1.

Errors in a disclosure document must be corrected within 31 calendar days of

discovery.? False

When an error is discovered, the document cannot be used until corrected and
all clients must be notified of the correction.

2. statements regarding CPO fees and expense disclosure requirements:

Fees charged under the CTA's contract to manage trading for the pool are not
considered up-front fees; only the CTA's initial management fee is an up-front
fee.

Fees and expenses initially deducted from an investment by a CPO (such as

start-up costs and legal and accounting fees) must be deducted as up-front fees
from a pool participant's gross capital contribution. In certain instances, up-front
fees and expenses may be amortized by the CPO (if IRS qualified), so they will
not appear as up-front deductions.

Up-front fees and expenses must be disclosed before a CPO can accept a
customer's capital or accept the customer as a participating investor

The CFTC offers no options for placement of up-front fees in the CPO's disclosure
document. Up-front fees must be displayed in tabular fashion on the front page of
the document.

3. If prices and open interest are rising, which of the following statements are
TRUE

I. Longs are buying.

II. Shorts are selling.

4. An individual registered solely as a CTA may perform all of the following

functions EXCEPT

CTAs may not clear trades unless they are also registered as FCMs. CTAs may
provide advice to speculators and hedgers through reports and newsletters and
perform account management under powers of attorney (trading authorization).

5. The seller of a T-bond (futures) put is obligated to buy (go long) a T-bond
futures contract.

6. An investor is long two gold May 910 puts for 2½. Gold futures are quoted at
908.65. What is the intrinsic value? Put strike price is 910 − 908.65 = 1.35.

7. Which of the following entities is primarily responsible for the content of

promotional materials distributed by an NFA member? A member's supervisors
8. A bear spread involves selling the near and buying the deferred. In an inverted
market, risk is virtually unlimited. If the anticipated price climb in the deferred
month does not occur, the deferred future will be sold at a loss.

9. Hypothetical trading results may be used in member promotional materials if

limitations are appropriately disclosed. The use of high-pressure sales tactics,
material omissions, and misleading implications of universal suitability are
prohibited.

10. A customer has up to 24 months (two years) to pursue financial restitution

through the CFTC's reparations program.

11. An offsetting futures offer exchanges price limits ?

guaranteeing a fill at the price limits

Price limits don't guarantee order execution, they operate to reduce market
volatility. Daily limits mean that no order may be filled beyond the limit, and daily
limits may affect whether the order may be filled.

12. An investor buys one June S&P 500 145 stock price futures call option for a
premium of 2.85 when the June futures contract is trading at 143.90. If, at the
expiration of the option, the underlying futures contract is trading at 151.50 (1 =
$250), the investor realizes

$151.50 futures price − 145 call strike price

$6.50 intrinsic value − 2.85 premium = $3.65 points (+) gained × 250 contract size
$912.50 (+) gain.

13. After a single day's trading at the limit, CBOT contract price limits expand by
150% on the following trading day. This would result in a new initial and
maintenance margins applying to all contracts

14. A customer who signs a margin agreement permits the FCM to automatically
transfer excess funds from the customer's commodities account to a securities
account if a deficiency is found in the securities account. False

A commodity account balance must be segregated from a securities account

and cannot be transferred unless the customer signs a supplemental agreement
(funds transfer form).

15. Customer financial information may help the FCM determine an initial
position size for the customer. The firm may set a conservative limit when the
account is opened and increase the limit as the customer demonstrates
reliability in trading and margin call satisfaction. establish a position size that is
appropriate to the customer's means

16. A client buys 2 Jan 1220 soybean puts for a premium of 6’0 and sells 2 Jan
1210 soybeans puts for a premium of 2’0. The underlying soybean futures
contract size is 5,000 bu. What is the breakeven point?

This question involves a put spread. The premium on the two long positions is 6
and the premium on the short positions is 2, therefore we have a net premium
that would be a debit of 4 points. This would be your maximum loss. To find the
breakeven point for a put spread, you must put down. This means to subtract the
net premium from the option with the higher strike price (1220 − 4 = 1216).

17. The open interest for all delivery months during a crop year for a particular
commodity cannot exceed the available supply of the actuals.? False

Open interest may vary widely over a contract's life. However, as a futures
contract nears its expiration, open interest will reflect the actual supply.

18. Which of the following statements regarding a futures risk disclosure

statement are TRUE?

A risk disclosure document must be made available to and signed by all

customers. Furthermore, it must state that spread positions may not be any safer
than net long or short futures positions.

19. An AP may transfer funds between stock and commodity accounts only if the
customer has signed a supplemental agreement. Without the supplemental
agreement, the AP may not transfer the funds even with the customer's
permission.

20. Which of the following futures professionals is required to provide risk

disclosure statements to customers? IB and FCM

Individuals who conduct futures business with the public must provide a risk
disclosure statement to customers. In contrast, disclosure requirements are
eased for qualified eligible purchases (QEPs). CPOs generally make QEPs.

28. Standard and Poor's 500 stock index futures are best suited for hedging?

S&P stock price index futures contracts reflect overall market performance
based on a large number of common stocks of companies in many diverse
industries a broadly diversified portfolio.

29. With regard to up-front fees with relationships with CTAs and CPOs, which of
the following items must be disclosed?

The amount of up-front fees (such as sales and administrative fees) and the
effect of those fees on returns must be disclosed. For CTAs, this is generally
accomplished with a breakeven analysis in a dilution table or other statement.
CPOs may also express the effect of up-front fees by disclosing the (net) amount
of proceeds available for investment after up-front fees are deducted.

30. A long hedge attempts to lower the purchase price, and a short hedge
attempts to increase the sales income of the actuals in the cash market.

31. A growth fund portfolio is valued at $2.4 million with a beta of 1.25. The S&P
500 (1 pt = $250) Mar 300 futures option is available for a hedge. Which do you
recommend to the manager as a hedge?

Market value to hedge = portfolio value $2.4 million × beta 1.25 = $3 million. S&P
$250 × 300 strike = $75,000; $3 million ÷ $75,000 = 40 puts. Thus, 40 contracts
will be necessary to hedge against a declining market.

32. A liquidating market is best understood as many positions being lifted. True

A characteristic of a liquidating market is decreasing open interest; traders are

getting out. As more investors offset their positions, fewer positions remain
open.

33. A market-if-touched (MIT) order to buy becomes a market order when a trade
occurs at or below the order price. True

A market-if-touched (MIT) order to buy is triggered at or below the order price.

34. Which of the following actions is NOT permissible for an associated person in
handling a nondiscretionary account?

Accepting a customer's instructions to take advantage of solid opportunities

when they arise and informing the customer of resulting order executions

In nondiscretionary accounts, the customer must authorize each transaction

before the AP enters an order. The customer may give the representative
discretion over the price and time of a trade, even in a nondiscretionary account.
Representatives may cancel a customer's previously entered orders and provide
fundamental and technical information.

35. An investor buys two Mar sugar 7.5 calls for .40 and two Mar sugar 7.5 puts
for .90. The option writer profits if the price of the Mar futures contract were

A long straddler profits if either the call or the put profits by an amount
exceeding the combined premiums. To find the higher breakeven on a straddle
(long or short), add the two (total) premiums to the strike price. To find the lower
breakeven, subtract the two (total) premiums from the strike price. If the long
straddler makes a profit above 8.8 or below 6.2, the straddle writer makes money
if it is below 8.8 or above 6.2.

36. Which of the following statements regarding advertising of actual

performance records is TRUE?

comparable Performance records must include the results of all reasonably

accounts.

37. Summary arbitration for customer disputes is required when the amount
involved is?

Summary arbitration (no hearing) is automatic when disputes are for $25,000 or
less.

38. An equal weighted index takes into account both the price and capitalization
of the underlying stock. False

An equal weighted index (or price equally weighted index) takes into account
only the price.

39. How long after preparation may a disclosure document be used by a CPO or
CTA?

CTA and CPO disclosure documents must be dated and can be used for only 12
months.

40. The bona fide hedger is exempt from position limits.

41. Associated persons must inquire about each customer's financial situation,
investment experience, and education to determine their suitability for trading
futures. False

There is no requirement in inquire about education level. However, regulations

require an RCR or AP to make inquiries about a customer's financial background
and use due diligence when deciding whether trading futures is suitable for the
customer.

42. The owner of both regulated futures and a securities account held at an FCM
receives a margin call for activity within the securities account. If excess equity
exists in the futures account, the firm may make the transfer if the customer has
signed a funds transfer (supplemental) agreement authorizing the firm to transfer
money from the regulated futures account to the securities account.

43. Open interest is best explained as the number of futures contracts?

bought or sold that have not been liquidated

The total number of futures contracts of a given commodity that has not yet
been offset is known as the open interest. Each open transaction has a buyer
and a seller. In working out open interest, only one side of the contract is
counted. Although there are two parties involved, there is only one contract.

44. The risks involved with trading options on futures contracts may be disclosed
on either a distinct options disclosure or a combined document that discloses
the risk of trading both futures and commodity option contracts.

45. Except for ex-pit transactions, there are certain circumstances in which
trades may occur at prices that are NOT officially quoted on the floor of a
commodity exchange.

The rules of the exchange specify that all prices must be accompanied by open
outcries. This open outcry procedure ensures that all prices at which trades
occur are officially quoted and recognized.

46. Which of the following is required to open a nondiscretionary futures trading

account?

Risk disclosure statement

47. Under CFTC and NFA rules, no NFA member or associate may conduct futures
business with a suspended trader.

48. If your client sold 50 call options with a delta of .2, how many futures would
she have to transact to achieve neutral status?

A delta of .2 means 20% of the movement in the underlying futures contract. The
number of options multiplied by delta equals the number of futures contracts to
transact (50 × .2 = 10).

49. Hedging cash corporate bonds with Treasury bond futures contracts
is best described as a?

Investors who employ a futures market whose underlying instrument(s) is(are)

related to but differ from the cash instrument which is at risk is deemed to be a
cross-hedge.

50. Which of the following customer records must be maintained by a commodity

trading advisor?

The CTA must maintain each client's signed acknowledgment of the risk
disclosure statement as well as the customer's written trading authorization
(limited power of attorney).

51. An associated person may enter an order for a customer even if there is a
shortage of funds in the account if the customer satisfactorily assures the AP
that sufficient funds are forthcoming
The AP may, at his discretion, accept the order subject to rules of the firm. If he
does, he must ensure that the firm will receive the margin money from the
customer. The representative is creating additional risk for the firm and must
have good reason for believing that the margin will be satisfied.

52. In July, a retail supplier of No. 2 heating oil (HO) needs to purchase 4.2
million gallons in 3 months. The spot price for the commodity is $2.96/gal. He
locks in his price by purchasing 100 futures contracts for delivery in New York
Harbor in three months at $3.00/gal. If the price of HO rises and converges with
the futures at $3.25 the net price of the HO to the hedger would be

HO futures price having converged with the spot price will be $3.25/gal. As the
long futures position was entered at a lower price of $3.00/gal, it will have gained
$0.25 per gallon ($3.25 − $3.00). With 100 contracts covering a total of 4.20
million gallons of heating oil, the total gain from the long futures position is
$1,050,000. In the end, the higher purchase price is offset by the gain in the
heating oil futures market, resulting in a net payment amount of $13,650,000 −
$1,050,000 = $12,600,000. This amount is equivalent to the amount payable when
buying the 4.20 million gallons of heating oil at $3.00/gal.

53. Your customer is short 2 February lean hogs futures (40,000 lbs) and long 2
May lean hogs. At initial placing of the positions, February is 100 points under
May; on offsetting both contracts, February is 400 under May. What is the result?

The position is a spread, and gain is in movements of the comparative prices.

Your customer is short the near, long the far. This is a normal market and if the
difference between the contracts gets larger (widens), a profit will be made. The
difference widens by 300 points by two contracts for 600 points.

54. The NFA may NOT act in the absence of a respondent's legal representation
by summary action.

The only exception to the respondent's right to legal representation throughout

NFA disciplinary proceedings is a summary action, in which the NFA orders a
violator to immediately cease business activities that present an immediate
danger to futures markets or customers. Although the NFA may act immediately
without a hearing, the respondent may appeal.

55. Confirmations must be sent no later than the next business day following
execution of the trade.
56. If an investor sells a feeder cattle May 106 put for 3.56 and the futures price
is 104.27, the put has?

When the market price of a futures contract is lower than the strike price of a
put on the futures, the put has intrinsic value. The strike price of the put is 106,
and the market is 104.27. The difference is 1.73 of intrinsic value, or the in-the-
money amount. Intrinsic value is not based on premium.

57. An investor who purchased May lean hogs and sold July lean hogs would be
considered an ? intracommodity spreader

This is the same commodity; therefore it is an intracommodity spread.

58. If an investor who is long an option is concerned with time value as a wasting
asset, he would attempt to find an option with as much time value in the
premium as possible.

False. Time value is a wasting asset; the most efficient option purchase would be
one with as little time value in it as possible.

59. A corporation will receive a $2.5 million return of principal from maturing
Treasury bills in 60 days. The company intends to reinvest in new T-bills. However
interest rates may decline. What would an associated person most likely
recommend? (T-bill futures have a $1 million par.)

Place an anticipatory hedge by buying three T-bill futures or calls on T-bill futures
today. The corporation's risk is that interest rates will decline (making T-bill
prices rise). The buy hedge will profit if rates indeed decline. To fully hedge its
$2.5 million investment, the corporation needs to buy three T-bill futures or
futures option contracts, each representing $1 million par value.

60. When a new long buys from a new short, open interest? Increases

When a new long buys from a new short, a position is created and open interest
increases by one.

61. In a trade resulting in a give-up, the customer may designate which broker
will receive it?

A customer will designate which firm receives the commission if two brokerage
firms are involved in executing the same transaction. They cannot split the
commission; only one can receive it.

62. Citing the results of one or a few profitable trades while excluding the results
of typical or poor trades is called Cherry picking

63. An introducing broker need NOT maintain customer disclosure documents if

such records are kept by the futures commission merchant. False
Rules of both the NFA and CFTC require each member to keep the customer's
signed acknowledgment of risk disclosure. Both a fully disclosed IB and its FCM
must maintain the records appropriate to their businesses.

64. A company intends to offer a $20 million bond issue in May. To hedge the
offering with T-bond futures ($100,000 par value), the company might consider

Hedgers often seek a position in a futures contract that will mature close to the
intended cash market transaction. Because the bonds will likely be issued in
May, June is a better choice than December. The correct number of contracts is
found by dividing the actual position ($20 million) by the contract size
($100,000).

65. Your customer is long 2 gold August futures and short 2 gold December
futures on the COMEX (each contract is 100 troy ounces). At the beginning, Aug
is a $3.75 discount to Dec and on offset of the positions Aug $1.15 premium to
Dec. What is the gain or loss?

Your customer is long the near, short the far. The difference changes from −$3.75
to +$1.15 for a gain of 4.90 × 2 positions = 9.80.

66. Customers' written acknowledgment of the risk disclosure document (for

futures contracts and/or options on futures contracts) must be maintained for
five years and must be accessible for two years.

67. Which of the following statements regarding up-front fees in a CPO's

disclosure document is(are) TRUE?

Up-front fees must be disclosed on the front page of the CPO's disclosure
document. A CPO's up-front fees and expenses do not include initial CTA
management fees but do include attorney and accounting fees.

68. According to NFA Rule 2-30, futures commission merchants are required to
verify the information provided by customers on their annual income and
previous investment and futures trading experience.?

Although they must collect such information, FCMs are not required to verify
customer information regarding annual income and previous investment and
futures trading experience.

69. Delta is defined as the change in the premium of an option?

Delta measures the responsiveness of a change in an option premium with a

given change in the price of the underlying futures contract, divided by a change
in the price of the underlying futures contract

70. A customer's educational background does not necessarily reveal suitability

for commodity trading.