ORDERS
A trader wants to buy soybean futures immediately because a crop report just came out and prices are moving fast. She tells her broker that speed matters more than getting a specific price. The broker warns her that the final execution price could be different from what she sees on the screen.
What is:
A. A limit order
B. A market order
C. A stop limit order
D. An OCO order
What is B. A market order
A new futures customer is surprised to learn that futures margin is not the same as borrowing money to buy stock. The broker explains that the money deposited is more like a good-faith deposit to guarantee contract performance. The customer still controls a much larger contract value than the cash deposited.
What is:
A. A dividend
B. A performance bond
C. A sales charge
D. A coupon payment
What is B. A performance bond
A trader buys futures contracts because she believes prices will rise. She does not own the commodity, and she is not trying to protect a business inventory position. Her only goal is to profit from the price move.
What is:
A. Hedging
B. Speculation
C. Basis trading
D. Delivery
What is B. Speculation
A trader buys one futures contract month and sells another futures contract month in the same commodity. She is not mainly focused on whether the whole market rises or falls. She cares about the price relationship between the two contracts.
What is:
A. A spread
B. A margin call
C. A market order
D. A cash forward contract
What is A. A spread
A farmer owns a crop that will be sold later and worries prices may fall before harvest. To protect against that decline, the farmer sells futures contracts. The goal is not to get rich from the futures trade; it is to protect the cash position.
What is:
A. Short hedge
B. Long hedge
C. Bull spread
D. Market order
What is A. Short hedge
A trader wants to buy wheat futures, but only if the price falls to 620 or lower. He is not willing to chase the market higher just because other traders are excited. The order will sit there until the market reaches his price or until the order is canceled.
What is:
A. A buy stop order
B. A market order
C. A limit order
D. A discretionary order
What is C. A limit order
A trader deposits $4,000 to open a futures position. The maintenance margin requirement is $3,200. After losses, the account balance drops to $3,000.
What happens next?
What is a margin call
Layman’s Terms Explanation:
The trader’s equity fell below the $3,200 maintenance requirement. Once the account drops below maintenance, the firm requires the trader to deposit more money to bring the account back up.
A trader buys corn futures at 520 and sells them at 532. Each cent is worth $50. The trader is happy because the market moved exactly the way he expected.
What is the profit?
What is $600
Layman’s Terms Explanation:
The price rose 12 cents: 532 - 520 = 12. Each cent is worth $50, so 12 × $50 = $600.
A trader enters a spread at 12 cents and exits when the spread is 18 cents. The spread widened by 6 cents. Each cent is worth $50.
What is the change in value?
What is $300
Layman’s Terms Explanation:
The spread widened by 6 cents. Each cent is worth $50. So 6 × $50 = $300.
A cereal manufacturer needs to buy grain in the future and worries prices may rise before the purchase. The company buys futures to lock in protection against higher costs. If prices rise, the futures gain can help offset the higher cash price.
What is this strategy?
What is a long hedge
A trader is long crude oil futures at $76 and wants protection if prices start falling. She enters an order to sell if the market trades at $74. She does not want to exit now, but she wants the position sold if the market moves against her.
What is this order?
What is a sell stop order?
A customer posts $5,000 in margin and controls a futures contract worth $100,000. The customer is excited because a small price move could create a large percentage return. The broker warns that the same effect can create large percentage losses.
What concept is being described?
What is leverage
A speculator believes prices will decline after a bearish crop report. She sells futures contracts first and plans to buy them back later at a lower price. Her profit depends on the market falling.
What position has she taken?
What is a short futures position
A trader expects the nearby futures contract to strengthen compared to the deferred futures contract. He buys the nearby contract and sells the deferred contract. He is trading the relationship between the two delivery months.
What is this generally called?
What is a bull spread
A hedger notices that the cash price and futures price did not move perfectly together. The futures position helped, but it did not completely offset the cash market loss. The relationship between cash and futures changed during the hedge period.
What is:
A. Basis risk
B. Cash settlement
C. Time value
D. Stop protection
What is A. Basis risk
A trader places one order to take a profit and another order to limit a loss on the same futures position. He tells his broker that if one order is executed, the other should automatically be canceled. He is going to be in meetings all afternoon and does not want both orders accidentally working at the same time.
What is:
A. One cancels the other order
B. Exchange for physicals order
C. Market-if-touched order
D. Switch order
What is A. One cancels the other order
A trader opens a long futures position with $6,000 in original margin. The position later produces a $1,500 profit. The trader wants to know the return based only on the margin deposit.
What is the percentage return on margin?
What is 25%
Layman’s Terms Explanation:
Take the profit and divide it by the margin deposit. $1,500 ÷ $6,000 = 0.25, which is 25%.
A trader sells crude oil futures at $80 and later buys them back at $77. Each contract represents 1,000 barrels. The trader jokes that falling prices finally worked in his favor for once.
What is the profit?
What is $3,000
Layman’s Terms Explanation:
The trader sold high at $80 and bought back lower at $77. That is a $3 gain per barrel. $3 × 1,000 barrels = $3,000.
A trader buys March wheat at 610 and sells July wheat at 630, creating a 20-cent spread. Later, March is 625 and July is 637, making the spread 12 cents. The spread narrowed.
What is the spread change?
What is 8 cents narrower
Layman’s Terms Explanation:
The original spread was 20 cents: 630 - 610. The new spread is 12 cents: 637 - 625. The spread narrowed by 8 cents.
A soybean farmer sells futures at 650 and later buys them back at 620. Each cent is worth $50. The farmer used the futures position to protect against falling crop prices.
What is the futures gain per contract?
What is $1,500
Layman’s Terms Explanation:
The farmer sold at 650 and bought back at 620. That is a 30-cent gain on a short futures position. 30 × $50 = $1,500.
A trader wants to sell a futures contract if the price rises to a specific level. The market is currently below that level, and the trader believes touching that higher price would be a good point to enter the trade. This is not a stop order because the trader wants execution after the market touches a favorable price.
What is this type of order?
What is a market-if-touched order
A customer opens a futures account and deposits the required amount to begin trading. Later, the exchange raises margin requirements because volatility has increased. The customer is upset because no new trade was made, but the firm still asks for more money.
What is:
A. A margin increase
B. A cash settlement
C. A basis change
D. A spread adjustment
What is A. A margin increase
A trader expects interest rates to rise, which would generally push Treasury bond futures lower. She sells Treasury bond futures to profit from that expected decline. Her coworker reminds her that debt futures can move quickly when economic data surprises the market.
What is:
A. Bullish on bond futures
B. Bearish on bond futures
C. Neutral on bond futures
D. Hedged against crop prices
What is B. Bearish on bond futures
A trader believes deferred futures prices will strengthen more than nearby futures prices. She sells the nearby contract and buys the deferred contract. She is not just betting on the overall commodity price; she is betting on the spread relationship.
What is:
A. Bear spread
B. OCO order
C. Buying hedge
D. Stop limit order
What is A. Bear spread
A portfolio manager owns a diversified stock portfolio and worries the overall market may decline. Instead of selling every stock, she sells stock index futures. The goal is to temporarily reduce market exposure.
What is:
A. Short stock index hedge
B. Long commodity hedge
C. Currency speculation
D. Bull call spread
What is A. Short stock index hedge
A customer tells the broker, “Use your judgment on when to execute this order, but I still want the best possible execution.” The customer gives the broker flexibility because the market is moving unevenly. The broker must still act within the customer’s instructions and not just trade however they feel.
What is:
A. Not held order
B. Market order
C. Stop order
D. Give up order
What is A. Not held order
A trader buys a crude oil futures contract at $72 and later sells it at $74.50. The contract represents 1,000 barrels. The trader originally deposited $8,000 in margin.
What is the profit?
What is $2,500
Layman’s Terms Explanation:
The price increased by $2.50 per barrel. Since the contract controls 1,000 barrels, multiply $2.50 × 1,000 = $2,500.
A trader buys one Treasury bond futures contract at 112-16 and sells it at 113-00. Each full point is worth $1,000 and each 1/32 is worth $31.25. The move is smaller than he hoped, but it is still profitable.
What is the profit?
What is $500
Layman’s Terms Explanation:
112-16 to 113-00 is a move of 16/32. Each 1/32 is worth $31.25. So 16 × $31.25 = $500.
A spread trader enters a position because he believes two contract months are mispriced relative to each other. Both contracts later rise, but the contract he sold rises more than the contract he bought. He loses money even though the overall market moved higher.
What risk is being shown?
What is spread risk
A hedger calculates the basis as the cash price minus the futures price. The cash price is $5.80 and the futures price is $6.05. The hedger wants to know whether the basis is positive or negative.
What is the basis?
What is -$0.25, or negative 25 cents
Layman’s Terms Explanation:
Basis = cash price - futures price. $5.80 - $6.05 = -$0.25. Since the answer is below zero, the basis is negative.
A trader is short one gold futures contract at 2,040 and places a buy stop at 2,055. The market rallies and triggers the stop at 2,055, but the actual execution occurs at 2,058 because prices are moving quickly. Each point is worth $100.
What is the loss from entry to execution?
What is $1,800
Layman’s Terms Explanation:
She sold at 2,040 and bought back at 2,058. That is an 18-point loss. Each point is worth $100, so 18 × $100 = $1,800.
A trader shorts a futures contract and the market rises sharply. The account loses value because the trader benefits when prices fall, not when they rise. The firm contacts the trader after account equity falls below the required maintenance level.
What is:
A. Variation settlement
B. Margin call
C. Cash delivery
D. Limit-up trading
What is B. Margin call
A trader believes the U.S. dollar will weaken against the euro. She buys euro futures because a rising euro futures price would benefit her. The trade is speculative because she has no business need for euros.
What is:
A. Long foreign currency futures
B. Short stock index futures
C. Short euro futures
D. Long Treasury futures
What is A. Long foreign currency futures
A trader enters a spread at 25 cents and exits at 15 cents. Each cent equals $50. The trader profits because the spread moved in the expected direction.
What is the dollar profit?
What is $500
Layman’s Terms Explanation:
The spread changed by 10 cents: 25 - 15 = 10. Each cent is worth $50. So 10 × $50 = $500.
A portfolio is worth $2,400,000. One stock index futures contract represents $120,000 of market exposure. The manager wants a rough hedge and is ignoring beta for this question.
How many contracts are needed?
What is 20 contracts
Layman’s Terms Explanation:
Divide the portfolio value by the futures contract value. $2,400,000 ÷ $120,000 = 20 contracts.
A trader enters an order that becomes a market order once a trigger price is reached, but the exchange also applies a protection range to prevent execution too far away from the trigger price. The trader wants the order activated quickly, but not filled at a wildly unreasonable price during a fast market. This is commonly used to reduce extreme slippage risk.
What is this order?
What is a stop order with protection
A trader deposits $7,500 to control a futures contract worth $150,000. The position loses 3% of the contract value after an unexpected report moves prices against her. She is shocked because the loss feels much larger than the percentage move.
What is the dollar loss?
What is $4,500
Layman’s Terms Explanation:
The contract value is $150,000. A 3% loss means $150,000 × 0.03 = $4,500. Futures losses are based on the full contract value, not just the margin deposit.
A trader posts $5,000 in margin and earns $2,250 on a successful futures trade. He wants to know his return on margin. His friend tells him not to get too excited because leverage works both ways.
What is the return on margin?
What is 45%
Layman’s Terms Explanation:
Divide the profit by the margin deposit. $2,250 ÷ $5,000 = 0.45, which equals 45%.
A spread order is entered as one combined order instead of two unrelated outright futures trades. The trader wants execution based on the price difference between contracts. This helps the trader focus on the relationship rather than accidentally entering one side without the other.
What is:
A. Spread order
B. Market-if-touched order
C. Give up order
D. Delivery notice
What is A. Spread order
A stock index futures contract does not require the delivery of every stock in the index. Instead, gains and losses are settled in money. This makes the product more practical for broad-market trading.
What is:
A. Cash settlement
B. Physical delivery
C. Exchange for physicals
D. Warehouse receipt
What is A. Cash settlement
A trader sells a December futures contract and buys a March futures contract for the same commodity at the same time. She is not closing out the commodity entirely; she is moving from one contract month into another. The broker processes it as one coordinated transaction.
What is:
A. Switch order
B. OCO order
C. Limit order
D. Discretionary order
What is A. Switch order
A hedger is allowed to post a lower margin requirement than a pure speculator. The exchange recognizes that the hedger is using futures to reduce business risk rather than simply gamble on price movement. The hedger still has obligations if the market moves against the futures position.
What is this called?
What is hedger margin
A speculator shorts three wheat futures contracts at 640 and covers at 618. Each cent is worth $50 per contract. The market fell after a stronger-than-expected crop report.
What is the total profit?
What is $3,300
Layman’s Terms Explanation:
The price dropped 22 cents: 640 - 618 = 22. Since she was short, the drop is profitable. 22 × $50 = $1,100 per contract, and $1,100 × 3 = $3,300.
A trader buys June stock index futures and sells September stock index futures because he expects the near-term contract to outperform. The trader’s opinion is not simply “stocks up” or “stocks down.” He is focused on how one contract performs compared with another.
What is the key idea behind this trade?
What is relative price movement
A portfolio manager owns a $5,000,000 portfolio with a beta of 1.2. The futures contract value is $250,000. The manager wants to hedge the portfolio’s systematic risk exposure.
How many contracts are needed?
What is 24 contracts?
Layman’s Terms Explanation:
First multiply the portfolio value by beta: $5,000,000 × 1.2 = $6,000,000 adjusted exposure. Then divide
A grain elevator and a commercial counterparty arrange to exchange a cash commodity position for a related futures position. The transaction allows them to transfer risk between the physical and futures markets. This is not a normal open-market order placed just to speculate on price movement.
What is this transaction called?
What is an exchange for physicals order
A trader has $10,000 in a futures account. A position loses $3,700 in one day, leaving the account with $6,300. If the maintenance margin is $7,000, how much below maintenance is the account?
What is $700 below maintenance
Layman’s Terms Explanation:
Start with $10,000 and subtract the $3,700 loss. That leaves $6,300. Since maintenance is $7,000, the account is $700 short.
A trader buys stock index futures because she believes the broad equity market will rally after a strong jobs report. The trade gives her exposure to the overall market without buying individual stocks. Her risk is still substantial because futures are leveraged.
What is:
A. A bullish stock index futures trade
B. A covered call
C. A short hedge
D. A physical delivery strategy
What is A. A bullish stock index futures trade
A trader enters a spread at 6 points and exits at 14 points. Each point is worth $250. The spread moved 8 points in the trader’s favor.
What is the profit?
What is $2,000
Layman’s Terms Explanation:
The spread moved 8 points: 14 - 6 = 8. Each point is worth $250. So 8 × $250 = $2,000.
A hedger has a cash price of 710 and a futures price of 735 when the hedge begins, creating a negative basis of 25. Later, the cash price is 690 and the futures price is 705, creating a negative basis of 15. The hedge did not move perfectly, but the basis changed in the hedger’s favor.
What happened to the basis?
What is the basis strengthened by 10 cents
Layman’s Terms Explanation:
The basis moved from -25 to -15. That means it became less negative and moved closer to zero. A move from -25 to -15 is a 10-cent strengthening.