NFA: Series 3 Study Outline – National Futures Association

Text Preview:
EXAMINATION SUBJECT AREAS
         National Commodity Futures Examination

SERIES 3
The following is a general listing of the major subject areas covered by the examination and does not represent an ex-
haustive list of the actual test questions.

Part 1

    FUTURES TRADING THEORY AND BASIC FUNCTIONS
                   TERMINOLOGY


A.General Theory                                          E.Speculative Theory
    1. Development of futures markets                          1.Leverage
    2.Futures and securities compared                          2.Risk
      Rights                                                  3.Market liquidity
      Obligations                                             4.Price volatility
      Transfer of ownership
                                                          F.General Futures Terminology
B.The Futures Contract                                      Associated Person      Floor Broker
    1.Futures and forward contracts compared                Basis                  Floor Trader
    2.Offset provisions                                     Bucketing              Forward contract
    3.The clearinghouse function                            Carrying charges       Intoducing broker
      Clearing members                                     Churning               Inverted market   
      Non-clearing members                                 Clearinghouse          Limit up/down
    4. Delivery provisions                                  Convergence            Lock limit
      Basis grade                                          Commodity Pool         Long
      Premiums                                               Operator             Normal market
      Discounts                                            Commodity Trading      Pit
                                                              Advisor              Position Trader
C.The Structure of Futures Markets
                                                          Deferred                 Retender
    1.Normal markets
                                                            Discount               Scalper
      Carrying charges
                                                           Expit                   Short
      "Full carry" markets
                                                            Futures Commission Spot
    2.Inverted markets
                                                              Merchant             Variation call
      Supply shortages
                                                            First Notice Day       Warehouse receipt
      Other factors
                                                          
D. Hedging Theory                                         G.General Options Terminology
 1.Risk reduction                                         At-the-money             Out-of-the-money
   Unhedged position                                       Call                   Premium
   Effect on pricing of cash markets                     Conversion               Put
 2.Short hedging                                           Delta                   Spread
   Typical short hedgers: farmers,                       Exercise                 Straddle
 producers, holders of inventory                          Expiration               Strangle
   Effect on pricing of cash markets                       Grantor                Synthetic 
 3.Long hedging                                            In-the-moneyOptions/Futures
   Typical long hedgers: processors,                       Intrinsic Value        Time value
manufacturers, exporters                                                           Writer
   Protection against price rise

                                                     12
  Series 3 (continued)
             FUTURES MARGINS, OPTION PREMIUMS,
     PRICE LIMITS, FUTURES SETTLEMENTS, DELIVERY,
                      EXERCISE, AND ASSIGNMENT
  A.Margin Requirements             C.Price Limits
   1. The nature of futures margin                     1.Effect of limit-up/down price change
     Performance bond                                 2.Expanded limits
     Comparison with securities margin                3.Effects on margin of limit moves
     Authority of exchanges to establish and          4.Lock limit
  revise requirements                                  5.Circuit breakers
     Initial and maintenance requirements
     Documentation: margin agreement, 
                                                   D.Offsetting Contracts, Settlements, Delivery
                                                    1.Liquidating long and short positions
   transfer of funds agreement
                                                    2.First notice day
   2.Margin calculations
                                                    3.Trading in the spot month
     Initial
                                                    4.The clearinghouse role in the delivery
     Maintenance/variation
                                                    5.Delivery notices
     Effects of substantial price movement
                                                    6.Retenders/stopped notices
     Effects of change in requirements on 
                                                    7.Physical delivery, warehouse receipts
   new and existing positions
                                                    8.Cash settled contracts; how settlement is 
     Withdrawal of excess equity
                                                   computed
   3.Alternative calculations
                                                     .Stock indices
     Hedge margin
                                                      Municipal bonds
     Spread margin
                                                      Eurodollars
  B.Option Premiums                                 9. EFP's
    1.Intrinsic value
    2.Time value
                                                   E.Options Exercise, Assignment, Settlement
                                                       1.Process of assignment
    3.The delta
                                                       2.Margin requirements upon exercise
    4.Premium quotations
                                                       3.Final trading/exercise dates
   Note: where different from underlying 
   contract (e.g., T-Bonds)


            TYPES OF ORDERS, CUSTOMER ACCOUNTS,
                       PRICE ANALYSIS

  A.
  
    Basic Characteristics and Uses of                  5.Gaps
      1.Market orders                                  6.Triangles: ascending and descending
      2.Stop orders                                    7.Double tops and bottoms
      3.Stop-limit orders                              8.Volume and open interest
      4.Market-if-touched orders                       9.Liquidating markets
      5.Orders on electronic markets
                                                   D.Fundamental Price Analysis
  B. Additional Orders                                 1.Effects of economic or political instability
      1.Good till canceled (GTC)                       2.Supply and demand elasticity
      2.Fill-or-kill                                   3.U.S. agricultural policies
      3.On close                                       4.Crop years
      4.One cancels the other (OCO)                    5.Hog/corn ratio

  C. Technical Price Analysis                      E.Interest Rate Analysis
 1.Charts: bar, point and figure                       1.Yield curves: positive, inverted, flat
 2.Trendlines                                          2.Effects of governmental policies
 3.Support/resistance levels                             Tax policy
 4.Congestion areas                              13      Monetary policy

Series 3 (continued)


              BASIC HEDGING, BASIS CALCULATIONS,

      HEDGING FUTURES                                        4.The basis in financial markets
                                                               Short-term rates vs. long-term rates
                                                               "Implied repo rate"
A.Short Hedging and Long Hedging
    1.Anticipatory hedges
                                                         C.Hedging Calculations
                                                           1.Net result of hedge
    2.Long the basis/short the basis
                                                           2.Net price received upon purchase or sale
B.The Basis                                                Examples:
  1.How determined                                        Grains                   T-Notes, T-Bonds
  2.Effect of basis charge on                             Livestock                T-Bills, Eurodollars
    The short hedger                                    Foodstuffs                Municipals
    The long hedger                                     Metals                    Currencies
  3.Effect on price of commodity actually                 Energy                   Stock indices
 delivered or purchased                                  Lumber
    Transportation costs
    Variation in deliverable grades




                                         SPREADING
A.Spread Trading                                         B.Common Types of Spreads
    1.Order execution                                        1.Carrying charge or limited risk spreads
    2.Expectations                                             Intra-market
      Narrowing or widening basis                             Inter-delivery
      Normal or inverted market strategies                  2.Bull and bear spreads
                                                             3.Intermarket spreads




                          SPECULATING IN FUTURES

A.Profit/loss calculations for speculative               B.Trading Applications
trades (including spreads)                                 1.Recommend appropriate speculative 
    1.Gross profit on speculative trades:                 trades given certain economic or 
 single or multiple contract positions                    technical circumstances
    2.Effect of commissions on gross profits               2.Use appropriate orders both to initiate 
    3.Return on (margin) equity calculations              and protect position
      Examples:
 Grains                      T-Notes, T-Bonds
 Livestock                   T-Bills, Eurodollars
Foodstuff                    Municipals
Metals                       Currencies
 Energy                      Stock indices
Lumber

                                                    14
Series 3 (continued)

         OPTION HEDGING, SPECULATING, SPREADING


A.Option Theory                                         D.Option Spread Strategies/Calculations
 1.Long                                                    1.Call bull spreads
   Limited risk                                             Spread to widen
   Increased leverage                                       Maximum profit/loss
   Total loss of investment (premium)                     2.Call bear spreads
possible                                                     Spread to narrow
 2.Short                                                     Maximum profit/loss
   Increased risk                                         3.Put bull spreads
   Earn premium                                             Spread to narrow
   Loss may exceed premium received                         Maximum profit/loss
                                                           4.Put bear spreads
B.Option Hedge Strategies/Calculations                       Spread to widen
  1.Long put as alternative to short futures 
                                                             Maximum profit/loss
hedge
                                                           5.Calendar spreads
  2.Long call as alternative to long futures 
                                                           6.Arbitrage spreads
hedge
  3.Allows for increased profit once 
 breakeven point is reached

C.Option Speculative Strategies/Calculations
  1.Long call as substitute for long futures
    Risk limited to premium
    Breakeven point
    Profit and return on equity
  2.Long put as substitute for short futures
    Risk limited to premium
    Breakeven point
    Profit and return on equity
  3.Long call to protect short futures 
 (synthetic long put)
  4.Long put to protect long futures (synthetic 
 long call)
  5.Long futures-short call (covered call)
  6.Conversions
  7.Reverse conversions (reversals)





                                                   15
Series 3 (continued)

   Part 2

                                      REGULATIONS

A.General                                     Rules for acceptance of customer funds
 1. CFTC registrations/NFA membership       2.Net capital requirements
    Floor Broker (FB)                      3.Financial reports
   Floor Trader (FT)                       4.Collection of margin deposits
   Associated Person (AP)                  5.Customer complaints
   Commodity Pool Operator (CPO)             Options-related complaints
   Commodity Trading Advisor (CTA)           Adjustments to accounts
   Introducing Broker (IB)                 6.Time-stamping requirements
   Futures Commission Merchant (FCM)       7.Promotional Material (NFA Compliance Rule 2-29)
   Exemptions from registration            8.Disclosure by FCMs and IBs required for 
   NFA membership                          costs associated with futures transactions
 2.Futures account opening requirements
                                           C.CPO/CTA
   Know Your Customer (NFA             
                                            1.Disclosure documents
 Compliance Rule 2-30)
                                              Upfront fees
   Verbatim risk disclosure statement
                                              Performance records
   Commodity customer agreement
                                              Disclosure statements
   Discretionary accounts
                                              Trading program
      Written authorization
                                              Five-year business background of principals
  Account supervision and review
                                              Conflicts of interest
  AP minimum experience requirement
                                            2.Records to be maintained
 3.Position reporting requirements
                                               Bunched orders
   Set by CFTC or exchanges
                                            3.Promotional Material (NFA Compliace Rule 2-29)
   Daily reports
   Applicable to both speculators and     D.      Arbitration Procedures
hedgers
 4.Speculative position limits             E.NFA Disciplinary Procedures
   Maximum net long or short position             1.Formal complaints
 specified by CFTC or exchanges                    2.Warning letters
   Bona fide hedgers' exemption                   3.Hearings
                                                     Offers to settle
B.FCM/IB Regulations                                 Appeal process
    1.Guaranteed and independent IBs               4.Member responsibility actions (MRA)
      Responsibilities of guarantor FCM           5.Penalties for violators
                                                     Fine
                                                     Cease and desist order
                                                     Expulsion

                                           F.      CFTC Commodity Exchange Act Enforcement





                                              16
Download Link:
Share Link: Forum Link:

More on Recreation

  • Picture: REPAIR PARTS MANUAL MODEL NO. SO17542LT 17.5 HP 42 INCH

    REPAIR PARTS MANUAL MODEL NO. SO17542LT 17.5 HP 42 INCH

    File Size: 754.45 KB, Pages: 20, Views: 265,464 views

    REPAIR PARTS MANUAL MODEL NO. SO17542LT 17.5 HP 42 INCH LAWN TRACTOR For Parts and Service, contact our authorized distributor: call 1-800-849-1297 For Technical Assistance: call 1-800-829-5886 433486 HOW TO USE THIS MANUAL This manual is designed to provide the customer with a means to …
  • Picture: Request for Information for Comprehensive Network Solution(s)

    Request for Information for Comprehensive Network Solution(s)

    File Size: 289.38 KB, Pages: 16, Views: 174,819 views

    Request for Information for Comprehensive Network Solution(s) September 17, 2014 This is an unofficial copy of the Request for Information for Comprehensive Network Solution(s). The official version will be posted on the Federal Business Opportunities Website at www.fbo.gov. Responses to this Request for Information shall …
  • Picture: Trusts & Estates Outline  Foster - Law School

    Trusts & Estates Outline Foster – Law School

    File Size: 437.23 KB, Pages: 50, Views: 34,594 views

    Trusts & Estates Outline Foster GENERALLY I Inheritance & Its Limitations...................................................................1 A. Gen'l Rule Testator can place conditions on inheritance b/c there is not natural/Constitutional right to receive property B. Limits on Conditions C. Reoccurring Issue Conflict b/t deadhand and interests of descendants/society II The …
  • Picture: BASIC PUMP OPERATIONS - California

    BASIC PUMP OPERATIONS – California

    File Size: 1,786.95 KB, Pages: 163, Views: 51,197 views

    BASIC PUMP OPERATIONS INSTRUCTOR GUIDE Approved by AL Fire Service Training and Education Program a component of the CALIFORNIA FIRE SERVICE TRAINING AND EDUCATION SYSTEM FIRST EDITION BASIC PUMP OPERATIONS INSTRUCTOR GUIDE Approved by AL Published by California State Fire Marshal California Fire Service Training …
  • Picture: SCOTT FORESMAN READING STREET - CMCSS

    SCOTT FORESMAN READING STREET – CMCSS

    File Size: 70.71 KB, Pages: 6, Views: 73,755 views

    Scott Foresman Reading Street Kindergarten 040013 Kindergarten Package (Box 1 of 5) Decodable Readers Classroom Set (36 titles) 1. Who Am I? 0-328-14464-9 2. Am I? 0-328-14465-7 3. The Little Toys 0-328-14466-5 4. At the Zoo 0-328-14467-3 5. Animal Friends 0-328-14468-1 6. Let's Go 0-328-14469-X …

Leave a Reply

Your email address will not be published. Required fields are marked *