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Series 3 wrong questions and answers already passed 2024
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Series 3 wrong questions and answers already passed 2024
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Series 3 wrong questionsWhich of the following has (have) the least effect on storage cost? - correct
answer ✔Price of substitutable commodities -- Prices of substitute
commodities, while related to the price of the commodity being stored, have
little effect on storage costs. Interest rates and insurance are elements of
carrying charges. Inflation directly affects interest rates and the prices of a
commodity.
Reference: 3.1.1.2.9 in the License Exam Manual
The U.S. has a trade surplus and has dropped interest rates. This has which
of the following effects on the price of silver? - correct answer ✔The key to
the question is falling interest rates. Normally investors will be more willing to
buy or hold metals (and get no interest on their investments) when interest
rates are low or falling. High interest rates tend to attract money to interest
bearing investments.
Reference: 3.1.1.2.8 in the License Exam Manual
An oil refinery hedges a forward sale of gasoline by going long 20 crude oil
futures contracts. While hedged, the basis changes from $.27 under to $.22
under per bbl. What is the effect of the hedge on the refinery's cost of crude
oil? (1000 bbl/contract) - correct answer ✔Increased by $1,000 -- The
change in the refinery's cost equals change in the basis multiplied by the size
of the position. Because the forward sale was hedged by going long futures,
the refinery is short the basis and thus will have its effective cost increased if
the basis strengthens. A long hedger being short the basis wants a weakening
basis. A change from -$.27/bbl to -$.22/bbl is a strengthening of $.05/bbl,
which unfortunately increases the hedger's cost as follows:20,000 bbl Size of
position =× $.05/bbl Change in basis per barrel$1,000 Increase in cost of oil
Reference: 2.2.1.1.1 in the License Exam Manual
A customer buying or selling a futures contract is contingently liable for -
correct answer ✔the full value of the contract -- A futures contract represents
,an obligation to make or take delivery. The customer need only deposit the
initial margin to open the position. The obligation means while a position is
held, the customer is potentially liable for the full value of the contract-which
may be unlimited.
Reference: 1.1.6.5 in the License Exam Manual
A lumber user contracts to buy lumber from a miller for delivery in April. The
price of the lumber will be the cash price on the date of delivery. At the time
the contract is signed, cash lumber sells for $110 and Jun futures sell at $104.
Both parties hedge their positions. If the lumber is delivered on April 22nd,
when cash lumber at the delivery point is $116 and Jun futures is $120, at
expiration of the futures contract, the miller may either offset or deliver lumber
against the futures contract. - correct answer ✔False -- If all output is sold
cash forward, none will be left to deliver against the futures contract (don't
infer that the user is not fully hedged).
Reference: 2.2 in the License Exam Manual
A hedger is long the basis when he has - correct answer ✔a short futures
hedge against unsold inventory -- A hedger who is long the basis will profit if
cash prices improve relative to futures prices (the basis increases). A long
futures hedge against unsold inventory is a cash sale with specific delivery
instructions. Sold grain for delivery "on track, country station" presents a long
futures position rather than a hedge.
Reference: 2.2.4.1.3 in the License Exam Manual
An Iowa feedlot operator has sold forward fat cattle 20,000 cwt at 84.70 cents
per lb on May 5. At the same time, he hedges in feeder cattle. The cash price
is 85.04 cents per lb, while the Nov futures is 86.72. On Sept 30, he closes his
position by buying the feeder cattle at 87.81 and offsetting his futures
contracts at 88.48. The commission is $7.50 per contract per side basis. What
was his effective purchase price? - correct answer ✔$17,210 -- The feedlot
operator sold forward fat cattle which makes the operator short. The way to
hedge would be to buy a futures contract. The feedlot operator is short the
basis at 85.04. So the operator buys the future for 86.72 (long hedge position)
,and pays 1.68 over the basis. In September, the position is closed; the basis
is 87.81, and the future is sold for 88.48 and ends up receiving .67. The
operator paid 1.68 over the basis and sold it for .67 over the basis. Therefore
the position lost 1.01, which will add to the cost or effective price. The short
basis is + 1.01 (1.68 - .67). The cash price entering was 85.04 and now
adding 1.01 to it, it becomes 86.05. Now 86.05 times the 20,000 cwt equals
$17,210.The short basis is + 1.01 (1.68 â' .67)85.04 + 1.01 = 86.05 cwt.8605
x 20,000 cwt = $17,210Here is another way to answer the question. The
feedlot operator buys the (hedge) future for 86.72 and sells it at 88.48 for a
profit of 1.76. When the position is closed, note that at the time of the sale of
the futures contract, the cash price for fat cattle is 87.81. Because the
operator made 1.76 on the futures trade, the 1.76 would be subtracted from
the cash price at the time the position was closed. 87.81 â" 1.76 = 86.05. Now
86.05 times the 20,000 cwt equals $17,210.88.48 â' 86.72 = 1.7687.81 â' 1.76
= 86.0586.05 x 20,000 cwt = $17,210
Reference: 2.2.4 in the License Exam Manual
With an adequate supply of live cattle and normal supply and demand
circumstances, cash feeder cattle sell at a discount to the live cattle futures. -
correct answer ✔True -- Presuming a normal market, the cash commodity
trades at a discount to the futures because the cash price does not reflect
carrying charges associated with the futures.
Reference: 1.1.4.2 in the License Exam Manual
For a technical analyst, the primary significance of volume and open interest
lies in - correct answer ✔their respective changes in connection with the
direction of the price movement - Volume and open interest are used as
technical indicators to confirm the significance of other technical indicators.
o Reference: 3.2.1.5 in the License Exam Manual
Bailey and Keep, Ltd. a registered investment advisor, is convinced inflation
will increase over the coming two quarters. B&K takes a short position in 5
June T-bond futures contracts at 99-00. The company pays $250 in
commissions. The value of the futures contracts decline. B&K liquidates the
, position in the futures contracts at 96-24. The T-bond futures contract's
underlying face value at maturity is $100,000. What is Bailey and Keep's gain
or loss? - correct answer ✔$11,000 gain-- Inflation acts in opposition to bond
prices by eroding purchasing power of a bond's future cash flow. In other
words, the higher the rate of inflation and the higher the expected future
inflation rate, the higher yields will rise across the curve. Investors will demand
higher yield to counteract inflation. Therefore, if B&K is correct, prices of T-
bond futures contracts will decline during periods of rising inflation as
predicted by B&K. To calculate the gain or loss, first calculate per contract the
amount of commission. B&K paid $250 in total commissions, i.e. $50 round-
turn commissions ($250 ÷ 5 = $50). Furthermore, let us say for ease of use in
the handling fractions that the shorts priced at 99-00 were equal to 98 32/32.
When B&K purchase the shorts (closes the position) at 96 24/32 for a
difference of 2 8/32 i.e. a profit 2,250. Each whole point is $1,000 and each
32nd is $31.25.
§ Round-turn commissions ($50)
§ Net profit per contract $2,200
§ Number of contracts × 5 = Total profit $11,000
§ Reference: 4.1.2.5 in the License Exam Manual
All security futures contracts must be fungible. - correct answer ✔A
requirement of listing security futures is clearinghouses must have
arrangements for identical security futures contracts that can be originated
and offset on different markets. However, there is currently no requirement
that the various markets develop identical contracts, and the contracts are not
fungible.
o Reference: 4.4.4 in the License Exam Manual
If your customer is long 3 T-bond May 94 puts (contract value is 100,000)
for .24, what is the breakeven point? - correct answer ✔93.20 -- The
customer breaks even with futures at 93.20 (93-20/32nds). For puts,
breakeven is the strike price of 94, minus the premium of 24/64ths. Although
the T-bond futures contract is quoted in 1/32nds, the T-bond futures option
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