Series 3 — National Commodity Futures Exam — All Questions
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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
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.
A customer's futures account equity falls below the maintenance margin level. What must the customer generally do?
- a.Deposit only enough to reach the maintenance level again
- b.Deposit funds to restore the account to the initial margin level✓
- c.Nothing, because losses are covered by the clearinghouse
- d.Liquidate the position within five business days
Once equity drops below maintenance margin, a margin call requires the customer to bring the account back up to the full initial margin level, not merely to the maintenance level. Restoring only to maintenance is a common distractor.
Futures margin is best described as:
- a.A good-faith performance bond ensuring the customer can meet obligations✓
- b.A partial down payment toward the purchase price of the commodity
- c.A loan from the broker that accrues interest
- d.A non-refundable fee paid to the exchange
Unlike securities margin, futures margin is a performance bond, not a loan or a down payment. It guarantees the trader can meet daily settlement obligations and is returned when the position is closed if no losses have consumed it.
The process by which the clearinghouse credits gains and debits losses to open futures positions each day is called:
- a.Conversion
- b.Offsetting
- c.Assignment
- d.Marking to market✓
Marking to market is the daily settlement process: every open position is revalued at the day's settlement price and the resulting gain or loss is posted to the account. This is why maintenance margin calls can occur daily.
A speculator who is long one futures contract will profit if:
- a.The futures price declines
- b.The futures price rises✓
- c.The basis weakens
- d.Volatility falls to zero
A long position agrees to buy, so it gains when the futures price rises above the entry price and loses when it falls. A short position profits from a price decline.
A customer wants to buy a futures contract but will not pay more than a specified price. The correct order to enter is a:
- a.Market order
- b.Stop order
- c.Buy limit order✓
- d.Market-if-touched sell order
A buy limit order sets a maximum acceptable price and executes only at that price or lower. A market order takes whatever price is available, and a stop order is used to trigger action once a price is reached, typically to limit a loss.
Because futures margin is only a small fraction of a contract's notional value, futures positions are characterized by:
- a.High leverage, so small price moves cause large percentage gains or losses✓
- b.Low leverage, so returns closely track the underlying cash market
- c.No leverage, because the full contract value is deposited
- d.Negative leverage in falling markets only
A small margin deposit controls a large contract value, producing high leverage. This magnifies both gains and losses as a percentage of the margin posted, which is central to the risk of futures trading.