National Commodity Futures Examination (Series 3) Review

Practice vocabulary flashcards for the National Commodity Futures Examination (Series 3) covering exchange operations, regulations, price forecasting, pricing, orders, margin, speculation, spreads, hedging, stock index futures, and commodity options.

Cash Forward Transaction

An agreement between a buyer and a seller for delivery of a specified amount of the cash commodity to be delivered at a specified time, price, and delivery point, which is typically a non-transferable agreement.

Futures Contract

A standardized agreement negotiated on an exchange involving specified amounts and grades of a commodity to be delivered from approved locations at specified times.

Basis Grade

The standard grade of a commodity that may be delivered on a futures contract as determined by the exchange.

Corner

A market condition occurring when an individual or group accumulates all or substantially all of the available supply of a commodity to dictate prices to short sellers; also known as a squeeze.

Speculator

An individual who buys a commodity expecting a price rise or sells expecting a decrease, assuming risks that hedgers wish to avoid in hopes of making profits.

Futures Commission Merchant (FCM)

An individual or business entity that solicits or accepts orders for futures or options and accepts money or property to margin those transactions; must maintain adjusted net capital of at least $1,000,000$.

Omnibus Account

An account opened by a non-clearing FCM with a clearing member FCM that carries multiple customers' trades on a non-disclosed basis.

Introducing Broker (IB)

A person or entity that solicits or accepts futures orders but does not accept money or property to margin transactions; must maintain adjusted net capital of at least $45,000$.

Commodity Trading Advisor (CTA)

An individual or entity that, for compensation or profit, advises others on the trading of futures or options contracts.

Commodity Pool Operator (CPO)

An individual or entity that pools funds from several customers to trade as a single account; exempt from registration if pool contributions are $400,000$ or less and participants are $15$ or fewer.

Associated Person (AP)

A natural person associated with an FCM, IB, CPO, or CTA who solicits customer orders or funds, or supervises those engaged in such activities.

Risk Disclosure Statement

A standardized document required by the NFA to be provided to and acknowledged by customers before they trade, highlighting that the risk of loss in commodity futures can be substantial.

Bunched Order

A single order placed by a CTA for multiple accounts where the contracts are allocated after execution.

Bucketing

An unethical and illegal practice where an FCM or IB fraudulently reports a completed trade to a customer while actually executing it later to retain a price difference profit.

Visible Supply

A report issued by the Chicago Board of Trade indicating stocks of grain in public elevators, afloat, or in store at certain loading centers, excluding stocks on farms.

Crop Year

The period starting with the harvest and running to the next harvest; for wheat, it is June $1$ to May $31$, and for corn, it is September $1$ to August $31$.

Hog-Corn Ratio

A feed ratio measuring the number of bushels of corn equivalent to $100$ pounds of live hogs, calculated as the price of hogs divided by the price of corn.

Open Interest

The total number of futures or options contracts that are still in effect and have not been liquidated or delivered.

Normal Market

A market where the nearest futures month is at the lowest price and distant months sell at progressively higher prices to reflect carrying charges; also called a carrying charge market.

Inverted Market

A market where near months sell at higher prices than advanced months due to a shortage of the cash commodity; also known as a discount market.

Resistance Level

A price level where heavy selling pressure is encountered, preventing further price increases.

Support Level

A price level where buying pressure is encountered, stopping a price decline.

Head and Shoulders Top

A bearish technical chart formation that indicates the reversal of an upward trend.

Lock Limit

A situation where the market price has moved to its daily limit above or below the previous day's settlement price and no trading can occur outside that limit.

T-Bond Futures

Long-term financial futures with a face value of $100,000$, quoted in increments of $\frac{1}{32}$ of a point (tick value of $31.25$).

Basis Point

A unit of measure for short-term financial futures equal to $\frac{1}{100}$ of $1\%$, with a value of $25$ for a $1,000,000$ Treasury bill contract.

Market-If-Touched (MIT) Order

An order that becomes a market order when the commodity trades at or through a specified limit price; buy MITs are placed below the market and sell MITs are placed above.

One Cancels the Other (OCO) Order

A transaction involving two alternative orders where the execution of one automatically cancels the other.

Exchange for Physicals (EFP)

An ex-pit transaction where two hedgers prearrange to exchange cash and futures positions outside the trading ring; also called against actuals.

Pyramiding

The practice of using excess equity in a margin account from unrealized profits to establish additional positions.

Crush Spread

The simultaneous purchase of soybean futures and the sale of soybean oil and soybean meal futures.

NOB Spread

A spread involving the purchase of $10$-year Treasury notes and the sale of $30$-year Treasury bonds, or vice versa (Notes Over Bonds).

Basis

The difference between the price of a cash commodity and the price of the nearest futures delivery month (Cash $-$ Futures).

Long the Basis

A hedger's position when they are long the cash commodity and short the futures contract.

Short the Basis

A hedger's position when they are short the cash commodity (committed to a fixed-price sale) and long the futures contract.

Intrinsic Value

The amount by which an option is in-the-money; for a call, it is the amount the futures price exceeds the strike price.

Time Value

The portion of an option premium that exceeds its intrinsic value, reflecting the time remaining until expiration and market volatility.

Delta

An estimate of how much an option premium will change in value for a $1.00$ change in the underlying futures price.

Synthetic Long Call

An options strategy created by being long a futures contract and long a put option.

Straddle

The simultaneous purchase or sale of both a call and a put on the same underlying futures with the same strike price and expiration date.