Series 3 Exam questions and answers
with solutions
Actuals - ANSWER The physical, or cash, commodity. The goods underlying a futures contract.
Arbitrage - ANSWER The purchase of a commodity against the simultaneous sale of a
commodity to profit from unequal prices. The two transactions may take place on different
exchanges, between two different commodities, in different delivery months, or between the
cash and future markets.
Basis - ANSWER The difference between cash price and the futures price of a commodity. CASH-
FUTURES=BASIS. Basis is also used to refer to the difference between prices at different markets
or between different commodity grades.
Bear Spread - ANSWER Sale of near-month futures contracts against the purchase of deferred
month futures contracts. Expect price to decline more in near month relative to the distant
month.
EX: Sell December contract and buy the more distant March Contract.
Beta - ANSWER A measure correlating stock price movement to the movement of an index. Beta
is used to determine the number of contracts required to hedge with stock index futures or
futures options.
Bull Spread - ANSWER The purchase of near-month futures contracts against the sale of
deferred-month futures contracts. Expect price increase more in near month relative to the
distant month.
,Limited Risk Spread - ANSWER A type of bull spread that is placed only when the market is near
full carrying charges.
Call - ANSWER The period at market opening or closing during which futures contract prices are
established by auction.
Call Option - ANSWER A contract giving the buyer the right to purchase something within a
specified time period at a specified price. The contract also obligates the seller to deliver, if the
buyer exercises.
Carrying Charges - ANSWER The cost of storing a physical commodity, consisting of interest,
insurance, and storage fees.
Usually reflected in the difference between Futures prices for different delivery months.
Cash Commodity - ANSWER A physical commodity, as distinguished from a futures contract,
which calls for the delivery of the "cash commodity" during the delivery period.
Clearinghouse - ANSWER An Agency associated with an exchange which guarantees all trades,
thus assuring contract delivery and/or financial settlement. The clearinghouse becomes the
buyer for every seller, and the seller for every buyer.
Clearing Member - ANSWER A clearinghouse member responsible for executing client trades.
Clearing members also monitor the financial capability of their clients by requiring sufficient
margins and position reports.
Commodity Futures Trading Commission (CFTC) - ANSWER a federal regulatory agency with
exclusive jurisdiction over all futures trading. The CFTC is empowered to regulate (among
others) the futures exchanges, futures commission merchants and their agents, floor brokers,
and traders. The agency was created by the Commodity Exchange Act of 1974.
, Commodity Pool Operator (CPO) - ANSWER An individual or firm who accepts funds, securities,
or property for trading commodity futures contracts, and combines customer funds into pools.
The larger the account/pool, the more staying power the CPO and his clients have. They may be
able to last through a dip in prices until the position becomes profitable. CPO's must register
with the CFTC, and are closely regulated.
Commodity Product-Spread - ANSWER The simultaneous purchase (or sale) of a commodity and
the sale (or purchase) of the products of that commodity.
Crush Spread - ANSWER A type of Commodity Product-Spread
EX: Buying soybeans and selling soybean oil and meal.
Crack Spread - ANSWER A type of Commodity Product-Spread
EX: Buying crude oil and selling gasoline and heating oil.
Commodity Trading Advisor (CTA) - ANSWER A person or company who analyzes the markets
and recommend trades. CTAs are required to be registered with the CFTC and to belong to the
NFA.
Contrarian Theory - ANSWER A theory suggesting that the general consensus about trends is
wrong. The contrarian would take the opposite position from the majority opinion to capitalize
on overbought or oversold situations.
Convergence - ANSWER The movement of nearby futures contract prices and cash market prices
coming together as the futures contract nears delivery and the two prices become one.
with solutions
Actuals - ANSWER The physical, or cash, commodity. The goods underlying a futures contract.
Arbitrage - ANSWER The purchase of a commodity against the simultaneous sale of a
commodity to profit from unequal prices. The two transactions may take place on different
exchanges, between two different commodities, in different delivery months, or between the
cash and future markets.
Basis - ANSWER The difference between cash price and the futures price of a commodity. CASH-
FUTURES=BASIS. Basis is also used to refer to the difference between prices at different markets
or between different commodity grades.
Bear Spread - ANSWER Sale of near-month futures contracts against the purchase of deferred
month futures contracts. Expect price to decline more in near month relative to the distant
month.
EX: Sell December contract and buy the more distant March Contract.
Beta - ANSWER A measure correlating stock price movement to the movement of an index. Beta
is used to determine the number of contracts required to hedge with stock index futures or
futures options.
Bull Spread - ANSWER The purchase of near-month futures contracts against the sale of
deferred-month futures contracts. Expect price increase more in near month relative to the
distant month.
,Limited Risk Spread - ANSWER A type of bull spread that is placed only when the market is near
full carrying charges.
Call - ANSWER The period at market opening or closing during which futures contract prices are
established by auction.
Call Option - ANSWER A contract giving the buyer the right to purchase something within a
specified time period at a specified price. The contract also obligates the seller to deliver, if the
buyer exercises.
Carrying Charges - ANSWER The cost of storing a physical commodity, consisting of interest,
insurance, and storage fees.
Usually reflected in the difference between Futures prices for different delivery months.
Cash Commodity - ANSWER A physical commodity, as distinguished from a futures contract,
which calls for the delivery of the "cash commodity" during the delivery period.
Clearinghouse - ANSWER An Agency associated with an exchange which guarantees all trades,
thus assuring contract delivery and/or financial settlement. The clearinghouse becomes the
buyer for every seller, and the seller for every buyer.
Clearing Member - ANSWER A clearinghouse member responsible for executing client trades.
Clearing members also monitor the financial capability of their clients by requiring sufficient
margins and position reports.
Commodity Futures Trading Commission (CFTC) - ANSWER a federal regulatory agency with
exclusive jurisdiction over all futures trading. The CFTC is empowered to regulate (among
others) the futures exchanges, futures commission merchants and their agents, floor brokers,
and traders. The agency was created by the Commodity Exchange Act of 1974.
, Commodity Pool Operator (CPO) - ANSWER An individual or firm who accepts funds, securities,
or property for trading commodity futures contracts, and combines customer funds into pools.
The larger the account/pool, the more staying power the CPO and his clients have. They may be
able to last through a dip in prices until the position becomes profitable. CPO's must register
with the CFTC, and are closely regulated.
Commodity Product-Spread - ANSWER The simultaneous purchase (or sale) of a commodity and
the sale (or purchase) of the products of that commodity.
Crush Spread - ANSWER A type of Commodity Product-Spread
EX: Buying soybeans and selling soybean oil and meal.
Crack Spread - ANSWER A type of Commodity Product-Spread
EX: Buying crude oil and selling gasoline and heating oil.
Commodity Trading Advisor (CTA) - ANSWER A person or company who analyzes the markets
and recommend trades. CTAs are required to be registered with the CFTC and to belong to the
NFA.
Contrarian Theory - ANSWER A theory suggesting that the general consensus about trends is
wrong. The contrarian would take the opposite position from the majority opinion to capitalize
on overbought or oversold situations.
Convergence - ANSWER The movement of nearby futures contract prices and cash market prices
coming together as the futures contract nears delivery and the two prices become one.
