Series 3 — National Commodity Futures Exam — All Questions
15 questions
The buyer of a call option on a futures contract has the right to:
- a.Go long the underlying futures at the strike price✓
- b.Go short the underlying futures at the strike price
- c.Require the writer to deliver the physical commodity immediately
- d.Collect the premium from the writer
A call gives its buyer the right to buy, meaning to establish a long futures position at the strike price. A put gives the right to go short. The premium flows from the buyer to the writer, not the reverse.
What is the maximum loss for the buyer of a put option on futures?
- a.Unlimited
- b.The premium paid for the option✓
- c.The strike price times the contract size
- d.The initial margin on the underlying futures
An option buyer can never lose more than the premium paid, regardless of how the market moves. This defined, limited risk is a key reason hedgers and speculators buy options instead of trading futures outright.
A call option on futures with a strike price of 50 is trading while the underlying futures price is 56. The option is:
- a.Out of the money by 6
- b.At the money
- c.In the money by 6✓
- d.Worthless because it has no time value
A call is in the money when the futures price is above the strike. Here 56 minus 50 gives 6 points of intrinsic value, so the call is in the money by 6. Any premium above 6 would be time value.
An option that may be exercised only on its expiration date is called:
- a.A European option✓
- b.An American option
- c.A naked option
- d.A synthetic option
A European option may be exercised only on the expiration date, while an American option can be exercised at any time up to and including expiration.
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
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.
A 1,300 call on soybean futures has a premium of 42 when the futures are at 1,325. The call's intrinsic value and time value are:
- a.42 and 0
- b.25 and 17✓
- c.0 and 42
- d.17 and 25
Intrinsic value is the amount the futures price exceeds the call's strike: 1,325 − 1,300 = 25. Time value is the portion of the premium above intrinsic value: 42 − 25 = 17.
Other things equal, which option has the most time value?
- a.All have equal time value
- b.One expiring next week
- c.One expiring tomorrow
- d.One expiring in six months✓
The CFTC states that the longer the time remaining until expiration, the greater an option's time value.
The person who sells an option and takes on the obligation to perform if it is exercised is the:
- a.Clearing member
- b.Writer✓
- c.Purchaser
- d.Holder
The option writer originates the contract by promising to perform in return for the premium; the writer is also called the grantor or seller. The purchaser holds a right, not an obligation.
At expiration, which part of an option's premium has disappeared?
- a.Intrinsic value
- b.The delta
- c.Time value✓
- d.The strike price
Time value is the portion of the premium above intrinsic value, and it is greater the longer the time remaining until expiration; at expiration no time remains, so only intrinsic value is left.
A trader buys a 4.50 call on corn futures for 0.12. At expiration the futures are 4.75. The profit per bushel is:
- a.0.25
- b.0.12
- c.0.37
- d.0.13✓
The call's intrinsic value at expiration is 4.75 − 4.50 = 0.25; subtracting the 0.12 premium gives 0.13. Answering 0.25 forgets the premium; 0.37 adds it.
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An option position consisting of a long call and a long put with the same expiration but different strike prices is a:
- a.Conversion
- b.Strangle✓
- c.Box spread
- d.Straddle
A strangle is the purchase of put and call options with the same expiration but different strike prices; a straddle uses the same strike.
A short call combined with a long position in the underlying futures is called a:
- a.Covered call✓
- b.Synthetic long put
- c.Naked call
- d.Reverse conversion
For options on futures, a covered call is a short call position combined with a long futures position. A naked call is sold without an offsetting position in the underlying.
An option with a delta of 0.25 would be expected to change by about how much if the underlying futures price rises by 4.00?
- a.1.00✓
- b.16.00
- c.0.25
- d.4.00
Delta is the expected change in an option's price for a one-unit change in the underlying: 0.25 × 4.00 = 1.00.
Which strategy gives a short hedger a minimum selling price while keeping the benefit of higher prices?
- a.Selling futures
- b.Selling calls
- c.Buying puts✓
- d.Selling puts
A put gives the right to a short futures position at the strike, so it sets a floor while the buyer's risk is limited to the premium and costs. Selling futures locks in the futures price and gives up gains from a rise.
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
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.