Series 3 Test

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The Series 3 test,also known as the National Commodity Futures Examination, is a challenging and comprehensive assessment for men and women looking to enter this field of money management. In order to register for the National Futures Association, candidates must pass this exam.

The Series 3 exam consists of 120 multiple-choice questions, requires two-and a-half hours to complete, and is administered in two parts. The first portion is divided into seven content areas:

  1. The first content area, futures trading theory and basic functions terminology, covers general theory, the futures contract, the structure of futures markets, hedging theory, speculative theory, general futures terminology, and general options terminology.
  2. The second content areafutures margins, option premiums, price limits, futures settlements, delivery, exercise, and assignmentaddresses margin requirements; option premiums; price limits; offsetting contracts, settlements, and delivery; and options exercise, assignment, and settlement.
  3. The Series 3 test content area on types of orders, customer accounts, and price analysis covers basic characteristics and uses of various orders, additional orders, technical price analysis, fundamental price analysis, and interest rate analysis.
  4. The content area on basic hedging, basis calculations, and hedging futures addresses short hedging and long hedging, the basis, and hedging calculations.
  5. Spreading covers spread trading and the common types of spreads.
  6. The section on speculating in futures addresses profit/loss calculations for speculative trades (including spreads) and trading applications.
  7. The final content areaoption hedging, speculating, and spreadingaddresses option theory and option hedge, speculative, and spread strategies and calculations.

The second part of the Series 3 test focuses on regulation and includes questions devoted to general regulation, FCM/IB regulations, CPO/CTA, arbitration procedures, and NFA disciplinary procedures.

Series 3 Test Practice Questions

1. Which does not occur during the movement of commodities through the commodities cash market?

a. The commodities are obtained from sources such as mining or farming
b. The sources ship the commodities to middlemen who finish and store the commodities
c. The finished commodities are delivered to primary users who use the commodities to create products
d. The finished products are purchased by secondary users

2. Which item is specified in a forward contract?

a. The storage location of the commodity
b. The delivery date
c. The current market price of the commodity
d. The seller’s name and address

3. Which statement describes the difference between a normal market for futures and an inverted market?

a. In a normal market, commodity prices decrease over the long term
b. In a normal market, commodity prices increase over the short term
c. In an inverted market, commodity prices increase over the short term
d. In an inverted market, commodity prices decrease over the short term

4. What is the main factor used when determining the price on an exchange traded futures contract?

a. The number of ticks written into the contract
b. The delivery date prevailing price
c. The quality of the commodity
d. The location of delivery

5. What is the difference between the cash price of a commodity and the delivery price of a commodity called?

a. The basis
b. The spot price
c. The forward price
d. None of the above

Answers

1. D: The finished products are purchased by secondary users. The finished products are purchased by downstream users, not by secondary users. All commodities go through a four-step process that begins with the production of a commodity (such as wheat or corn) or the extraction of the commodity (from mining operations). These raw materials are sent to middlemen who pay the spot price to the producer. A middleman may be a feed lot for cattle or a storage facility. Middlemen then sell to primary users, which may include oil refineries, steel or lumber mills, or automobile manufacturers. Primary users turn the commodities into finished products that are then sold to the downstream, or end, user.

2. B: The delivery date. A forward contract is an agreement for the producer of a commodity to sell to a buyer at a specified price, time, and location. A forward contract provides some protections against price fluctuations caused by the laws of supply and demand, but it does not offer “hedge” protection to either buyer or seller. In addition to a specified price, date and location for the delivery of a commodity, a forward contract must also specify the quantity and the quality (condition) of the commodity being sold.

3. C: In an inverted market, commodity prices increase over the short term. Under normal market conditions, commodity prices increase as the length of time allotted for delivery or execution of the futures contract gets longer. It’s easier for commodities sellers to set a price in the short term than to set one in the long term because it’s easier to predict commodity prices one month into the future rather than three or four months in the future. An inverted, or opposite, situation occurs when a commodity becomes scarce, or when demand becomes unusually strong. A large number of buyers competing for a limited number of futures contracts for sale will result in a diminishing price curve, reflecting that the price in the short-term is higher than the price in the long-term.

4. B: The delivery date prevailing price. An exchange traded futures contract contains the quantity, quality, time and location of the delivery of a commodity. The futures contract does not contain a specific price. The price is set by the exchange as a range of prices, and is based on the prevailing commodity’s price at the time delivery is made. The price at delivery date is a guideline, and not the exact price, as the exchange traded futures contract contains an amount by which the delivery date prevailing price may be increased or decreased. The increases or decreases are set in incremental stages, or ticks. The actual price is the delivery date prevailing price plus or minus the number of ticks written into the contract.

5. A: The basis. Basis is a measure of the difference between a commodity’s price in the current period (the cash price) and its price at a delivery time in the future. The costs of transportation and storage, the condition of a commodity and routine supply and demand variables all contribute to an increased price for a commodity on the commodities futures exchange. The spot price is the current price at which a commodity can be bought or sold at a specified time and place. The spot price is the price quoted for commodities sold on the day of the quote. The forward price is the pre-determined delivery price for a commodity, decided by buyer and seller, and paid at a pre-determined date in the future.

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By Lindsay Downs

Last Updated: 04/12/2014

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