RULES & REGULATIONS
An individual works for an FCM and accepts customer orders for futures contracts. She also discusses account activity with customers and is supervised by the firm. Her manager reminds her that she must be properly registered before engaging in this activity.
What is:
A. Commodity Pool Operator
B. Associated Person
C. Floor Broker
D. Commodity Trading Advisor
What is B. Associated Person
A futures customer deposits money to open a crude oil futures position. The broker explains that this is not a stock-style loan or a partial purchase of oil. It is a good-faith deposit to ensure contract performance.
What is:
A. Original margin
B. Dividend
C. Premium
D. Coupon
What is A. Original margin
A soybean farmer owns a crop and fears prices may decline before harvest. She sells futures to protect the value of the crop. Her goal is risk reduction, not aggressive speculation.
What is:
A. Short hedge
B. Long hedge
C. Bull spread
D. Call purchase
What is A. Short hedge
A trader wants immediate execution in soybean futures after unexpected news hits the market. She does not care about receiving a specific price. Her main concern is getting into the market quickly.
What is:
A. Market order
B. Limit order
C. Stop limit order
D. OCO order
What is A. Market order
A trader buys a call option on a futures contract. She wants the right to benefit if the underlying futures price rises. Her maximum risk is the premium paid.
What is:
A. Right to buy futures
B. Obligation to buy futures
C. Right to sell futures
D. Obligation to sell futures
What is A. Right to buy futures
A firm opens a futures account for a new customer and must provide a document explaining that futures trading involves substantial risk. The customer says he already trades stocks and does not need “extra paperwork.” The firm still must provide the disclosure before allowing the account to trade.
What is:
A. Risk Disclosure Statement
B. Official Statement
C. Prospectus
D. Margin Agreement
What is A. Risk Disclosure Statement
A trader opens a futures position with $5,000. The maintenance requirement is $4,000, and losses reduce the account to $3,700. The firm contacts the trader before the next session.
What has occurred?
What is a margin call
Layman’s Terms Explanation:
The account fell below the $4,000 maintenance level. Once that happens, the trader must deposit more money to restore the account.
A bakery needs wheat in three months and fears prices may rise. It buys wheat futures to reduce uncertainty about future purchase costs. If wheat rises, the futures gain helps offset higher cash prices.
What is:
A. Long hedge
B. Short hedge
C. Bear spread
D. Short call
What is A. Long hedge
A trader wants to buy corn only if it falls to 510 or lower. The order rests until the market reaches the stated price. He refuses to chase the contract higher.
What is:
A. Buy stop
B. Limit order
C. Market order
D. Switch order
What is B. Limit order
A trader buys a put option on soybean futures. He expects the futures price to decline. The option gives him bearish exposure with limited risk.
What is:
A. Right to sell futures
B. Right to buy futures
C. Obligation to sell futures
D. Obligation to buy futures
What is A. Right to sell futures
A firm accepts customer funds for futures trading and carries customer accounts. Another firm introduces customers but does not accept funds directly. The exam wants the role that can hold customer funds and carry accounts.
What is:
A. CTA
B. IB
C. FCM
D. CPO
What is C. FCM
A trader controls a $100,000 futures contract with only $5,000 deposited. A small move in the contract creates a large percentage gain or loss compared to the deposit. The broker warns that this cuts both ways.
What is:
A. Leverage
B. Cash settlement
C. Intrinsic value
D. Normal market
What is A. Leverage
Cash corn is $5.85, and corn futures are $6.10. The hedger calculates basis using cash minus futures. The result is negative.
What is the basis?
What is -$0.25
Layman’s Terms Explanation:
Basis = cash price - futures price. $5.85 - $6.10 = -$0.25.
A trader is long crude oil and wants protection if prices fall. She enters an order to sell if the market reaches a lower trigger price. The order is designed to limit downside risk.
What is:
A. Sell stop order
B. Buy stop order
C. MIT order
D. Give-up order
What is A. Sell stop order
A corn call has a strike price of 520, and the futures price is 548. The option is in-the-money. Ignore time value.
What is the intrinsic value?
What is 28 cents
Layman’s Terms Explanation:
For a call, intrinsic value = futures price - strike price. 548 - 520 = 28.
A customer gives written authority allowing another person to make trading decisions in the account. The firm must review and supervise the account activity carefully. The AP cannot simply trade freely without proper documentation.
What is required?
What is written power of attorney
A trader buys one crude oil futures contract at $71 and sells it at $73. The contract covers 1,000 barrels. Commissions are ignored.
What is the profit?
What is $2,000
Layman’s Terms Explanation:
The price increased by $2 per barrel. $2 × 1,000 barrels = $2,000.
A hedger expected the futures gain to fully offset the cash market loss, but the two prices did not move perfectly together. The relationship between cash and futures changed during the hedge. The hedge helped, but it was not perfect.
What is:
A. Basis risk
B. Delivery risk
C. Delta risk
D. Exercise risk
What is A. Basis risk
Open interest rises while futures prices rise for several sessions. A market analyst says new money appears to be entering the market. The move looks stronger than a rally caused only by short covering.
What does this generally suggest?
What is a strengthening bullish trend
A soybean put has a strike price of 1,200, and futures are trading at 1,155. The put is in-the-money because the holder can sell above the market. Ignore time value.
What is the intrinsic value?
What is 45 cents
Layman’s Terms Explanation:
For a put, intrinsic value = strike price - futures price. 1,200 - 1,155 = 45.
An IB notices a customer making multiple cash transactions in one day that exceed $10,000. The activity must be reported under anti-money laundering rules. The firm cannot ignore the activity just because the customer says it is “normal business money.”
What is:
A. Currency Transaction Report
B. Suspicious Activity Report only
C. Delivery Notice
D. Arbitration Claim
What is A. Currency Transaction Report
A trader has $8,000 in margin and loses $2,400 on the position. She wants to know the percentage loss based on margin deposited. The contract value is not needed for this calculation.
What is the percentage loss?
What is 30%
Layman’s Terms Explanation:
Divide the loss by the margin deposit. $2,400 ÷ $8,000 = 0.30, or 30%.
A farmer sells wheat futures at 720 and later buys them back at 690. Each cent is worth $50. The futures position protected against falling wheat prices.
What is the gain per contract?
What is $1,500
Layman’s Terms Explanation:
The farmer was short, so falling prices help. 720 - 690 = 30 cents. 30 × $50 = $1,500.
A trader buys March wheat and sells July wheat because she expects the price relationship between the months to change. She is not simply betting that wheat will rise or fall overall. The position is built around relative movement.
What is:
A. Spread
B. Margin call
C. Short hedge
D. Synthetic put
What is A. Spread
A trader pays 18 cents for a call option. At expiration, the option has 30 cents of intrinsic value. Each cent is worth $50.
What is the profit?
What is $600
Layman’s Terms Explanation:
The option is worth 30 cents, but the trader paid 18 cents. Profit = 12 cents. 12 × $50 = $600.
A customer makes a $6,000 cash transaction and the firm has reason to suspect suspicious activity. The amount is below $10,000, but the suspicion changes the reporting obligation. Compliance tells the AP not to tip off the customer.
What report is most likely required?
What is a Suspicious Activity Report
The exchange raises margin requirements after volatility increases in natural gas futures. A trader complains because she did not place a new trade. Her broker explains that exchanges can change margin requirements when risk changes.
What is:
A. Margin increase
B. Put-call parity
C. Basis strengthening
D. Cash forward pricing
What is A. Margin increase
A portfolio manager owns a broad stock portfolio and fears the market may decline. Instead of selling all the stocks, she sells stock index futures. The hedge targets broad market risk.
What is:
A. Short stock index hedge
B. Long commodity hedge
C. Foreign currency speculation
D. Long straddle
What is A. Short stock index hedge
A spread begins at 22 cents and later narrows to 14 cents. Each cent is worth $50. The move is favorable to the trader.
What is the dollar profit?
What is $400
Layman’s Terms Explanation:
The spread narrowed by 8 cents. 22 - 14 = 8. 8 × $50 = $400.
A trader buys both a call and a put on the same futures contract with the same strike and expiration. She expects a large price move but is unsure of direction. Her risk is limited to the total premiums paid.
What is:
A. Long straddle
B. Short straddle
C. Bull call spread
D. Bear put spread
What is A. Long straddle
A CTA advertises that clients “cannot lose money” using its crude oil strategy. The ad includes exciting testimonials and dramatic profit charts, but leaves out material risk disclosures. A regulator reviews the communication after complaints are filed.
What is:
A. Acceptable promotional material
B. Misleading promotional material
C. Proper risk disclosure
D. A permitted guarantee
What is B. Misleading promotional material
A short futures trader sold gold at 2,040 and bought it back at 2,022. Each point equals $100. The trader benefits because the market fell after the short sale.
What is the profit?
What is $1,800
Layman’s Terms Explanation:
The market fell 18 points. Since the trader was short, that drop is profitable. 18 × $100 = $1,800.
A portfolio is worth $3,000,000. One stock index futures contract represents $150,000 of market exposure. Ignore beta for this question.
How many contracts are needed?
What is 20 contracts
Layman’s Terms Explanation:
Divide portfolio value by contract value. $3,000,000 ÷ $150,000 = 20.
A trader expects nearby futures to strengthen compared with deferred futures. He buys the nearby contract and sells the deferred contract. The position is based on a bullish spread outlook.
What is:
A. Bull spread
B. Bear spread
C. Short straddle
D. Long put
What is A. Bull spread
A trader sells both a call and a put on the same futures contract with the same strike and expiration. He expects the market to remain stable. His risk can become large if the market breaks sharply in either direction.
What is:
A. Short straddle
B. Long straddle
C. Long call
D. Long put
What is A. Short straddle
An NFA member’s office loses power during a regional emergency, but the firm has backup procedures and designated emergency contacts. The plan allows the business to continue serving customers with minimal disruption. Regulators expect this plan to be written and maintained.
What is:
A. Business Continuity Plan
B. Customer Segregation Plan
C. Delivery Plan
D. Hedging Plan
What is A. Business Continuity Plan
A futures account is marked to market daily. Gains are credited and losses are debited based on that day’s settlement price. This keeps accounts current instead of waiting until the trade is closed.
What is:
A. Daily settlement
B. Final prospectus delivery
C. Static pricing
D. Time decay
What is A. Daily settlement
A stock index futures contract does not require delivery of every stock in the index. Instead, gains and losses are settled in money. This makes the contract easier to use for broad market exposure.
What is:
A. Cash settlement
B. Physical delivery
C. Warehouse receipt
D. Exchange for physicals
What is A. Cash settlement
A trader places two orders: one to take a profit and one to stop a loss. If either order executes, the other order should be canceled automatically. She is using the structure because she will be away from her screen.
What is:
A. OCO order
B. EFP order
C. Discretionary order
D. Give-up order
What is A. OCO order
An option premium is 34 cents. The option has 22 cents of intrinsic value. The remaining portion reflects time remaining and market volatility.
What is the time value?
What is 12 cents
Layman’s Terms Explanation:
Premium = intrinsic value + time value. 34 - 22 = 12 cents of time value.
A trader builds a very large speculative position in wheat futures. The position becomes large enough that regulators require reporting and may restrict further position size. The rule exists to reduce manipulation and excessive market concentration.
What is:
A. Margin maintenance
B. Speculative position limit
C. Time value
D. Basis narrowing
What is B. Speculative position limit
A trader deposits $6,000 and earns $1,500 on a futures trade. She wants the return on margin, not the return on the full contract value. Her friend tells her not to celebrate too hard because leverage works both ways.
What is the return on margin?
What is 25%
Layman’s Terms Explanation:
Profit ÷ margin deposit = return on margin. $1,500 ÷ $6,000 = 0.25, or 25%.
A $4,000,000 portfolio has a beta of 1.25. The futures contract value is $250,000. The manager wants to hedge the beta-adjusted exposure.
How many contracts are needed?
What is 20 contracts
Layman’s Terms Explanation:
First adjust for beta: $4,000,000 × 1.25 = $5,000,000. Then divide by $250,000. $5,000,000 ÷ $250,000 = 20.
A spread moves from 6 points to 11 points. Each point is worth $250. The movement is in the trader’s favor.
What is the profit?
What is $1,250
Layman’s Terms Explanation:
The spread moved 5 points. 11 - 6 = 5. 5 × $250 = $1,250.
A T-bond futures option premium is quoted at 1-16. T-bond futures option premiums are quoted in 64ths, and each 64th equals $15.625. The quote means 1 full point plus 16/64.
What is the dollar premium?
What is $1,250
Layman’s Terms Explanation:
One full point = 64/64. Add 16/64, for a total of 80/64. 80 × $15.625 = $1,250.
A firm discovers that a prospective customer appears on the OFAC SDN list. The customer insists the account should still be opened because the trade is urgent. Compliance blocks activity and escalates the matter.
What must the firm do?
What is block the transaction and notify appropriate authorities
A trader has $12,000 in account equity. A futures position loses $4,700, leaving $7,300. If maintenance margin is $8,000, how far below maintenance is the account?
What is $700 below maintenance
Layman’s Terms Explanation:
$12,000 - $4,700 = $7,300. Maintenance is $8,000, so the account is short by $700.
The basis moves from -30 cents to -18 cents during a hedge. The hedger says the basis became less negative. A student needs to identify the change correctly.
What happened to the basis?
What is the basis strengthened by 12 cents
Layman’s Terms Explanation:
Moving from -30 to -18 is closer to zero. That is a 12-cent strengthening.
A trader is long a futures position at 640 and enters a sell stop at 625. The market gaps lower and the order is filled at 621. Each cent equals $50.
What is the loss?
What is $950
Layman’s Terms Explanation:
The trader bought at 640 and sold at 621. That is a 19-cent loss. 19 × $50 = $950.
An option’s delta is .50. A hedger would normally need 10 futures contracts for the hedge, but wants to use options instead. The formula is futures contracts needed divided by delta.
How many options are needed?
What is 20 options
Layman’s Terms Explanation:
Options needed = futures contracts ÷ delta. 10 ÷ .50 = 20 options.