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Series 31 study materials
Series 31 study resources

Series 31 practice questions

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Question 1Futures Trading

The minimum performance bond (margin) that a futures commission merchant must collect from a customer for a new speculative futures position is set by:

  1. the National Futures Association for each contract market
  2. the exchange or clearing organization that clears the contract Correct answer.
  3. the customer's individual written agreement with the FCM
  4. the CFTC, case by case, for each speculative account

Explanation

Each exchange, through its clearing organization, establishes minimum performance bond levels for the contracts it lists. An FCM may require more from a particular customer, but may not accept less than the exchange minimum for speculative positions.

Question 2Futures Trading

A futures position is marked to market at the close of each trading day, and the resulting cash payment between the clearinghouse and a clearing member is called:

  1. a delivery margin
  2. a maintenance performance bond
  3. a variation settlement Correct answer.
  4. initial margin

Explanation

Daily gains and losses are credited to or debited from the account through variation settlement, which moves cash between the clearinghouse and its clearing members each day. Initial margin is the deposit required to establish a position, and maintenance is the minimum equity level that must be kept on deposit.

Question 3Futures Trading

A futures market is described as being in contango when:

  1. nearby delivery months are priced above deferred months
  2. the futures price equals the cash price for every delivery month
  3. open interest is larger than the available deliverable supply
  4. deferred delivery months are priced above nearby months Correct answer.

Explanation

Contango describes an upward-sloping futures curve in which later delivery months trade at a premium to nearby months. The premium generally reflects storage, insurance and financing costs carried until delivery.

Question 4Futures Trading

As a physically settled futures contract approaches expiration, its price tends to:

  1. converge to the cash price Correct answer.
  2. hold a constant discount to the cash price
  3. trade at a fixed premium to the cash price
  4. diverge progressively from the cash price

Explanation

Delivery arbitrage forces futures and cash prices together as expiration nears, because a deliverable contract must be worth approximately the cash commodity at the time of delivery. This convergence is why hedging effectiveness depends on the basis at the time the hedge is lifted.

Question 5Futures Trading

The clearinghouse's role in a matched futures trade is best described as:

  1. substituting its credit for that of the counterparties Correct answer.
  2. arranging delivery of the physical commodity between the parties
  3. lending customers the funds needed to meet margin calls
  4. guaranteeing only the short side of each trade

Explanation

Through novation the clearinghouse interposes itself between the original buyer and seller, becoming buyer to every seller and seller to every buyer. Each participant therefore faces the credit of the clearinghouse rather than the credit of an unknown counterparty.

Question 6Futures Trading

Compared with a forward contract, an exchange-traded futures contract is:

  1. exempt from regulation by a federal agency
  2. free of any obligation to post a performance bond
  3. negotiated privately and settled only at maturity
  4. standardized in its terms and marked to market daily Correct answer.

Explanation

Futures contracts are standardized as to quantity, quality and delivery month, are cleared, and are settled in cash each day. Forwards are privately negotiated agreements that typically settle once at maturity.

Question 7Futures Trading

A soybean farmer expects to harvest 40,000 bushels in October and wants protection against a price decline before the crop is sold. The standard hedge is to:

  1. wait for harvest and then sell the crop in the cash market
  2. sell November soybean futures now in a quantity matching the expected crop Correct answer.
  3. buy November soybean futures now
  4. sell November soybean futures only after the crop is harvested

Explanation

A producer hedges anticipated inventory by selling futures now in an amount approximating the expected production. If prices fall, the gain on the short futures position offsets the lower cash price received at sale.

Question 8Futures Trading

A cereal manufacturer will need to buy 100,000 bushels of wheat in six months and fears rising prices. The appropriate hedge is to:

  1. sell wheat futures now for a nearby delivery month
  2. sell wheat futures and buy them back at harvest
  3. buy wheat futures now for a month near the purchase date Correct answer.
  4. wait and buy wheat only when the six months have passed

Explanation

An anticipated buyer hedges by going long futures now, so that gains on the futures position offset the higher cash price paid when the wheat is actually purchased.

Question 9Futures Trading

A trader holds 400 contracts long in a market with a 500-contract speculative limit and also controls an account for a family member that is long 150 contracts in the same market. Under typical exchange rules the trader:

  1. is within the limit, because limits apply only to short positions
  2. exceeds the limit only if both accounts are traded by the same broker
  3. is within the limit, because each account is counted separately
  4. exceeds the limit, because accounts under common control are aggregated Correct answer.

Explanation

Speculative position limits apply to the net position a person holds or controls, including accounts of family members or entities over which the person has trading control. The aggregated position of 550 contracts exceeds the 500-contract limit.

Question 10Futures Trading

A grain elevator holds 800,000 bushels of corn inventory and wants a short futures position larger than the speculative limit. To obtain a bona fide hedge exemption it must generally demonstrate that the position:

  1. will be held for fewer than thirty days
  2. offsets documented risk in the hedger's cash market business Correct answer.
  3. is matched by an equal number of long call options
  4. will be liquidated before the delivery month begins

Explanation

Hedge exemptions are granted where the position is economically appropriate to reducing risk in the hedger's commercial cash business and the exposure can be documented. The size of the position must be justified by the cash exposure being hedged.

Question 11Futures Trading

A person whose futures position reaches a reportable level must file large trader reports with:

  1. the CFTC, through the carrying futures commission merchant Correct answer.
  2. the exchange's delivery committee
  3. the Treasury's Office of Financial Stability
  4. the National Futures Association alone

Explanation

Once a position reaches the reportable level set for a contract, the trader files large trader reports with the CFTC, ordinarily submitted through the FCM that carries the account. The reports identify the trader and the size and purpose of the position.

Question 12Futures Trading

An exchange for physical transaction (EFP) consists of:

  1. a simultaneous cash trade and an offsetting futures trade Correct answer.
  2. a large order filled away from the pit at the previous settlement price
  3. two futures trades made at different exchanges and netted
  4. a swap of a futures position for a forward position with a dealer

Explanation

An EFP pairs an over-the-counter cash or forward transaction with an equal and opposite futures transaction. It is commonly used to shift a hedge between the cash and futures markets without separate execution risk.

Question 13Futures Trading

A cash-settled futures contract, at expiration, requires:

  1. settlement at the price at which the position was opened
  2. a final cash payment tied to a designated index price Correct answer.
  3. assignment of the position to another customer
  4. delivery of a warehouse receipt to the clearinghouse

Explanation

Cash-settled contracts have no deliverable supply; at expiration the position is closed out at a final settlement price derived from the specified index or reference price, and the gain or loss is paid in cash.

Question 14Futures Trading

A daily price limit on a futures contract:

  1. caps the number of contracts that may trade in a session
  2. limits each customer to one position per delivery month
  3. sets the minimum order size the exchange will accept
  4. restricts how far price may move from the prior settlement Correct answer.

Explanation

A daily limit bounds the permitted move from the previous settlement price during a trading session. Many exchanges expand the limit or switch to a variable limit after a limit move.

Question 15Futures Trading

A futures contract for 42,000 gallons trades in minimum increments of $0.0001 per gallon. The value of one tick is:

  1. $4.20 Correct answer.
  2. $1.05
  3. $0.42
  4. $42.00

Explanation

The tick value is the contract size multiplied by the minimum price increment: 42,000 gallons x $0.0001 per gallon = $4.20.

Question 16Futures Trading

A customer is long July and short December contracts in the same futures market. The exchange typically:

  1. charges no margin on the short leg of the spread
  2. prohibits holding offsetting positions in the same account
  3. applies a lower spread rate than for two outright positions Correct answer.
  4. requires margin equal to twice the single outright rate

Explanation

Because the legs of a spread tend to move together, the risk of the combined position is less than the sum of two outright positions, so exchanges publish a reduced spread margin rate.

Question 17Futures Trading

A stock index futures contract is quoted at 2,450.00 with a multiplier of $50. One contract's notional value is:

  1. $245,000
  2. $122,500 Correct answer.
  3. $12,250
  4. $49,000

Explanation

Notional value equals the index level times the contract multiplier: 2,450.00 x $50 = $122,500.

Question 18Futures Trading

For a physically delivered futures contract, the first notice day is the first day on which:

  1. a seller may tender a notice of intent to deliver Correct answer.
  2. the clearinghouse assigns deliveries to hedgers only
  3. buyers must deposit the full contract value
  4. trading in the expiring contract is halted

Explanation

On the first notice day, sellers holding short positions in the expiring month may begin presenting delivery notices through the clearinghouse. A long who does not wish to receive delivery must offset the position before a notice is assigned.

Question 19Futures Trading

Open interest in a futures contract is:

  1. the volume of contracts traded in the most recent session
  2. the number of contracts outstanding and not yet offset or delivered Correct answer.
  3. the total number of accounts carried by the clearinghouse
  4. the quantity of the commodity held in exchange warehouses

Explanation

Open interest counts contracts still open, with each contract counted once even though it has both a long and a short holder. It rises when new positions are established and falls when positions are offset or delivered.

Question 20Futures Trading

Because a futures position is controlled with a performance bond that is a small fraction of contract value:

  1. small price moves produce large swings in customer equity Correct answer.
  2. the position carries no market risk
  3. returns are reduced in proportion to the bond posted
  4. losses on the position cannot exceed the performance bond

Explanation

The performance bond is only a good-faith deposit against a much larger contract value, so percentage changes in the customer's equity are magnified relative to the price change. Losses can exceed the deposit and trigger a margin call.

Question 21Futures Trading

A fund holds a long position in a market that is in persistent contango and rolls the position forward each month. All else equal, the roll will:

  1. produce a positive roll yield, since deferred contracts are cheaper
  2. have no effect on returns, because the old contract is offset
  3. produce a negative roll yield, since each new contract costs more Correct answer.
  4. remove the fund's exposure to the underlying commodity

Explanation

In contango the deferred contract the fund buys is more expensive than the expiring contract it sells, so a long holder repeatedly sells low and buys high. That slippage is a negative roll yield.

Question 22Futures Trading

The basis in a hedging context is defined as:

  1. the change in the futures price over one trading session
  2. the spread between the nearby and a deferred futures month
  3. the commission charged for making or taking delivery
  4. the cash price minus the futures price of the hedging contract Correct answer.

Explanation

Basis measures the relationship between the local cash price and the price of the futures contract used for hedging. A weakening basis hurts a short hedger, while a strengthening basis hurts a long hedger.

Question 23Futures Trading

In a give-up transaction, a customer's order is executed by one firm and then:

  1. transferred to the exchange's error account
  2. cancelled and re-entered by another firm at the same price
  3. reported to the CFTC as an error trade
  4. cleared and carried by a different firm chosen by the customer Correct answer.

Explanation

In a give-up, the executing broker gives the trade up to another clearing firm designated by the customer, which then clears and carries the position. The practice lets customers route orders to multiple executing brokers while keeping clearing at one firm.

Question 24Futures Trading

A customer's account equity falls below the maintenance performance bond level. The customer must generally:

  1. deposit only the amount required to bring equity back to the maintenance level
  2. close out all open positions in the account on the same trading day
  3. pay the exchange a penalty equal to the amount of the shortfall
  4. restore equity to the initial performance bond level by the next business day Correct answer.

Explanation

A maintenance call requires the customer to restore equity to the initial performance bond level, typically by the next business day. If the call is not met, the FCM may liquidate positions to protect itself.

Question 25Futures Trading

A trader buys four contracts at 88.50 and later sells them at 89.20. Each full point in the contract is worth $1,000. The gain is:

  1. $280
  2. $7,000
  3. $2,800 Correct answer.
  4. $700

Explanation

The price gain is 89.20 - 88.50 = 0.70 point. Multiplying by the point value and the number of contracts: 0.70 x $1,000 x 4 = $2,800.

Question 26Futures Trading

A corn futures contract covers 5,000 bushels and trades in minimum increments of one-quarter cent ($0.0025) per bushel. The value of one tick is:

  1. $25.00
  2. $12.50 Correct answer.
  3. $6.25
  4. $1.25

Explanation

A tick is the smallest permitted price change for the contract. Multiplying the increment by the contract size gives $0.0025 × 5,000 bushels = $12.50.

Question 27Futures Trading

Which statement best describes the role of the clearinghouse for a futures exchange?

  1. It lends performance bond money to customers who cannot meet a margin call.
  2. It becomes the opposite party to every trade. Correct answer.
  3. It sets the commission rates that member firms may charge their customers.
  4. It takes the other side only when no public counterparty is available.

Explanation

Through novation the clearinghouse substitutes itself as seller to every buyer and buyer to every seller. This guarantees performance of each contract and eliminates counterparty credit risk between the original parties.

Question 28Futures Trading

At the close of each trading day a futures position is marked to market. This means the account is:

  1. closed out and re-established at the following day's opening price
  2. adjusted only for the exchange's daily clearing fee
  3. debited or credited for the day's price change Correct answer.
  4. charged a commission equal to the change in settlement price

Explanation

Each open position is valued at the daily settlement price, and the resulting gain or loss is paid into or out of the account in cash. The position itself remains open unless the customer offsets it.

Question 29Futures Trading

A market order is best described as:

  1. an order that becomes a market order once a given price trades
  2. an order executable only during the closing range
  3. an order to be filled at once at the best available price Correct answer.
  4. an order to buy or sell at a specified price or better

Explanation

A market order has no price restriction and is executed immediately at the best price available in the pit or on the electronic system. The customer accepts whatever price the market offers in exchange for prompt execution.

Question 30Futures Trading

A customer enters an order to buy at 4.50 limit while the market is trading at 4.55. The order is filled at 4.45. Which statement is accurate?

  1. The broker must charge the customer the 4.50 limit price.
  2. The order should have waited for the market to trade at exactly 4.50.
  3. The fill is proper; 4.45 is better than the limit price. Correct answer.
  4. The fill is improper and must be re-executed at 4.50.

Explanation

A buy limit order is to be executed at the stated price or any lower price. A fill at 4.45 is a price improvement and is entirely proper.

Question 31Futures Trading

Under customer protection rules, funds belonging to futures customers that are held by a futures commission merchant must be:

  1. kept apart from the firm's own funds Correct answer.
  2. available to the firm for short-term working capital
  3. deposited with an exchange-owned depository at all times
  4. commingled with the funds of the firm's partners

Explanation

Customer funds must be segregated from the firm's proprietary funds and held in properly titled accounts. Commingling customer money with the firm's own money is prohibited.

Question 32Futures Trading

In the standard futures month code, the letter Z identifies:

  1. December Correct answer.
  2. October
  3. November
  4. January

Explanation

Contract months are identified by letter codes running from F for January through Z for December. Z is the twelfth letter used in the sequence and designates December.

Question 33Futures Trading

A customer who is long 3 contracts sells 3 contracts of the same commodity and delivery month through the same clearing member. The customer's position is now:

  1. transferred to the clearinghouse as a new short position
  2. flat, because the two positions offset Correct answer.
  3. reported as 6 contracts of open interest until delivery
  4. converted into a spread position

Explanation

A long and an equal short position in the same contract cancel each other. This is called offsetting, and the customer is left with no open position.

Question 34Futures Trading

A customer places a sell stop at 3.10 while the market is trading at 3.25. The market falls sharply and the next trade is at 3.05. The order is:

  1. filled at exactly 3.10
  2. unfilled, because 3.10 never traded
  3. filled at about 3.05, possibly at a worse price Correct answer.
  4. filled at 3.25, the price when the order was entered

Explanation

A stop order becomes a market order once the stop price is reached, and it is then filled at the best available price. Because prices gapped through the stop, the customer may receive a price below 3.10.

Question 35Futures Trading

A customer places a sell stop at 3.10 with a limit of 3.05 while the market is trading at 3.25. The next trade prints 3.00. The order:

  1. is filled at 3.05 because the stop was elected
  2. is filled at 3.10
  3. is filled at 3.00
  4. is unfilled unless the market returns to 3.05 Correct answer.

Explanation

A stop-limit order has two conditions: the stop must be elected, and then the order trades only at the limit price or better. With the market at 3.00, a sell limit at 3.05 cannot be filled until prices rise back to that level.

Question 36Futures Trading

A buy market-if-touched order at 4.20 is entered while the market is trading at 4.40. Once the market trades at 4.20, the order will be executed:

  1. only if the market holds at 4.20 or lower for a specified period
  2. as a limit order capped at 4.20
  3. at the best available price then prevailing Correct answer.
  4. only at the close, if 4.20 traded during the session

Explanation

A market-if-touched order becomes a market order when the specified price is reached. It therefore carries no price protection beyond that trigger point.

Question 37Futures Trading

Treasury bond futures are quoted in points and 32nds, where one point equals $1,000 per contract. A price move from 98-16 to 98-24 is worth, per contract:

  1. $31.25
  2. $250.00 Correct answer.
  3. $80.00
  4. $500.00

Explanation

The move is 8/32 of a point. One 32nd equals $1,000 ÷ 32 = $31.25, so 8 × $31.25 = $250.00 per contract.

Question 38Futures Trading

Clearing members generally require a lower performance bond for a calendar spread than for two outright positions because:

  1. the exchange guarantees the spread against loss
  2. spreads are exempt from margin requirements
  3. the two legs tend to move together, reducing risk Correct answer.
  4. only one leg of a spread is marked to market

Explanation

Because the long and short legs are in related delivery months, their price changes largely offset, so the maximum probable loss is smaller. That lower risk is reflected in a reduced margin requirement.

Question 39Futures Trading

The last trading day of a futures contract is the day on which:

  1. the clearing member must move the position to a forward month
  2. trading in that contract ceases Correct answer.
  3. the exchange posts the final settlement price for the next contract month
  4. the first delivery notices may be issued

Explanation

The last trading day is the final session on which the expiring contract may be traded. After it, remaining positions must be settled by delivery or cash settlement according to the contract terms.

Question 40Futures Trading

A commercial firm holding futures positions that exceed the speculative position limit may do so provided that:

  1. it posts double the speculative performance bond
  2. the positions are bona fide hedges of its cash exposure Correct answer.
  3. the positions are carried in a proprietary account
  4. it holds the position for fewer than five trading days

Explanation

Exchanges grant hedge exemptions for positions that offset a real commercial exposure in the cash market. The exemption must be applied for and is limited to the quantity actually being hedged.

Question 41Futures Trading

As a physically delivered futures contract nears expiration, the futures price tends to converge toward the cash price because:

  1. delivery arbitrage links the two markets Correct answer.
  2. speculators are required to liquidate before the final week
  3. open interest rises sharply in the final week
  4. the exchange narrows the daily price limit near expiration

Explanation

At expiration the futures contract is a claim on the actual commodity, so traders can arbitrage any gap between futures and cash by making or taking delivery. That arbitrage forces the two prices together.

Question 42Futures Trading

A cereal maker hedges a planned purchase by buying futures at 3.50 and later buys cash wheat at 3.80 while selling the futures at 3.90. The effective cost per bushel is:

  1. 3.80
  2. 3.50
  3. 3.90
  4. 3.40 Correct answer.

Explanation

The futures gain is 3.90 − 3.50 = 0.40 per bushel. Subtracting that gain from the 3.80 cash purchase price gives an effective cost of 3.40.

Question 43Futures Trading

A hedger who owns canola and offsets the price risk with soybean oil futures is using:

  1. a carrying-charge hedge
  2. a strip hedge
  3. a cross-hedge Correct answer.
  4. an anticipatory hedge

Explanation

A cross-hedge uses futures on a different but related commodity because no contract exists for the exact cash item. It leaves the hedger exposed to basis risk between the two markets.

Question 44Futures Trading

Before an associated person may exercise discretion over a customer's futures account, the firm must have:

  1. a power of attorney filed only with the National Futures Association
  2. approval from the exchange's business conduct committee
  3. a written authorization signed by the customer Correct answer.
  4. verbal authorization confirmed by the customer within 30 days

Explanation

Discretionary authority requires the customer's prior written authorization, often referred to as a power of attorney, on file with the carrying firm. Trading ahead of that documentation is prohibited.

Question 45Futures Trading

A producer wants to hedge 75,000 bushels of corn using 5,000-bushel futures contracts. Ignoring any basis adjustment, the number of contracts required is:

  1. 5
  2. 15 Correct answer.
  3. 10
  4. 20

Explanation

The hedge size divided by the contract size gives the number of contracts: 75,000 ÷ 5,000 = 15. Any deviation in quality or location would be handled by adjusting the hedge ratio.

Question 46Futures Trading

A trader is long 10 March crude oil contracts and short 10 June crude oil contracts. This position is:

  1. an intramarket spread Correct answer.
  2. a cash-and-carry arbitrage
  3. a cross-hedge
  4. an intermarket spread

Explanation

A long and a short position in different delivery months of the same futures market is an intramarket, or calendar, spread. The trader is trading the price relationship between the two months rather than the outright price level.

Question 47Futures Trading

When the holder of a call option on a futures contract exercises the option, the holder:

  1. must take delivery of the physical commodity within two business days
  2. receives the difference between the strike price and settlement price in cash
  3. acquires a long futures position at the strike price Correct answer.
  4. acquires a short futures position at the strike price

Explanation

Exercising a call gives the holder a long position in the underlying futures contract at the strike price. The resulting futures position is then subject to normal margin and settlement rules.

Question 48Futures Trading

A feedlot operator who will need to buy corn in three months but has not yet contracted for it can protect against a price increase by:

  1. selling corn futures now and buying them back later
  2. buying corn futures now and selling them when the purchase is made Correct answer.
  3. waiting for the cash purchase and hedging afterward
  4. buying a put option on corn futures

Explanation

This is an anticipatory hedge: the operator locks in a price now for a need that has not yet arisen. The futures gain offsets a higher cash price later, and the position is closed when the corn is bought.

Question 49Futures Trading

The settlement price used to mark futures accounts to market each day is:

  1. a price determined by the exchange from the closing period's trades Correct answer.
  2. the highest price traded during the session
  3. the last trade of the session
  4. the average of the session's high and low

Explanation

Each exchange publishes rules for calculating the daily settlement price, typically from the range of trades during the closing period. It is not simply the final trade or an arbitrary point in the day's range.

Question 50Futures Trading

When a customer order is received by a firm's order desk, the firm must:

  1. record the time the order was received Correct answer.
  2. execute it within five minutes of receipt
  3. record only the time of execution on the order ticket
  4. confirm it in writing before routing it to the floor

Explanation

Order tickets must show the time an order is received as well as the time it is executed, so that the handling of the order can be reconstructed. Both times are required entries on the record.