Series 3 – The National Commodities Futures Test Series 3 – The National Commodities Futures Test Futures Trading Mechanics & Market Structure 2 — Questions and Answers
Question 1: Which entity acts as the buyer to every seller and the seller to every buyer in futures markets?
- Clearinghouse (Correct answer)
- Introducing broker
- Commodity pool operator
- NFA
Correct answer: Clearinghouse
The clearinghouse interposes itself between all parties, guaranteeing contract performance and eliminating counterparty risk.
Question 2: A futures trader who offsets a long position by selling an equal number of contracts in the same delivery month has:
- Closed the position (Correct answer)
- Rolled the position forward
- Created a spread
- Exercised a delivery option
Correct answer: Closed the position
Selling an equal and opposite contract in the same month closes (offsets) the original long position.
Question 3: What does the term 'contract month' refer to in futures trading?
- The month in which delivery or final settlement occurs (Correct answer)
- The month the contract was first listed
- The month margin requirements change
- The month the trader opened the position
Correct answer: The month in which delivery or final settlement occurs
The contract month specifies when the futures contract expires and physical delivery or cash settlement takes place.
Question 4: Which price relationship shows whether a futures contract is trading above or below the spot price?
- Basis (Correct answer)
- Spread
- Premium
- Contango differential
Correct answer: Basis
Basis is the difference between the cash (spot) price and the futures price at a specific location and time.
Question 5: A 'limit move' in a futures market occurs when:
- The price reaches the maximum daily price change set by the exchange (Correct answer)
- A trader exceeds position limits
- The clearinghouse stops accepting orders
- The exchange halts trading for the day
Correct answer: The price reaches the maximum daily price change set by the exchange
A limit move means the futures price has moved the maximum amount allowed by exchange rules in a single session.
Question 6: Which type of order becomes a market order only when the futures price reaches a specified level?
- Stop order (Correct answer)
- Limit order
- Market-if-touched (MIT) order
- Day order
Correct answer: Stop order
A stop order is triggered and converts to a market order once the futures price trades at or through the stop price.
Series 3 – The National Commodities Futures Test Series 3 – The National Commodities Futures Test Futures Trading Mechanics & Market Structure 2
Which entity acts as the buyer to every seller and the seller to every buyer in futures markets?