Unit 1.C

Question 1

Margin is a down payment

A: True
B: False

Answer 1

B: False. In commodity futures, margin represents earnest money or a performance bond. It is not a down payment

Question 2

A customer has $3,000 on deposit in her commodities account. She enters an order to buy 1 COMEX gold futures contract that has an initial margin requirement of $2,000 and a maintenance requirement of $1,500. Under exchange rules, the customer may withdraw $1,250 from her account?

A: True
B: False

Answer 2

B: False. Withdrawals that could make an account fall below the initial margin level are not permitted. The most this customer could withdrawal is $1,000.

Question 3

Changes in margin requirements are always retroactive:

A: True
B: False

Answer 3

A: True. Customers must meet current margin requirements, even when they change. All changes are retroactive and apply to positions established before those changes.

Question 4

Minimum initial margin is set by:

A: members of the exchange
B: the CFTC
C: the board of directors of the exchange
D: all of the above

Answer 4

C: the board of directors of the exchange

A commodity exchanges board of directors establishes margin requirements on behalf of the exchange

Question 5

All of the following statements describe initial margin EXCEPT:

A: funds required by the broker when a futures contract is initiated
B: the minimum amount to fund a customer must deposit with their broker
C: established by the exchange on which the commodity trades
D: established by the federal government

Answer 5

D: Exchanges establish minimum customer margin requirements. Specific firms may set higher (but never lower) margin requirements.

Question 6

RATIO OF MARGIN TO CONTRACT

A customer shorts 2 soybean oil futures (60,000 lbs per contract) at $26.39 per hundred weight. Margin is $800 per contract. The ratio of margin to contract value is:

A: 3.30%
B: 5.05%
C: 6.60%
D: 10.10%

Answer 6

B: 5.05%

$26.39 * 600 (60,000 lbs per contract/ 100 weight) = $15,834

$800/ $15,834 = 5.05%

Question 7

PERCENTAGE OF MARGIN IS PROFIT

The commission for a corn contract (5,000 bu) on the CBOT is $30, and the margin is $.12 per bu. If an account is long 2 contracts at $1.35 and offsets when the position has advanced $.06 per bu per contract, what percentage of margin is the profit?

A: 25%
B: 45%
C: 50%
D: 100%

Answer 7

B: 45%

Profit = price change times the contract size ties the number of contracts minus commission per contract time the number of contracts
Margin requirement = margin per bu times the contract size times the number of contracts
Profit as percentage = profit divided by margin requirements

Profit = ($.06/bu * 5,000 bu * 2) - ($30 * 2) = $600 - $60 = $540
Margin requirement = $.12 * 5,000 *2 = $1,200
Profit as a percentage = $540/$1,200 = 45%

Question 8

A client buys one contract of CBOT corn (5,000 bu) at $3.25 per bu. He then sells his contract at $3.41 per bu. His margin is $.20 per bu, and the commission is $30 per contract. What is the percentage of the profit on the investment?

A: 16%
B: 22%
C: 77%
D: None of the above

Answer 8

C: 77%

5,000 * .16 bu = $800 - $30 (commission) = $770 / 1,000 margin per contract ($.20 bu * 5000 bu) = 77%

Question 9

A customer is long one contract of lean hogs (40,000 lbs) at $.86 per lb. She invests $5,000. If the price changes by 2%, the percentage change of her investment is:

A: 13.76%
B: 16%
C: 35%
D: 50%

Answer 9

A: 13.76%

(40,000 * $.86) = 34,400 * .02 (percentage change) = $688 which is the dollar amount price change

$688 / $5,000 (the investment) = 13.76%

Question 10

An individual takes a short position of 3 contracts in soybeans when the price of soybeans is $5.50. He deposits a $.35 margin per bu. His total investment is $5,250 on 3 contracts. The price of soybeans declines by 2%. This represents a profit on his investment of:

A: 7%
B: 31%
C: 35%
D: 45%

Answer 10

B: 31%

2% * $5.50 = $.11 / $.35 (margin) = 31%

Question 11

Futures margin varies as a function of the individuals objective. Because of this, certain clients have a lower initial and maintenance margin level than others. The following clients all have this preferential margin requirement, with the exception of:

A: hedgers
B: spreaders
C: speculators
D: both B and C

Answer 11

C: Speculators pay regular margin, hedgers and spreaders have lower requirements. The actual amounts for each of the three classes of margin are established by the individual exchanges.

Question 12

A customer may withdraw cash from a commodity future account:

A: under no circumstances
B: as long as equity is not reduced below the initial margin requirement
C: as long as equity is not reduced below the minimum maintenance requirement
D: only after all positions have been offset

Answer 12

B: A customer may withdraw any equity in excess of the initial margin requirement.

Question 13

The initial or original margin must be deposited within 24 hours after initiation of the first trade with the member firm:

A: True
B: False

Answer 13

B: False. The margin must be deposited before the execution of any transaction.

Question 14

Clearing members must always know if their customers accounts are fully margined:

A: True
B: False

Answer 14

A: True

Question 15

MARGIN REQUIREMENTS IN CENTS

The initial margin requirement for corn is $1,000 per contract, and the maintenance requirement is $800. The contract for the commodity futures contract is 5,000 bushels. What are the margin requirements in cents per bushel?

A: 5c and 4c
B: 10c and 8 c
C: 20 c and 16 c
D: Cannot be determined

Answer 15

C: 20c and 16 c

$1,000 / 5,000 bushels = 20c
$800 / 5,000 bushels = 16c

Question 16

A short hedge (selling hedge):

A: is similar to a long hedge (buying hedge)
B: has less risk basis than a long trade
C: protects the hedger against an unexpected fall in prices
D: helps a commodity dealer with unsold inventory remain competitive in the marketplace

Answer 16

A: a short hedge offers some protection against a decline in inventory prices