Series 3 National Commodities Futures Exam Questions and Answers
Question 1. A grain merchandiser compares an exchange-traded corn futures contract with a privately
negotiated forward contract. Which feature most clearly distinguishes the futures contract?
A. It is standardized and normally cleared through a clearinghouse.
B. It can be created only by a commercial hedger.
C. Its price is fixed by federal regulators.
D. It always requires physical delivery at expiration.
Correct Answer: A. It is standardized and normally cleared through a clearinghouse.
Explanation: Exchange-traded futures use standardized contract terms and are normally cleared through a clearing
organization. A forward is typically a bilateral agreement whose terms can be customized by the counterparties. Most futures
positions are offset before delivery, so physical delivery is not the defining feature. Regulators oversee the market but do not
set the negotiated futures price.
Question 2. When a trader establishes a long futures position and holds it to settlement, what is the trader's
basic contractual exposure?
A. The trader has only a right to buy and no contractual obligation.
B. The trader benefits only if basis weakens, regardless of futures price.
C. The trader benefits from rising futures prices and is obligated under the contract unless the position is offset.
D. The trader receives the option premium and has no market exposure.
Correct Answer: C. The trader benefits from rising futures prices and is obligated under the contract unless the
position is offset.
Explanation: A long futures position gains when the futures price rises and loses when it falls. Futures create obligations for
both sides, unlike a purchased option, which gives its holder a right without an obligation to exercise. The long can normally
eliminate the obligation by making an offsetting sale before the contract's delivery process. Basis may matter to a hedger, but it
does not replace the long position's direct futures-price exposure.
Question 3. What is the basic market exposure of a trader who is short one futures contract?
A. The position gains when the cash price rises faster than the futures price in every case.
B. The position generally gains when the futures price declines and loses when it rises.
C. The position has no obligation unless the trader receives a delivery notice.
D. The position can lose no more than the initial margin deposit.
Correct Answer: B. The position generally gains when the futures price declines and loses when it rises.
Explanation: A short futures position is economically exposed to falling prices as favorable and rising prices as unfavorable.
Initial margin is a performance bond, not a cap on losses, so losses can exceed the original deposit. Delivery obligations can
arise if the position is held into the delivery period, but market exposure exists from the moment the short is opened.
Cash-price behavior matters to hedgers, yet the futures position itself is marked according to the futures price.
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,Question 4. A customer is long three December wheat futures and wants to liquidate the position before
delivery. What transaction normally offsets the position?
A. Buy three additional December wheat futures.
B. Buy three December wheat call options.
C. Sell three March wheat futures.
D. Sell three December wheat futures of the same contract.
Correct Answer: D. Sell three December wheat futures of the same contract.
Explanation: A futures position is ordinarily offset by taking the opposite side in the same contract month and quantity. Selling
three December contracts closes a long position of three December contracts. A different delivery month creates a spread
rather than an offset, and buying more futures increases the long exposure. Options can alter risk but do not by themselves
close the futures contract.
Question 5. A speculator is short two June crude oil futures and wants to close the position. Which action is
the direct offset?
A. Buy two June crude oil put options.
B. Buy two July crude oil futures.
C. Buy two June crude oil futures.
D. Sell two June crude oil futures.
Correct Answer: C. Buy two June crude oil futures.
Explanation: A short futures position is offset by buying the same number of contracts in the same delivery month. The
clearing process nets the opening sale against the later purchase. Selling more June contracts would increase the short
position, while trading July would create a calendar spread. An option position may hedge the risk but does not directly
liquidate the short futures.
Question 6. Why is the clearinghouse central to an exchange-traded futures market?
A. It becomes the buyer to every clearing seller and the seller to every clearing buyer, reducing bilateral counterparty
exposure.
B. It sets the cash-market price of the underlying commodity.
C. It guarantees that every customer will earn back deposited margin.
D. It predicts the settlement price and requires traders to follow that forecast.
Correct Answer: A. It becomes the buyer to every clearing seller and the seller to every clearing buyer, reducing
bilateral counterparty exposure.
Explanation: A clearinghouse interposes itself between clearing members so that participants face the clearing system rather
than relying solely on the original counterparty. This structure, together with margin and daily settlement, helps manage
counterparty credit risk. It does not guarantee trading profits or eliminate market risk. It also does not determine the underlying
cash-market price.
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,Question 7. A brokerage firm executes customer futures orders but is not itself a clearing member of the
exchange's clearinghouse. How are its trades typically cleared?
A. Directly by the CFTC for each customer.
B. By the customer's bank without a clearing intermediary.
C. Through a clearing member with which the firm has an arrangement.
D. They cannot be executed unless the firm becomes a clearing member first.
Correct Answer: C. Through a clearing member with which the firm has an arrangement.
Explanation: A non-clearing market participant can have its trades carried and cleared through a clearing member. Clearing
members meet the clearinghouse's financial and operational requirements and stand behind obligations submitted through
them. The CFTC regulates the market but does not clear individual customer trades. A bank may hold funds, but that function
is different from exchange clearing.
Question 8. In a physically delivered futures contract, the term 'basis grade' most nearly refers to what?
A. The lowest grade of commodity that can ever trade in the cash market.
B. The grade assigned to a broker's order-routing performance.
C. The quality grade used to calculate a customer's maintenance margin.
D. The standard deliverable quality against which delivery premiums or discounts are measured.
Correct Answer: D. The standard deliverable quality against which delivery premiums or discounts are measured.
Explanation: A physically delivered contract often specifies a par or basis grade as the reference quality for delivery. Other
permitted grades may be deliverable at stated premiums or discounts relative to that grade. The concept concerns contract
delivery specifications, not margining or broker performance. Cash markets may trade grades that are not deliverable under a
particular futures contract.
Question 9. A futures contract permits delivery of a higher-quality grade at a stated premium to the basis
grade. What is the purpose of the premium?
A. To adjust the invoice value for the superior deliverable grade.
B. To compensate the clearinghouse for higher volatility.
C. To convert a futures position into an option position.
D. To increase the buyer's initial margin after delivery.
Correct Answer: A. To adjust the invoice value for the superior deliverable grade.
Explanation: Delivery premiums adjust the delivery invoice when an allowed grade is valued above the contract's basis grade.
This helps different deliverable grades compete within the standardized delivery framework. The premium is not a margin
surcharge and does not compensate the clearinghouse for volatility. It also does not change the legal nature of the futures
contract.
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, Question 10. If an exchange allows a lower-quality deliverable grade at a discount, what does the discount
generally do?
A. It lowers the exchange's daily price limit.
B. It reduces the delivery invoice relative to the basis-grade value.
C. It reduces the number of contracts that must be delivered.
D. It guarantees the short a trading profit.
Correct Answer: B. It reduces the delivery invoice relative to the basis-grade value.
Explanation: A delivery discount adjusts the invoice price downward for a permitted grade valued below the basis grade. The
quantity of contracts and the exchange's price-limit rules are separate contract features. The discount is an adjustment to
delivery economics rather than a guaranteed source of profit. Actual profit or loss still depends on the trader's futures and
cash-market economics.
Question 11. Which price relationship is most characteristic of a normal carrying-charge market?
A. All delivery months must trade at exactly the same price.
B. Nearby futures always trade above deferred futures.
C. Cash prices must remain above every futures delivery month.
D. Deferred futures generally trade above nearby futures by amounts related to carrying costs.
Correct Answer: D. Deferred futures generally trade above nearby futures by amounts related to carrying costs.
Explanation: In a normal market, deferred futures commonly trade at premiums to nearby contracts that reflect storage,
financing, insurance, and other carrying costs. The relationship need not equal full carrying charges at every moment. An
inverted market has the opposite general shape, with nearby supplies commanding a premium. Cash and futures prices are
linked but are not required to maintain one fixed ranking across all maturities.
Question 12. What best describes a 'full carry' relationship between two delivery months?
A. The spread equals the trader's initial margin requirement.
B. The nearby month is at the daily price limit.
C. The deferred-month premium approximately reflects the cost of carrying the commodity from the nearby month to the
deferred month.
D. The deferred month is always below the nearby month by the storage cost.
Correct Answer: C. The deferred-month premium approximately reflects the cost of carrying the commodity from
the nearby month to the deferred month.
Explanation: Full carry refers to an interdelivery price difference that approximately compensates for the economic cost of
storing and financing the commodity over the interval. It is a price-structure concept, not a margin or price-limit rule. In a
carrying-charge relationship, the deferred month is normally above the nearby month, not below it. Supply constraints and
delivery economics can prevent the spread from reaching theoretical full carry.
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Question 1. A grain merchandiser compares an exchange-traded corn futures contract with a privately
negotiated forward contract. Which feature most clearly distinguishes the futures contract?
A. It is standardized and normally cleared through a clearinghouse.
B. It can be created only by a commercial hedger.
C. Its price is fixed by federal regulators.
D. It always requires physical delivery at expiration.
Correct Answer: A. It is standardized and normally cleared through a clearinghouse.
Explanation: Exchange-traded futures use standardized contract terms and are normally cleared through a clearing
organization. A forward is typically a bilateral agreement whose terms can be customized by the counterparties. Most futures
positions are offset before delivery, so physical delivery is not the defining feature. Regulators oversee the market but do not
set the negotiated futures price.
Question 2. When a trader establishes a long futures position and holds it to settlement, what is the trader's
basic contractual exposure?
A. The trader has only a right to buy and no contractual obligation.
B. The trader benefits only if basis weakens, regardless of futures price.
C. The trader benefits from rising futures prices and is obligated under the contract unless the position is offset.
D. The trader receives the option premium and has no market exposure.
Correct Answer: C. The trader benefits from rising futures prices and is obligated under the contract unless the
position is offset.
Explanation: A long futures position gains when the futures price rises and loses when it falls. Futures create obligations for
both sides, unlike a purchased option, which gives its holder a right without an obligation to exercise. The long can normally
eliminate the obligation by making an offsetting sale before the contract's delivery process. Basis may matter to a hedger, but it
does not replace the long position's direct futures-price exposure.
Question 3. What is the basic market exposure of a trader who is short one futures contract?
A. The position gains when the cash price rises faster than the futures price in every case.
B. The position generally gains when the futures price declines and loses when it rises.
C. The position has no obligation unless the trader receives a delivery notice.
D. The position can lose no more than the initial margin deposit.
Correct Answer: B. The position generally gains when the futures price declines and loses when it rises.
Explanation: A short futures position is economically exposed to falling prices as favorable and rising prices as unfavorable.
Initial margin is a performance bond, not a cap on losses, so losses can exceed the original deposit. Delivery obligations can
arise if the position is held into the delivery period, but market exposure exists from the moment the short is opened.
Cash-price behavior matters to hedgers, yet the futures position itself is marked according to the futures price.
1
,Question 4. A customer is long three December wheat futures and wants to liquidate the position before
delivery. What transaction normally offsets the position?
A. Buy three additional December wheat futures.
B. Buy three December wheat call options.
C. Sell three March wheat futures.
D. Sell three December wheat futures of the same contract.
Correct Answer: D. Sell three December wheat futures of the same contract.
Explanation: A futures position is ordinarily offset by taking the opposite side in the same contract month and quantity. Selling
three December contracts closes a long position of three December contracts. A different delivery month creates a spread
rather than an offset, and buying more futures increases the long exposure. Options can alter risk but do not by themselves
close the futures contract.
Question 5. A speculator is short two June crude oil futures and wants to close the position. Which action is
the direct offset?
A. Buy two June crude oil put options.
B. Buy two July crude oil futures.
C. Buy two June crude oil futures.
D. Sell two June crude oil futures.
Correct Answer: C. Buy two June crude oil futures.
Explanation: A short futures position is offset by buying the same number of contracts in the same delivery month. The
clearing process nets the opening sale against the later purchase. Selling more June contracts would increase the short
position, while trading July would create a calendar spread. An option position may hedge the risk but does not directly
liquidate the short futures.
Question 6. Why is the clearinghouse central to an exchange-traded futures market?
A. It becomes the buyer to every clearing seller and the seller to every clearing buyer, reducing bilateral counterparty
exposure.
B. It sets the cash-market price of the underlying commodity.
C. It guarantees that every customer will earn back deposited margin.
D. It predicts the settlement price and requires traders to follow that forecast.
Correct Answer: A. It becomes the buyer to every clearing seller and the seller to every clearing buyer, reducing
bilateral counterparty exposure.
Explanation: A clearinghouse interposes itself between clearing members so that participants face the clearing system rather
than relying solely on the original counterparty. This structure, together with margin and daily settlement, helps manage
counterparty credit risk. It does not guarantee trading profits or eliminate market risk. It also does not determine the underlying
cash-market price.
2
,Question 7. A brokerage firm executes customer futures orders but is not itself a clearing member of the
exchange's clearinghouse. How are its trades typically cleared?
A. Directly by the CFTC for each customer.
B. By the customer's bank without a clearing intermediary.
C. Through a clearing member with which the firm has an arrangement.
D. They cannot be executed unless the firm becomes a clearing member first.
Correct Answer: C. Through a clearing member with which the firm has an arrangement.
Explanation: A non-clearing market participant can have its trades carried and cleared through a clearing member. Clearing
members meet the clearinghouse's financial and operational requirements and stand behind obligations submitted through
them. The CFTC regulates the market but does not clear individual customer trades. A bank may hold funds, but that function
is different from exchange clearing.
Question 8. In a physically delivered futures contract, the term 'basis grade' most nearly refers to what?
A. The lowest grade of commodity that can ever trade in the cash market.
B. The grade assigned to a broker's order-routing performance.
C. The quality grade used to calculate a customer's maintenance margin.
D. The standard deliverable quality against which delivery premiums or discounts are measured.
Correct Answer: D. The standard deliverable quality against which delivery premiums or discounts are measured.
Explanation: A physically delivered contract often specifies a par or basis grade as the reference quality for delivery. Other
permitted grades may be deliverable at stated premiums or discounts relative to that grade. The concept concerns contract
delivery specifications, not margining or broker performance. Cash markets may trade grades that are not deliverable under a
particular futures contract.
Question 9. A futures contract permits delivery of a higher-quality grade at a stated premium to the basis
grade. What is the purpose of the premium?
A. To adjust the invoice value for the superior deliverable grade.
B. To compensate the clearinghouse for higher volatility.
C. To convert a futures position into an option position.
D. To increase the buyer's initial margin after delivery.
Correct Answer: A. To adjust the invoice value for the superior deliverable grade.
Explanation: Delivery premiums adjust the delivery invoice when an allowed grade is valued above the contract's basis grade.
This helps different deliverable grades compete within the standardized delivery framework. The premium is not a margin
surcharge and does not compensate the clearinghouse for volatility. It also does not change the legal nature of the futures
contract.
3
, Question 10. If an exchange allows a lower-quality deliverable grade at a discount, what does the discount
generally do?
A. It lowers the exchange's daily price limit.
B. It reduces the delivery invoice relative to the basis-grade value.
C. It reduces the number of contracts that must be delivered.
D. It guarantees the short a trading profit.
Correct Answer: B. It reduces the delivery invoice relative to the basis-grade value.
Explanation: A delivery discount adjusts the invoice price downward for a permitted grade valued below the basis grade. The
quantity of contracts and the exchange's price-limit rules are separate contract features. The discount is an adjustment to
delivery economics rather than a guaranteed source of profit. Actual profit or loss still depends on the trader's futures and
cash-market economics.
Question 11. Which price relationship is most characteristic of a normal carrying-charge market?
A. All delivery months must trade at exactly the same price.
B. Nearby futures always trade above deferred futures.
C. Cash prices must remain above every futures delivery month.
D. Deferred futures generally trade above nearby futures by amounts related to carrying costs.
Correct Answer: D. Deferred futures generally trade above nearby futures by amounts related to carrying costs.
Explanation: In a normal market, deferred futures commonly trade at premiums to nearby contracts that reflect storage,
financing, insurance, and other carrying costs. The relationship need not equal full carrying charges at every moment. An
inverted market has the opposite general shape, with nearby supplies commanding a premium. Cash and futures prices are
linked but are not required to maintain one fixed ranking across all maturities.
Question 12. What best describes a 'full carry' relationship between two delivery months?
A. The spread equals the trader's initial margin requirement.
B. The nearby month is at the daily price limit.
C. The deferred-month premium approximately reflects the cost of carrying the commodity from the nearby month to the
deferred month.
D. The deferred month is always below the nearby month by the storage cost.
Correct Answer: C. The deferred-month premium approximately reflects the cost of carrying the commodity from
the nearby month to the deferred month.
Explanation: Full carry refers to an interdelivery price difference that approximately compensates for the economic cost of
storing and financing the commodity over the interval. It is a price-structure concept, not a margin or price-limit rule. In a
carrying-charge relationship, the deferred month is normally above the nearby month, not below it. Supply constraints and
delivery economics can prevent the spread from reaching theoretical full carry.
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