ABOUT THE SERIES 3 EXAM xiii
ABOUT THIS BOOK xvii
ABOUT THE TEST BANK xix
ABOUT THE SECURITIES INSTITUTE OF AMERICA xxi
CHAPTER 1 FUTURES AND FORWARDS 1
Introduction 1
The Spot Market 1
Forward Contracts 2
Futures 3
The Role of the Futures Exchange 3
Trading Futures on the Floor of the Exchange 4
Clearinghouse 5
Clearing Member Margin Calculations 7
Basis Grade 8
Cornering the Market 8
Delivery 8
Speculators and Hedgers 9
Pretest 11
CHAPTER 2 TRADING COMMODITY FUTURES 15
Introduction 15
Types of Orders 15
Market Orders 16
Buy Limit Orders 16
Sell Limit Orders 16
Stop Orders/Stop Loss Orders 17
Buy Stop Orders 18
Sell Stop Orders 18
Stop Limit Orders 19
Other Types of Orders 19
Commissions 26
Delivery Months 27
Pretest 29
CHAPTER 3 FUTURES PRICING 31
Introduction 31
Contract Sizes and Pricing 31
U.S. Treasury Futures 35
Stock Index Futures 36
Index Future Settlement 37
Foreign Currency Futures 37
Pretest 41
CHAPTER 4 PRICE FORECASTING 43
Introduction 43
Futures Market Pricing Structure 43
Agricultural Futures Pricing 46
Crop Year 46
Technical Analysis 47
Open Interest 50
Pretest 53
CHAPTER 5 SPECULATION AND HEDGING 57
Introduction 57
Speculation 57
Margin 60
Maintenance Margin 62
Open Trade Equity 63
Changes to the Margin Requirement 66
Hedging 67
Case Study: Long Hedger 68
Case Study: Short Hedger 69
How to Manage an Imperfect Hedge 71
A Change in Basis Price 72
Hedging Financial Risks 75
Using Index Futures as a Hedge 75
Beta Hedge 76
Currency Hedge 77
Interest Rate Hedge 79
Pretest 83
CHAPTER 6 COMMODITY FUTURES OPTIONS AND COMMODITY FUTURES SPREADS 87
Introduction 87
Option Classification 87
Call Options 87
Put Options 88
Option Classes 88
Option Series 88
Bullish vs. Bearish 88
Bullish 88
Bearish 89
Possible Outcomes for an Option 89
Exercised 89
Sold 90
Expire 90
Exercise Price 90
Managing an Option Position 90
Buying Calls 90
Maximum Gain Long Calls 91
Maximum Loss Long Calls 91
Determining the Breakeven for Long Calls 91
Selling Calls 92
Maximum Gain Short Calls 92
Maximum Loss Short Calls 93
Determining the Breakeven for Short Calls 93
Buying Puts 94
Maximum Gain Long Puts 94
Maximum Loss Long Puts 94
Determining the Breakeven for Long Puts 95
Selling Puts 95
Maximum Gain Short Puts 96
Maximum Loss Short Puts 96
Determining the Breakeven for Short Puts 96
Option Premiums 97
In the Money Options 98
At the Money Options 98
Out of the Money Options 98
Intrinsic Value and Time Value 99
Premiums for Options on Treasury Bond Futures 99
Premiums for Options on Treasury Bill Futures 100
Multiple Option Positions and Strategies 100
Long Straddles 100
Maximum Gain Long Straddle 101
Maximum Loss Long Straddle 101
Determining the Breakeven for Long Straddle 102
Short Straddles 103
Maximum Gain Short Straddle 104
Maximum Loss Short Straddle 104
Determining the Breakeven for Short Straddle 104
Spreads 106
Price Spread/Vertical Spread 106
Calendar Spread/Time Spread 106
Diagonal Spread 107
Analyzing Spreads/Price Spreads 107
Bull Call Spreads/Debit Call Spreads 107
Maximum Gain Bull Call Spread 108
Maximum Loss Bull Call Spread 109
Determining the Breakeven for a Bull Call Spread 109
Spread Premiums Bull Call Spread 109
Bear Call Spreads/Credit Call Spreads 110
Maximum Gain Bear Call Spread/Credit Call Spread 110
Maximum Loss Bear Call Spread 111
Determining the Breakeven for a Bear Call Spread 111
Spread Premiums Bear Call Spread 112
Bear Put Spreads/Debit Put Spreads 113
Maximum Gain Bear Put Spread/Debit Put Spread 113
Maximum Loss Bear Put Spread 113
Determining the Breakeven for a Bear Put Spread 114
Spread Premiums Bear Put Spread 114
Bull Put Spreads/Credit Put Spreads 115
Maximum Gain Bull Put Spread 115
Maximum Loss Bull Put Spread 115
Determining the Breakeven for Bull Put Spread 116
Spread Premiums Bull Put Spread 116
Synthetic Risk and Reward 117
Long Futures Short Calls/Covered Calls 118
Long Futures Long Puts/Married Puts 118
Short Futures Long Calls 118
Short Futures Short Puts 118
Delta 119
Spreading Futures Contracts 119
Pretest 123
CHAPTER 7 CFTC & NFA AND REGULATIONS 127
Introduction 127
The Commodity Exchange Act of 1936 127
The National Futures Association 128
Futures Commission Merchant 129
Introducing Broker 130
Commodity Pool Operator 130
Commodity Trading Advisor 132
Risk Disclosure Documents 132
Customer Accounts 138
Individual Account 139
Joint Account 139
Joint Tenants with Rights of Survivorship 140
Joint Tenants in Common 140
Transfer on Death 140
Death of a Customer 141
Partnership Accounts 141
Corporate Accounts 141
Discretionary Trading Authorization 141
Managing Discretionary Accounts 142
Arbitration 142
The Arbitration Process 143
The CFTC Reparation Process 144
Awards Under Arbitration 144
Currency Transactions 144
The Patriot Act 144
U.S. Accounts 145
Foreign Accounts 145
Annual Compliance Questionnaire 146
Ethics Training 146
Violations and Complaints 146
Position Reporting and Speculative Position Limits 147
Written Communication with the Public 148
Customer Confirmations 148
Customer Account Statements 149
Record Keeping 149
Business Continuity Plan 150
Pretest 151
ANSWER KEYS 155
Chapter 1: Futures and Forwards 155
Chapter 2: Trading Commodity Futures 156
Chapter 3: Futures Pricing 157
Chapter 4: Price Forecasting 157
Chapter 5: Speculation and Hedging 158
Chapter 6: Commodity Futures Options & Commodity Futures Spreads 159
Chapter 7: CFTC & NFA and Regulations 160
GLOSSARY OF EXAM TERMS 163
INDEX 177
