Series 3 – National Commodities Futures Practice Exam
1. Which of the following best describes the primary economic purpose of futures markets?
A. To generate tax revenue for government entities
B. To allow small investors to invest in stocks of large corporations
C. To provide a mechanism for price discovery and risk transfer
D. To ensure all commodities are priced equally
Answer: C
Explanation: Futures markets exist primarily to facilitate risk transfer (hedging) and to aid in
efficient price discovery for commodities and financial instruments.
2. Which of the following statements is true regarding the evolution of futures markets?
A. They originated to trade foreign currencies only
B. They began as forward markets for agricultural commodities
C. They were first developed by stock exchanges to handle corporate shares
D. They emerged after the advent of modern electronic trading platforms
Answer: B
Explanation: Futures markets evolved from forward contracts used historically by farmers and
merchants to lock in prices for agricultural products, reducing uncertainty.
3. The primary difference between futures markets and securities (stock) markets is that
futures contracts typically involve:
A. Ownership interest in a company
B. An underlying asset delivered in the future or offset before delivery
C. Voting rights and dividend payouts
D. Regulation under the Securities and Exchange Commission exclusively
Answer: B
Explanation: Futures contracts are agreements to buy or sell an underlying asset in the future,
whereas stock transactions transfer ownership stakes in a company immediately.
4. Futures markets are considered more leveraged than most securities markets because:
A. Traders must pay for the entire contract value in cash upfront
B. Traders use margin, which is only a fraction of the contract’s notional value
C. The price of futures never changes
D. Futures markets prohibit speculation
, Series 3 – National Commodities Futures Practice Exam
Answer: B
Explanation: Futures margin requirements are typically a small percentage of the contract’s
value, creating greater leverage compared to outright securities purchases.
5. One of the main advantages of trading futures over stocks is:
A. Elimination of all market risk
B. Lower transaction costs and higher leverage
C. Guaranteed profits on every trade
D. No regulatory oversight
Answer: B
Explanation: Futures trades often have lower brokerage commissions (relative to contract size)
and higher leverage, but they still carry significant risk and are regulated.
6. When comparing futures markets to stock markets, which statement is most accurate?
A. Futures markets always have higher liquidity than stock markets
B. Stock markets are more regulated than futures markets
C. The primary goal of futures is hedging, while stocks focus on ownership
D. Futures never involve speculation
Answer: C
Explanation: Hedging is a foundational purpose of futures, whereas stock markets revolve
around investment in corporate equity. Both markets are regulated and can offer liquidity.
7. The Commodity Futures Trading Commission (CFTC) regulates:
A. Stock issuance by publicly traded companies
B. Spot market transactions in foreign currencies
C. Futures and options on futures markets in the United States
D. Municipal bond trading
Answer: C
Explanation: The CFTC is the federal regulatory agency overseeing U.S. futures and options on
futures markets, while the SEC handles securities (like stocks and bonds).
8. The concept of price discovery in the futures market implies that:
A. Prices are set arbitrarily by the exchange
, Series 3 – National Commodities Futures Practice Exam
B. Market participants collectively determine the fair value of the underlying
C. Regulators fix prices based on supply and demand
D. Each contract has the same price across all exchanges
Answer: B
Explanation: Price discovery occurs as buyers and sellers interact, finding a market equilibrium
that reflects current and expected supply and demand conditions.
9. One distinction between forward contracts and futures contracts is:
A. Forward contracts are standardized, while futures are custom
B. Futures contracts always require physical delivery
C. Futures contracts are traded on an exchange and are standardized
D. Forward contracts have a clearinghouse guarantee
Answer: C
Explanation: Futures are standardized and traded on regulated exchanges with clearinghouse
guarantees, whereas forward contracts are privately negotiated and not standardized.
10. Which of the following best describes a commodity futures contract?
A. It grants partial ownership in a commodity-producing company
B. It is an obligation to purchase or sell a specific commodity at a future date
C. It is an option to buy or sell a stock
D. It is a certificate of deposit with a fixed interest rate
Answer: B
Explanation: A commodity futures contract obligates the buyer (long) or the seller (short) to
take or make delivery, respectively, at a predetermined price and future date.
11. Futures trading enhances market efficiency by:
A. Eliminating speculation from the market
B. Guaranteeing profits to hedgers
C. Helping narrow bid-ask spreads and fostering continuous price discovery
D. Imposing identical position limits on all traders
Answer: C
Explanation: Competition and standardized terms in futures contribute to narrower spreads and
continuous price updates, enhancing market efficiency.
, Series 3 – National Commodities Futures Practice Exam
12. One risk that is unique to futures markets, compared to equities, is:
A. The absence of a clearinghouse
B. Margin calls that can exceed initial deposits due to rapid price moves
C. Complete lack of regulation
D. Inability to offset a losing position
Answer: B
Explanation: Because futures are highly leveraged, adverse price moves can create margin calls
exceeding the initial deposit, necessitating additional funds.
13. Commodity futures markets exist mainly to help:
A. Minimize government spending on farm subsidies
B. Reduce price uncertainty for producers and end-users
C. Provide tax shelters for corporations
D. Create exclusive trading clubs for wealthy speculators
Answer: B
Explanation: By allowing producers and users to lock in prices, commodity futures markets
reduce uncertainty and risk due to fluctuations in prices.
14. Which of the following participants would be most likely to use futures for hedging
rather than speculation?
A. Day traders hoping to profit from price swings
B. A cattle rancher looking to lock in a price for feed
C. An individual investor seeking to diversify into metals
D. A high-frequency trading firm
Answer: B
Explanation: A rancher uses futures to secure feed costs at a known price, hedging against
upward price movements.
15. If a futures market did not exist, a likely impact on producers and consumers would be:
A. They would still hedge using standardized contracts
B. They would have no need to lock in prices
C. They might resort to less efficient methods like private forward contracts
D. The demand for commodities would drop to zero
1. Which of the following best describes the primary economic purpose of futures markets?
A. To generate tax revenue for government entities
B. To allow small investors to invest in stocks of large corporations
C. To provide a mechanism for price discovery and risk transfer
D. To ensure all commodities are priced equally
Answer: C
Explanation: Futures markets exist primarily to facilitate risk transfer (hedging) and to aid in
efficient price discovery for commodities and financial instruments.
2. Which of the following statements is true regarding the evolution of futures markets?
A. They originated to trade foreign currencies only
B. They began as forward markets for agricultural commodities
C. They were first developed by stock exchanges to handle corporate shares
D. They emerged after the advent of modern electronic trading platforms
Answer: B
Explanation: Futures markets evolved from forward contracts used historically by farmers and
merchants to lock in prices for agricultural products, reducing uncertainty.
3. The primary difference between futures markets and securities (stock) markets is that
futures contracts typically involve:
A. Ownership interest in a company
B. An underlying asset delivered in the future or offset before delivery
C. Voting rights and dividend payouts
D. Regulation under the Securities and Exchange Commission exclusively
Answer: B
Explanation: Futures contracts are agreements to buy or sell an underlying asset in the future,
whereas stock transactions transfer ownership stakes in a company immediately.
4. Futures markets are considered more leveraged than most securities markets because:
A. Traders must pay for the entire contract value in cash upfront
B. Traders use margin, which is only a fraction of the contract’s notional value
C. The price of futures never changes
D. Futures markets prohibit speculation
, Series 3 – National Commodities Futures Practice Exam
Answer: B
Explanation: Futures margin requirements are typically a small percentage of the contract’s
value, creating greater leverage compared to outright securities purchases.
5. One of the main advantages of trading futures over stocks is:
A. Elimination of all market risk
B. Lower transaction costs and higher leverage
C. Guaranteed profits on every trade
D. No regulatory oversight
Answer: B
Explanation: Futures trades often have lower brokerage commissions (relative to contract size)
and higher leverage, but they still carry significant risk and are regulated.
6. When comparing futures markets to stock markets, which statement is most accurate?
A. Futures markets always have higher liquidity than stock markets
B. Stock markets are more regulated than futures markets
C. The primary goal of futures is hedging, while stocks focus on ownership
D. Futures never involve speculation
Answer: C
Explanation: Hedging is a foundational purpose of futures, whereas stock markets revolve
around investment in corporate equity. Both markets are regulated and can offer liquidity.
7. The Commodity Futures Trading Commission (CFTC) regulates:
A. Stock issuance by publicly traded companies
B. Spot market transactions in foreign currencies
C. Futures and options on futures markets in the United States
D. Municipal bond trading
Answer: C
Explanation: The CFTC is the federal regulatory agency overseeing U.S. futures and options on
futures markets, while the SEC handles securities (like stocks and bonds).
8. The concept of price discovery in the futures market implies that:
A. Prices are set arbitrarily by the exchange
, Series 3 – National Commodities Futures Practice Exam
B. Market participants collectively determine the fair value of the underlying
C. Regulators fix prices based on supply and demand
D. Each contract has the same price across all exchanges
Answer: B
Explanation: Price discovery occurs as buyers and sellers interact, finding a market equilibrium
that reflects current and expected supply and demand conditions.
9. One distinction between forward contracts and futures contracts is:
A. Forward contracts are standardized, while futures are custom
B. Futures contracts always require physical delivery
C. Futures contracts are traded on an exchange and are standardized
D. Forward contracts have a clearinghouse guarantee
Answer: C
Explanation: Futures are standardized and traded on regulated exchanges with clearinghouse
guarantees, whereas forward contracts are privately negotiated and not standardized.
10. Which of the following best describes a commodity futures contract?
A. It grants partial ownership in a commodity-producing company
B. It is an obligation to purchase or sell a specific commodity at a future date
C. It is an option to buy or sell a stock
D. It is a certificate of deposit with a fixed interest rate
Answer: B
Explanation: A commodity futures contract obligates the buyer (long) or the seller (short) to
take or make delivery, respectively, at a predetermined price and future date.
11. Futures trading enhances market efficiency by:
A. Eliminating speculation from the market
B. Guaranteeing profits to hedgers
C. Helping narrow bid-ask spreads and fostering continuous price discovery
D. Imposing identical position limits on all traders
Answer: C
Explanation: Competition and standardized terms in futures contribute to narrower spreads and
continuous price updates, enhancing market efficiency.
, Series 3 – National Commodities Futures Practice Exam
12. One risk that is unique to futures markets, compared to equities, is:
A. The absence of a clearinghouse
B. Margin calls that can exceed initial deposits due to rapid price moves
C. Complete lack of regulation
D. Inability to offset a losing position
Answer: B
Explanation: Because futures are highly leveraged, adverse price moves can create margin calls
exceeding the initial deposit, necessitating additional funds.
13. Commodity futures markets exist mainly to help:
A. Minimize government spending on farm subsidies
B. Reduce price uncertainty for producers and end-users
C. Provide tax shelters for corporations
D. Create exclusive trading clubs for wealthy speculators
Answer: B
Explanation: By allowing producers and users to lock in prices, commodity futures markets
reduce uncertainty and risk due to fluctuations in prices.
14. Which of the following participants would be most likely to use futures for hedging
rather than speculation?
A. Day traders hoping to profit from price swings
B. A cattle rancher looking to lock in a price for feed
C. An individual investor seeking to diversify into metals
D. A high-frequency trading firm
Answer: B
Explanation: A rancher uses futures to secure feed costs at a known price, hedging against
upward price movements.
15. If a futures market did not exist, a likely impact on producers and consumers would be:
A. They would still hedge using standardized contracts
B. They would have no need to lock in prices
C. They might resort to less efficient methods like private forward contracts
D. The demand for commodities would drop to zero
