Series 3 -> STC Flashcards -> RD

True or False: An illiquid market has a small bid/ask spread.

False. Illiquid markets have a large bid/ask spread.

What is the role of the Business Conduct Committee?

To investigate complaints against members, prevent manipulation, and ensure that members comply with the rules.

Which contracts may be delivered to any location at any time—futures or forwards?

Forwards

Floor traders are also known as ___________________.

Floor traders are also known as locals or scalpers.

_______ buy or sell futures to protect themselves against a change in the price of a commodity.

Hedgers

True or False: Floor traders are obligated to maintain a fair and orderly market.

False. Unlike equity market makers, floor traders are not obligated to maintain a fair and orderly market.

True or False: Cash forwards can be for any amount of a commodity.

True. Cash forward transactions are negotiated between a buyer and seller and can be for any amount.

True or False: Futures contracts are for any amount of the commodity.

False. Futures contracts are for specified quantities of a commodity.

In a forward contract, which party has obligations?

Both the buyer and seller have obligations.

What is the role of the Arbitration Committee?

To settle disputes arising between exchange members, member firms, and the public.

How does an investor offset a short position?

By going long or buying.

Which contracts have counterparty (i.e., personal) risk—futures or forwards?

Forwards

Where is delivery made for a futures contract?

At a warehouse that is "regular for delivery" and approved by the exchange.

If a seller makes delivery of a superior grade of a commodity, she will receive a ______ price.

Higher

Where is the basis grade for the delivery of a futures contract set?

On the futures exchange

If a seller makes delivery of an inferior grade of a commodity, he will receive a _____ price.

Lower

Explain the concept of being stopped.

It is a situation where the exchange forces a long trader to accept a delivery notice.

What is the difference between cash commodities and futures contracts?

Cash commodities are delivered immediately, while futures contracts deliver the commodity at a future date.

How does an investor offset a long position?

By shorting or selling.

May the seller of a futures contract deliver a superior grade of the commodity?

Yes. If a superior grade may be delivered, the seller will receive a premium price.

True or False: Having a large number of speculators present in a market is indicative of its potential high volatility.

False. Speculators add to a market's liquidity and, therefore, will reduce its volatility.

Where are Intercontinental Exchanges (ICE) found?

Europe, New York, and Canada

What type of investor seeks risk or is willing to accept risk?

A speculator

A market with many participants is called a _________ market.

Liquid market

Exchange members will deposit margin with the _________________.

Clearinghouse

What should a speculator do if he thinks the market will fall?

Sell (short) a futures contract

Who determines the time and place of delivery?

The seller

True or False: Hedgers enter positions primarily to make a profit.

False. Hedgers are primarily looking to offset their price risk.

Define liquid market.

A market that has numerous buyers and sellers actively competing against one another.

Describe the role of the clearinghouse.

The clearinghouse guarantees all trades. It becomes the buyer for all sellers and vice versa.

For a futures contract, why do the exchanges allow different grades of the commodity to be delivered?

To prevent cornering or the manipulation of the cash commodity.

The buyer of a futures contract is obligated to ____________________________________________.

Take delivery of the commodity when the contract expires.

Sellers are long/short?

Short

What is easier to offset, a futures contract or a cash forward?

Futures contracts are easier to offset; forwards are generally non-transferrable.

True or False: Futures contracts may trade over-the-counter.

False. All futures contracts are exchange-traded.

If a trader is buying a cash commodity, when will she take delivery?

Immediately (i.e., on the same day).

Floor traders execute orders for ______________.

Floor traders execute orders for themselves.

True or False: A futures contract that is purchased on the London ICE may be offset in New York.

True. ICE contracts trade in Europe, New York, and Canada.

Which contracts are transferrable—futures or forwards?

Futures

The seller of a futures contract is obligated to ____________________________________________.

Make delivery of the commodity when the contract expires.

A ______________ is the buyer for every seller and the seller for every buyer.

Clearinghouse

True or False: The Globex market is owned by the Intercontinental Exchange (ICE).

False. Globex is owned and operated by the Chicago Mercantile Exchange (CME).

Will the exchange buy/sell futures contracts?

No, exchanges never buy/sell contracts or set prices for commodities.

In a futures contract, which party has obligations?

Both the buyer and seller have obligations.

True or False: Certain futures contracts allow a superior or inferior grade to be delivered.

True. In some cases, the exchanges will allow a higher or lower grade of the commodity to be delivered.

What is the role of the Floor Committee?

To establish trading rules and settle disputes regarding floor trading.

Which contracts have a predetermined basis grade—futures or forwards?

Futures

Which contracts are negotiated outside of the trading pits—futures or forwards?

Forwards

May a seller of a futures contract deliver an inferior grade of the commodity?

Yes, an inferior grade may be delivered, but the seller will receive a discounted price.

Which contracts trade on centralized exchanges—futures or forwards?

Futures

True or False: Speculators will buy when they think the market will rise.

True. Speculators will buy when they think prices will rise and sell when they think they will fall.

True or False: Electronically traded Globex futures are interchangeable with floor traded equivalent futures.

True. Electronically traded futures are interchangeable (fungible) with floor traded equivalent futures.

True or False: Clearing houses generally require margin deposits on net trades.

True. If a customer is long 10 contracts and short 6, he would deposit margin for the 4 contracts he is net long.

What is Globex?

An electronic platform for the trading of futures and options that is owned and operated by the CME.

True or False: Speculators enter positions primarily to make a profit.

True. Speculators buy and sell for the purposes of making a profit.

The clearinghouse eliminates ______________ risk.

Counterparty risk

Define cash commodity price.

The price of a commodity for immediate delivery.

Define first notice day.

The first day in a delivery month when delivery of the cash commodity may be made.

True or False: A short may deliver a higher quality grade than the basis grade.

True. If a superior grade is delivered, the seller will receive a premium price.

Floor brokers execute orders for __________________.

Floor brokers execute orders for their customers.

Describe the role of the clearing house.

To guarantee that all trades eliminate counterparty risk and to collect margin deposits.

What is the standard delivery grade on a futures contract?

Basis grade

True or False: An offsetting transaction may be made after the last trading day.

False. All positions must be offset by the last trading day.

Where is the delivery size of a futures contract set?

On the futures exchange

The clearing house settles all positions on a ________ basis.

Daily basis

Buyers are long/short?

Long

A market with few participants is called a(n) ___________________ market.

Illiquid or thin market

Define clearing member.

A member that is permitted to enter and execute orders on the exchange.

What are some of the benefits of futures exchanges?

Futures exchanges provide a place to hedge price risk as well as speculate on futures prices.

List some of the more important exchange committees.

The Arbitration Committee, the Business Conduct Committee, and the Floor Committee

If a commodity pool has a life of over 5 years, how many years of performance history must be disclosed to new clients?

5 years

For arbitration claims of less than $50,000, the NFA will appoint ____ arbitrator.

One arbitrator

True or False: Clearing FCMs may process customer orders.

True. Clearing FCMs are exchange members and may process orders on that exchange.

Describe the transfer agreement.

Transfer agreements allow an FCM to transfer cash from a brokerage account to meet a margin call in a futures account.

True or False: A speculator may exceed position limits.

False. Position limits apply to speculators; however, bona fide hedgers are exempt from position limits.

If a CPO only operates one pool at a time and does not receive compensation, is the CPO required to register?

No, a CPO in this scenario is exempt from registration.

An FCM must _________ all customer funds from its own.

Segregate

What type of training program are NFA members required to establish?

Ethics training

Name the disciplinary actions the NFA may impose.

Expulsion, suspension, barring from association, censure, fine of $500,000, or issuance of a cease and desist order.

What triggers a BD’s filing of a Currency and Monetary Instrument Report (CMIR)?

When anyone physically transports or receives cash (or equivalents) exceeding $10,000 into, or out of, the U.S.

To how many FCMs may an IB introduce business?

As many as they want, however if an IB is guaranteed, the FCM may have them sign an exclusive agreement.

Account statements must be sent to customers at least ____________.

Quarterly

May an FCM accept customer funds?

Yes, FCMs may accept customer funds and hold customer accounts.

True or False: Formal rules of evidence apply for an NFA hearing panel case.

False. Formal rules of evidence need not apply.

If a commodity pool has more than $500,000 in net assets, how often must it report its income/losses to participants?

Monthly

True or False: Sophisticated clients with extensive experience need not be provided with an Option Disclosure Document.

False. All clients receive the disclosure document.

Identify the acronym: CFTC

Commodity Futures Trading Commission

CTAs may allocate bunched orders using any method provided it is ____ and _________.

Fair and equitable

CPOs need not register if gross contributions do not exceed $_________ and there are no more than _____ participants.

$400,000; 15 participants

The maximum fine the NFA can assess is $_________ .

$500,000

True or False: The NFA can conduct a spot audit without notifying the member.

True. Unannounced spot audits can be conducted by the NFA.

What are some of the objectives of the NFA?

Perform audits, enforce minimum financial requirements, uphold ethical standards, and establish training requirements.

True or False: FCMs are responsible for the arbitration awards of their guaranteed IBs.

True

What is a bunched order?

A type of order in which a CTA effects trades for multiple accounts on one ticket.

True or False: An account may not be opened if a customer refuses to provide background information.

False. A customer may refuse to disclose information, but her refusal must be documented on her account form.

Identify the acronym: NFA

National Futures Association

If an NFA member is under investigation, may the member continue to do business?

Yes, although the member may not resign.

True or False: CTAs may accept customer funds directly.

False. CTAs may only accept funds through an FCM.

How long may a CPO use a risk disclosure document?

12 months

When does a guaranteed IB's contract expire?

There is no expiration for a contract between an FCM and a guaranteed IB.