Series 3 — National Commodity Futures Exam Practice Test
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Sample practice questions
A few real questions from this free bank, with full explanations. Use the practice tool above for the whole set.
- 1. Futures Fundamentals
In a standardized exchange-traded futures contract, which term is NOT set in advance by the exchange?
- a.The quantity of the commodity per contract
- b.The acceptable grade or quality of the commodity
- c.The price at which the trade is executed
- d.The delivery months available for trading
Answer: c
Explanation: The exchange standardizes quantity, grade, delivery months, and delivery terms so contracts are fungible. Price is the one term left to the open auction market, negotiated between buyer and seller each time a trade occurs.
- 2. Hedging, Basis & Spreads
An intramarket (calendar) spread in futures involves:
- a.Buying a call and selling a put on the same contract
- b.Buying the same commodity on two different exchanges
- c.Buying two unrelated commodities
- d.Buying one month and selling another of one commodity
Answer: d
Explanation: A calendar or intramarket spread buys one delivery month and sells another of the same commodity, profiting from a change in the price difference between the two months. Because the legs move together, spreads typically carry lower risk than outright positions.
- 3. Regulations (CEA, CFTC, NFA, AML)
Before a non-institutional customer may begin trading futures, the firm must ensure the customer has received:
- a.The standardized risk disclosure statement describing the risk of loss
- b.A guarantee that losses will not exceed the initial margin
- c.A prospectus filed with the SEC
- d.Written approval from the CFTC for that customer
Answer: a
Explanation: Firms must deliver the standardized risk disclosure document, which explains that futures trading carries a substantial risk of loss, before opening the account. There is no guarantee against loss and no SEC prospectus for futures.
- 4. Futures Fundamentals
A futures market in which prices in each more distant month are progressively lower is in:
- a.Contango
- b.Backwardation
- c.A normal market
- d.Full carry
Answer: b
Explanation: Backwardation is a market situation in which futures prices are progressively lower in the distant delivery months; contango is the opposite.
- 5. Futures Fundamentals
A self-regulatory organization, in the CFTC's usage, is best described as:
- a.A bank that holds segregated funds
- b.A federal agency that writes futures laws
- c.A customer committee that reviews complaints
- d.An exchange or registered futures association
Answer: d
Explanation: The CFTC defines self-regulatory organizations as exchanges and registered futures associations that enforce financial and sales practice requirements for their members. The federal agency that administers the Commodity Exchange Act is the CFTC itself.
- 6. Hedging, Basis & Spreads
A baker buys wheat futures at $6.30 to hedge a purchase. When the bakery buys cash wheat at $6.05, futures are at $5.90. The net purchase price is:
- a.$6.30
- b.$6.45
- c.$5.65
- d.$6.05
Answer: b
Explanation: The futures lost $6.30 − $5.90 = $0.40, which adds to the cost: $6.05 + $0.40 = $6.45, equal to $6.30 plus the ending basis of +$0.15. A long hedge protects against increases; when prices fall instead, the futures loss offsets the cheaper cash price.
- 7. Options on Futures
A call on crude oil futures has a strike of $75. Crude futures trade at $75. The call is:
- a.At the money
- b.In the money
- c.Out of the money
- d.Deep in the money
Answer: a
Explanation: An option is at the money when its strike price equals the current price of the underlying. It has no intrinsic value, since intrinsic value requires the futures to be above a call's strike.
- 8. Options on Futures
When the clearing organization designates a writer to take the opposite futures position after an option is exercised, the process is called:
- a.Delivery
- b.Assignment
- c.Retender
- d.Offset
Answer: b
Explanation: Assignment is the designation by a clearing organization of an option writer who will be required to buy (for a put) or sell (for a call) the underlying futures when an option has been exercised.
- 9. Regulations (CEA, CFTC, NFA, AML)
Which registrants are generally required to be NFA Members in order to do business with other NFA Members on behalf of customers?
- a.Only CPOs and CTAs
- b.Floor traders only
- c.Only FCMs
- d.FCMs, IBs, CPOs, CTAs
Answer: d
Explanation: NFA Bylaw 1101 bars Members from carrying accounts, accepting orders or handling transactions for a non-Member that is required to be registered as an FCM, IB, CPO, CTA or LTM and is acting for customers, pools or clients.
- 10. Regulations (CEA, CFTC, NFA, AML)
An IB may not simultaneously be a party to more than how many guarantee agreements?
- a.Two
- b.One
- c.Three
- d.Any number, if each FCM agrees
Answer: b
Explanation: An introducing broker may not simultaneously be a party to more than one guarantee agreement.