:cash price x interest rate / 12 = monthly interest2.20 x 8% / 12 = 1.46 monthly interest1.46 cents interest + 1 cent storage = 2.46 monthly carrying chargeDecember to March has a three month cost of carry.2.46 per monthx 3 months7.38 carrying charge for 3 months(Nearby futures contract price + 3 months cost of carry) / March futures price$2.23 + 7.38 cents = 230 3/8 cents

Question 92

When yields on long-term securities are greater than the yields on short-term securities, the yield curve is normal. a. True b. False

Answer 92

a. True When yields on long-term securities are greater than the yields on short-term securities, the yield curve is normal.

Question 93

A German automobile exporter sends cars to the United States and is paid in dollars. He decides to hedge using options rather than futures. The most likely strategy would be to: a. Buy Euro puts b. Sell Euro puts c. Buy Euro calls d. Sell Euro calls

Answer 93

c. Buy Euro calls A German exporter paid in dollars is short the Euro. To hedge, the exporter should buy Euro call options.

Question 94

A customer is long 20 put options with a delta of .30. Which of the following would neutralize this position? a. Buying six call options with a delta of .60 b. Selling ten call options with a delta of .60 c. Selling six futures contracts d. Buying six futures contracts

Answer 94

d. Buying six futures contracts In order to neutralize an option position which is 30% as volatile as the underlying futures contract (delta = .30), it is necessary to use 30% as many futures contracts (20 option contracts x 30% = 6 futures contracts). To neutralize long puts, it is necessary to buy the futures, in this case, 6 futures contracts.

Question 95

The Option Risk Disclosure Document must contain which of the following information? a. Description of costs if option is exercised b. Writer’s margin requirements c. Procedure for exercising the option d. All of the above

Answer 95

d. All of the above All of the items given must be included in the Option Risk Disclosure Document.

Question 96

An American food company imports chocolate from a Swiss company. The order calls for delivery of the chocolate in March. The current exchange rate is .5975. The order is valued at $1,195,000. The March Swiss Franc futures contract is .5950 (125,000 Swiss francs in a contract). How many futures contracts should the importer use to hedge? a. 6 contracts b. 9 contracts c. 10 contracts d. 16 contracts

Answer 96

d. 16 contracts The value of the order, $1,195,000, divided by the current exchange rate (.5975) equals 2,000,000 Swiss francs. The value of the order in Swiss francs (2,000,000) divided by the contract size (125,000 Swiss francs) equals the number of contracts used to hedge (16).

Question 97

Which of the following orders would be placed to buy at a price above the prevailing price in the market? a. Market if touched b. Stop order c. Limit order d. Contingency order

Answer 97

b. Stop order A buy stop order is placed at a price above the prevailing price in the market.

Question 98

A customer anticipates that a pending recession will drive interest rates lower. He takes a position in the September eurodollar futures contract based on the perception of lower interest rates. When the order is placed, September eurodollar futures are trading 91.08 bid/offered at 91.09. The customer places an order for four contracts. The order is filled and the customer’s position is established at 91.08 on the four contracts. When the customer liquidates his position, he receives a fill at 91.16. Round-turn commissions are $55. The customer’s profit or loss as a result of this trade is a: a. $580 profit b. $780 profit c. $1,020 loss d. $1,220 loss

Answer 98

a. $580 profit The customer’s profit is $580, calculated as follows:Sell 91.16Buy 91.08Profit .08 Basis pointsx $ 25 (Minimum tick)Profit $200 Commission - 55 (Round-turn)Profit $145 (Per contract)# of Contracts x 4Net Profit $580

Question 99

The contents of commodity promotional material to be broadcast over the radio is regulated by the FCC. a. True b. False

Answer 99

b. False Commodity promotional material used on television or radio is regulated by the NFA.

Question 100

A customer places an order with his IB. When the order is executed, the FCM calls the IB to report the execution. The IB does not need to time-stamp the report of execution since that is the responsibility of the FCM. a. True b. False

Answer 100

b. False The IB must time-stamp the report of execution on his order ticket when it is received from the FCM.

Question 101

A customer notices that the June 98 T-bond call option is trading 2-29. This option has a delta of 60%. The June T-bond futures contract is simultaneously trading 99-01. The customer buys a June 98 T-bond call option and pays a premium of 2-29. If the June T-bond futures contract rallied to 99-21, the premium of the June 98 T-bond call option would be: a. $2,640.63 b. $2,828.13 c. $3,281.25 d. $6,025.00

Answer 101

b. $2,828.13The premium of the June 98 T-bond call option would be $2,828.13, calculated as follows:Premium + Change in Premium = New Premium(99-21/32 - 99-01/32) x 60%20/32 x 60%2-29/64 + 0-12/32 $2,000 + (29 + $15.625) + (12 x $31.25)$2,453.13 + ($375.00) = $2,828.13

Question 102

The more speculators in a market, the more volatile the market. a. True b. False

Answer 102

b. False The more speculators in a market, the more liquid the market. The price change between transactions is very small in a liquid market since it is actively traded by many speculators.

Question 103

Hedgers that use options will write either a put or a call. a. True b. False

Answer 103

b. False Hedgers that use options will buy either a put or a call.

Question 104

The June gold futures contract that trades on the Comex is trading $400.00 per ounce. The June 400 gold put option is trading $6.60 per ounce. The delta of the put option is .50 (50%) If the price of June gold futures was to decline to $390.00, the premium of the June 400 gold put option would be: a. $5.00 b. $8.30 c. $9.90 d. $11.60

Answer 104

d. $11.60 The premium of the June 400 gold put option would be $11.60, calculated as follows:Premium + Change in Premium = New Premium$6.60 + $5.00 = $11.60($10 x 50%)

Question 105

A Futures Commission Merchant and a Commodity Pool Operator have an agreement stating that the FCM will pay a commission to the CPO for any business the CPO does on behalf of the pool through this particular FCM. This information does not need to be disclosed in the disclosure document provided to the pool participants. a. True b. False

Answer 105

b. False Any commission paid by a FCM to a CPO for any business the CPO does on behalf of a pool through the particular FCM, must be disclosed in the disclosure document.

Question 106

A September 94 put is trading 37 basis points. The September futures contract is at 93.77. The time value in the put option is: a. $218.75 b. $350.00 c. $437.50 d. $575.00

Answer 106

b. $350.00Since the strike price of the put option is above the market price, the put option is in-the-money. T-bills and eurodollars trade in basis points. The minimum tick of these contracts, for both options and futures, is a basis point (.01) = $25. The strike price of an in-the-money option minus the market price equals the intrinsic value of an option’s premium.strike price of put 94.00minus futures price 93.77equals intrinsic value .23 basis pointsoption premium = intrinsic value + time valueoption premium - intrinsic value = time valueoption premium 37minus intrinsic value -23equals time value 14.14 basis points x $25 = $350 time value.

Question 107

A firm has the right to, but is not required to, liquidate a customer’s account if a margin call has not been met in a reasonable amount of time. a. True b. False

Answer 107

a. True A firm has the right to liquidate positions in a customer’s account if a margin call has not been met in a reasonable amount of time.

Question 108

If open interest is declining but prices remain stable, the market is considered strong. a. True b. False

Answer 108

b. False If open interest is declining, prices must be declining for the market to be considered strong.

Question 109

A customer expects interest rates to decline. Which of the following would you recommend to your customer? a. Buying puts b. Selling puts c. Buying calls d. Selling calls

Answer 109

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

Question 110

A Commodity Pool Operator is exempt from registration as a CPO if it receives no compensation, does not advertise, and operates only one pool at a time. a. True b. False

Answer 110

a. True In general, registration is required unless:1. The total gross capital contributions to all pools is less than $400,000; and2. there are no more than 15 participants in any one pool.ora single pool is operated;the pool operator does not advertise; andthe pool operator does not receive compensation for operating the pool.

Question 111

The final settlement price of the S&P 500 futures contract is: a. The settlement price at the end of trading on the last trading day b. The closing price of the actual cash index at the end of trading on the last trading day c. The opening price of the actual cash index the day after the last trading day d. None of the above

Answer 111

c. The opening price of the actual cash index the day after the last trading day The final settlement price of the S&P 500 futures contract is the opening price of the actual cash index the day after the last trading day.

Question 112

An investment company portfolio includes $34 million in 7 5/8% Treasury bonds that mature in December of 2009. The company wishes to hedge its portfolio using the CBOT option on T-bond futures contracts. To establish a weighted hedge, how many option contracts should be bought if the bond conversion factor is .9629? a. 327 puts b. 328 puts c. 327 calls d. 328 calls

Answer 112

a. 327 putsFor a weighted hedge, one would need 327 put options. In order not to be considered a speculator, you need to round down to the nearest whole number.Portfolio size $34,000,000 = (340) Puts / Contract size ($100,000)340 Puts x .9629 (Conversion Factor) = 327.38

Question 113

A soybean farmer knows that beans in the cash market are trading between $7.58 1/4 and $7.59 3/4. He also knows that the July soybean futures contract on the CBOT is currently trading $7.70 1/4 - $7.70 1/2. He decides to hedge his entire crop and places a market order. The order is filled at $7.70 1/4. When he lifts his hedge, he receives $7.38 in the cash market. July futures are trading $7.48 1/2 - $7.49. He receives a report from his associated person that his order has been filled at $7.49. As a result of the hedge, the price per bushel the farmer receives for his soybeans is: a. $7.58 1/4 b. $7.59 c. $7.59 1/4 d. $7.59 1/2

Answer 113

c. $7.59 1/4 The price per bushel that the farmer receives is $7.59 1/4, calculated as follows:Cash | Futures Actual Price 7.38 cents | Sell 7.70 1/4 cents Plus futures profit .21 1/4 | Buy 7.49 centsNet price as a result of the hedge: 7.59 1/4 | Profit .21 1/4 cents

Question 114

If the market rises at the same time a put is written, the seller loses money. a. True b. False

Answer 114

b. False The seller of a put option is bullish and wants the market to rise.

Question 115

Funds collected from customers in a commodity pool are used to purchase T-bills. Margin requirements for the pool will be met with T-bills. This information must be disclosed in the disclosure document. a. True b. False

Answer 115

a. True The form in which the pool will meet its margin requirements must be disclosed in the disclosure document.

Question 116

Short-term interest rates are not a factor to consider in the basis between cash and futures. a. True b. False

Answer 116

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

Question 117

A factor to consider when placing a stop order is: a. Open interest b. Volume c. Time of the day d. Volatility

Answer 117

d. Volatility Volatility should be considered when placing a stop order. In a volatile market the price change between trades can be large. The price at which the stop is placed should be considered in a volatile market so that the position has a chance to profit before the position is stopped out.

Question 118

When a CTA is registered with the CFTC, the trading advisor may state that his qualifications have been approved by the CFTC. a. True b. False

Answer 118

b. False No persons or firms may state that their qualifications have been approved by the CFTC.

Question 119

NFA rules require members to conduct Ethics Training Programs on an annual basis. a. True b. False

Answer 119

b. False This is false. NFA members must conduct and maintain records concerning the ethics training the firm provides to its associated persons. Members are allowed flexibility as to the frequency and method of training used to fulfill its ethics training requirement.

Question 120

The Commodity Pool Disclosure Document does not need to state the types of commodity interest the pool will trade because the CTA makes those decisions. a. True b. False

Answer 120

b. False The CPO Disclosure Document must state the types of commodity interests the pool will trade.