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Question 1 of 10
1. Question
From the statements below regarding speculators provide liquidity to futures market, which one seems to be the most appropriate to you?
Correct
Speculators provide liquidity to futures market
Speculators provide liquidity to the futures market by accepting the risk of assuming the role of counterparty to hedgers. While many hedges are the result of two counterparties hedging opposite cash positions, many other positions involve only one hedge. Therefore, in order for the market to function efficiently and provide all traders with counterparties, speculators are a must. Without speculation, markets would be thinly traded, a condition that would result in exponentially more volatility and, in turn, more risk.
Incorrect
Speculators provide liquidity to futures market
Speculators provide liquidity to the futures market by accepting the risk of assuming the role of counterparty to hedgers. While many hedges are the result of two counterparties hedging opposite cash positions, many other positions involve only one hedge. Therefore, in order for the market to function efficiently and provide all traders with counterparties, speculators are a must. Without speculation, markets would be thinly traded, a condition that would result in exponentially more volatility and, in turn, more risk.
Question 2 of 10
2. Question
Which of the following statements is true regarding costs for underlying commodities?
Correct
Costs for underlying commodities
Trading in futures transactions does not exempt one from paying commissions and other fees. Aside from the costs of opening and closing a position, there are other types of costs for various underlying commodities (such as agricultural commodities and interest rates) that will affect gross profit. Costs for underlying agricultural commodities can include substantial delivery, inspection, and storage costs, among others. Costs for financial instruments include lesser costs, such as bank transfers and record keeping, as well as interest in situations where borrowed assets are used.
Incorrect
Costs for underlying commodities
Trading in futures transactions does not exempt one from paying commissions and other fees. Aside from the costs of opening and closing a position, there are other types of costs for various underlying commodities (such as agricultural commodities and interest rates) that will affect gross profit. Costs for underlying agricultural commodities can include substantial delivery, inspection, and storage costs, among others. Costs for financial instruments include lesser costs, such as bank transfers and record keeping, as well as interest in situations where borrowed assets are used.
Question 3 of 10
3. Question
Which of the following statements is false regarding The return on investment (ROI)?
Correct
ROI
The return on investment (ROI), also known as return on equity or return on margin employed, is the ratio between the gross profit on a trade and the margin required to secure that trade:
• gross profit/(loss) = gain/(loss) on trade – commissions
• investment = margin per contract × number of contracts
• gross profit / investment = rate of return (on investment)
While it is conventional to treat commissions as a reduction in the gain or loss on a trade, the cost may alternately be considered an addition to the investment cost. In such cases, both the numerator and the denominator of the ROI calculation would be increased by the commission amount, resulting in a higher rate of return. Therefore, the more conservative approach is to treat commission as a cost that reduces gross profit.
Incorrect
ROI
The return on investment (ROI), also known as return on equity or return on margin employed, is the ratio between the gross profit on a trade and the margin required to secure that trade:
• gross profit/(loss) = gain/(loss) on trade – commissions
• investment = margin per contract × number of contracts
• gross profit / investment = rate of return (on investment)
While it is conventional to treat commissions as a reduction in the gain or loss on a trade, the cost may alternately be considered an addition to the investment cost. In such cases, both the numerator and the denominator of the ROI calculation would be increased by the commission amount, resulting in a higher rate of return. Therefore, the more conservative approach is to treat commission as a cost that reduces gross profit.
Question 4 of 10
4. Question
Regarding comparing taxable and tax-free intercommodity trades, which of the following statements is true?
Correct
Comparing taxable and tax-free intercommodity trades
When calculating a comparative ROE for two intercommodity trades (one that is taxable and one that is tax free), the tax effect must be considered. There are two options for comparing a taxable and a tax-free transaction. The taxable amount must be reduced to adjust for the tax effect, or the tax-free amount must be similarly increased.
• calculation for a taxable transaction: taxable amount × (1 – tax rate) = tax-free amount
• calculation for a tax-free transaction: tax-free amount / (1 – tax rate) = taxable amount
Either calculation (but not both) will allow for an accurate comparison between commodities.
Incorrect
Comparing taxable and tax-free intercommodity trades
When calculating a comparative ROE for two intercommodity trades (one that is taxable and one that is tax free), the tax effect must be considered. There are two options for comparing a taxable and a tax-free transaction. The taxable amount must be reduced to adjust for the tax effect, or the tax-free amount must be similarly increased.
• calculation for a taxable transaction: taxable amount × (1 – tax rate) = tax-free amount
• calculation for a tax-free transaction: tax-free amount / (1 – tax rate) = taxable amount
Either calculation (but not both) will allow for an accurate comparison between commodities.
Question 5 of 10
5. Question
From the statements below regarding appropriate speculative futures trade recommendations, which one seems to be the most appropriate to you?
Correct
Appropriate speculative futures trade recommendations
In a trading environment where prices are expected to increase, a long position is recommended (buy). If prices are expected to decrease, a short position is recommended (sell).
Incorrect
Appropriate speculative futures trade recommendations
In a trading environment where prices are expected to increase, a long position is recommended (buy). If prices are expected to decrease, a short position is recommended (sell).
Question 6 of 10
6. Question
Regarding recommendations for changes in basis, which of the following statements is true?
Correct
Recommendations for changes in basis
A spread position is recommended if a trader is speculating on changes in the basis. Two types of spreads are available to take advantage of a narrowing (bull spread) or widening (bear spread) of the basis.
Incorrect
Recommendations for changes in basis
A spread position is recommended if a trader is speculating on changes in the basis. Two types of spreads are available to take advantage of a narrowing (bull spread) or widening (bear spread) of the basis.
Question 7 of 10
7. Question
Which of the following statements is true regarding stop order?
Correct
Stop order
A stop order is an instruction to execute a trade when a price trigger is reached. In effect, when the trigger price is reached, the stop order is converted to a market order. The intent of the trader is to confirm the direction of the market prior to actually executing the order. For example, a buy stop (or buying on the stop) executes a buy order after the market has moved upward in price. A sell stop executes a sell after the market has moved downward in price.
Incorrect
Stop order
A stop order is an instruction to execute a trade when a price trigger is reached. In effect, when the trigger price is reached, the stop order is converted to a market order. The intent of the trader is to confirm the direction of the market prior to actually executing the order. For example, a buy stop (or buying on the stop) executes a buy order after the market has moved upward in price. A sell stop executes a sell after the market has moved downward in price.
Question 8 of 10
8. Question
Which of the following statements is false regarding stop limit order?
Correct
Stop limit order
The keyword in the term stop limit order is “limit.” The trade will only execute at the limit order or better (it does not convert to a market order). In contrast, a stop order will execute at the next available market price once the trigger price is reached. In this instance, a trader has established a specific target price rather than a general market direction.
Incorrect
Stop limit order
The keyword in the term stop limit order is “limit.” The trade will only execute at the limit order or better (it does not convert to a market order). In contrast, a stop order will execute at the next available market price once the trigger price is reached. In this instance, a trader has established a specific target price rather than a general market direction.
Question 9 of 10
9. Question
Regarding one cancels the other (OCO) , which of the following statements is true?
Correct
OCO
A one cancels the other (OCO) order has two order legs. As the name implies, one leg is cancelled when the other leg is executed.
For example, assume crude oil is selling at $90 per barrel and an OCO order is entered as follows:
• sell $88.50 stop;
• sell $92.00 limit
The sell stop would be executed if the price falls to $88.50 (avoiding further losses), and the limit order would be cancelled. However, if the price does not fall and instead rises to $92, the trade would be executed (locking in gains). If neither occurs, the trade would expire when the market closes.
Incorrect
OCO
A one cancels the other (OCO) order has two order legs. As the name implies, one leg is cancelled when the other leg is executed.
For example, assume crude oil is selling at $90 per barrel and an OCO order is entered as follows:
• sell $88.50 stop;
• sell $92.00 limit
The sell stop would be executed if the price falls to $88.50 (avoiding further losses), and the limit order would be cancelled. However, if the price does not fall and instead rises to $92, the trade would be executed (locking in gains). If neither occurs, the trade would expire when the market closes.
Question 10 of 10
10. Question
From the statements below regarding Pyramiding, which one seems to be the most appropriate to you?
Correct
Pyramiding
Pyramiding is a trading strategy whereby profits earned on existing positions are automatically used to increase position size. The number of contracts added to increase position size typically grows progressively smaller. For example, in a rising market, a trader may use profits to add X number of contracts, then X – 1, then X – 2, etc. (assuming the price trend continues).
Incorrect
Pyramiding
Pyramiding is a trading strategy whereby profits earned on existing positions are automatically used to increase position size. The number of contracts added to increase position size typically grows progressively smaller. For example, in a rising market, a trader may use profits to add X number of contracts, then X – 1, then X – 2, etc. (assuming the price trend continues).
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