Series 3 Practice Test


The Series 3 practice test will assist you in passing the Series 3 Exam, which is a test that assesses the test-taker’s knowledge and ability to perform adequately in a financial planning profession. The Series 3 Exam will consist of 120 multiple-choice questions that will cover eight main content areas. These content areas are as follows: Futures Trading Theory and Basic Functions Terminology; Futures Margins, Option Premiums, Price Limits, Futures Settlements, Delivery, Exercise, and Assignment; Types of Orders, Customer Accounts, and Price Analysis; Basic Hedging, Basis Calculations, and Hedging Futures; Spreading; Speculating in Futures; Option Hedging, Speculating, and Spreading; and Regulations. The free Series 3 practice test will address the same content. The test will take two and a half hours to complete.


Series 3 Practice Test

Series 3 Study Guide

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Series 3 Study Guide

Series 3 Flashcard Study System



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Series 3 – The National Commodities Futures Test

This page is dedicated to the Series 3 Practice Test, which will outline the information that will prepare you to take the Series 3 Test. The Series 3 Test is an advanced level test to ensure the seasoned Registered Representative knows the required amount of financial information, narrowing the focus to futures and commodity trading, to perform these specific trades. This two hour and thirty minute test, which includes one hundred and twenty questions and has two parts. A 70 is required to pass both parts of the test. This is just one of the five tests required to take to become a registered commodity trader. One must also file an online registration application with the National futures Association, with the appropriate fees.


It is extremely critical to have working knowledge and experience of the terms and definitions associated with the questions on the Series 3 Exam. Due to the cost, detail and amount of information covered in the test, it is important to study and prepare for the Series 3 early and often. The Series 3 Study Guide provided my Mometrix, are specifically designed to help you obtain the very best test score possible.


What Does the Series 3 Test Cover?

The Mometrix series 3 Practice test covers the same content as the Series 3 Exam. The test is broken up into two concentrations, market knowledge and regulations. The breakdown and detail given to each specific topic can be mastered with daily study and diligent review of the Mometrix practice test. The content is updated as procedures change, it is the candidate’s responsibility to stay up to date on these changes. To get information regarding test times, cost, procedures, etc. please visit www.hfa.futures.org. The test detail and breakdown can be seen in the following overview:


Part One


FUTURES TRADING THEORY AND BASIC FUNCTIONS TERMINOLOGY

General Theory regarding the development of the futures markets and the way Futures and Securities compare, as far as; Rights, Obligations and Transfer of ownership.


Define the Futures Contract and how Futures and forward contracts compare to offset provisions. The Clearing House functions for both Clearing Members and Non-clearing Members. The Delivery provisions for Futures and the differences between the three pricing determinations; Basis Grade, Premiums and Discounts and how to calculate each.


Know the structure of the Futures Markets and the difference between them, Normal Markets and Inverted Markets, when it comes to Carrying Charges, “Fully Carry” markets, Supply shortages and other factors that differentiate the markets.


Be able to recognize Hedging Theory and how it defines and utilizes Risk Reduction, as far as unhedged positions and the effect on the pricing of cash markets. Have knowledge of Short Hedging and the typical short hedgers and the effect it has on cash markets. Know who the typical long hedgers are and how they protect their investment against price increases.


Define Speculative Theory and how it uses leverage, risk, market liquidity and price volatility to explain the risk elements of this type of investment.


Memorize the General Futures and Options Terminology and be able to recognize each as it is being used in a question. The list includes, but is not limited to the following:


Futures: Associated Person, Basis, Bucketing, Carrying Charges, Churning, Clearinghouse, Convergence, Commodity Pool Operator, Commodity Trading Advisor, Deferred, Discount, Expit, Futures Commission Merchant, First Notice Day, Floor broker, Floor Trader, Forward contract, Introducing Broker, Inverted Market, Limit up/down, Lock limit, Long, Normal Market, Pit, Position Trader, Retender, Scalper, Short spot, Variation call and Warehouse receipt.


Options: At-the-money, Call, Conversion, Delta, Exercise, Expiration, Grantor, In-the-money, Intrinsic Value, Out-of-the-money, Premium, Put, Spread, Straddle, Strangle, Synthetic Options/ Futures, Time Value and Writer.


FUTURES, MARGINS, OPTION PREMIUMS, PRICE LIMITS, FUTURES SETTLEMENTS, DELIVERY, EXERCISE AND ASSIGNMENT

Margin Requirements

and the nature if the futures margin compared to the performance of the bond and with the securities margin. The authority of the exchanges in establishing, revising, initial and maintenance requirements. The documentation required to establish a margin agreement and the transfer of funds agreement.


How the margin calculations are set and all the elements that effect the calculation, such as; maintenance, variation, price movement and the effects on new and existing positions, withdrawal of excess equity compared to the alternative calculations of hedge and spread margins.


Option premiums

and how the intrinsic value, time value and The Delta effect the premiums. Some premium quotes are different than the underlying contract, be able to explain or recognize the reasoning.


Price Limitations

and the effect of limit – up/down price changes, expanded limits and the effects on margin of their movement. How to set lock limits and circuit breakers and why they are important.


The ability to offset contracts, explain settlements and delivery of positions. Long and short positions and what happens as of the first notice day. Trading during the spot month and the clearinghouse’s role in the delivery, receipt and notice. Which notice needs to be hand delivered and delivery of Retenders and stopped notices. How settlement is computed for cash settled contracts for Stocks, Municipal and Eurodollar bonds and the exchange of Futures for Cash or EFPs.


The exercising of options and the process of assignment, the requirements upon exercising for margin and the final trading dates.


TYPES OF ORDERS, CUSTOMER ACCOUNTS, PRICE ANALYSIS

The basic characteristics and uses of market, stop, stop-limit, Market-if-touched and electronic market orders. Also know the uses of additional orders, such as, good till Cancelled (GTC), Fill-or Kill, on close and one cancels the other (OCO).


Be able to figure the analysis for technical, fundamental and interest rate pricing. The use of all types of charts, trend lines, support/ resistant levels, congestion areas, gaps, ascending and descending triangles, double tops and bottoms, volume, open interest and liquidating markets. Know the effects of economic or political instability and how the elasticity of supply and demand affect the market. Be able to analyze the three different types of yield curves and the effects of government policy on monetary and taxes. The policies of U.S. Agriculture that effect certain crops and the ratio of hogs and corn.


BASIC HEDGING and BASIS CALCULATIONS

The knowledge of anticipatory hedges and the basis for long and short hedging. Know how to determine the basis, the short and long term rates, the “implied repo rate” and the effects it has on the price and the actual commodity, transportation and deliverable grades of commodity.


Calculate the net of the hedge and the price received on the purchase or sale of the following: Grains, Livestock, Foodstuffs, Metals, Energy, Lumber, T-Notes, T-Bonds, T-Bills, Eurodollars, Municipals, Currencies and Stock indices.


SPREADING and SPECULATING IN FUTURES

Order expectation and execution of spread orders and knowledge of narrowing or widening basis in normal or inverted markets and the strategies to accomplish each. Know the different types of spreads, carrying charge, limited risks, intra-market, intra-delivery, bull, bear and intermarket.


Calculate the profit/loss for speculative trades and the positions of contracts. Know the effects of the commissions on gross profits and the return on Margin equity for each calculation. Explain the appropriate speculative trades and the economic or technical circumstance as to why this is the recommendation, use appropriate orders to initiate and protect the trade position.


OPTION HEDGING, SPECULATING, SPREADING

Know the details of the option theory, including the limited risk of the long option, how to increase leverage and the possible total loss of investment (premium) and the increased risk of the short option and can result in earned premium or losing more than original premium.


Option hedge strategies that work together such as the long put as an alternative to short futures hedge, the long call as an alternative to the long futures hedge and what the profit is increased to once the breakeven point is reached.


Option speculative strategies that work together such as the long call and as a substitute for long futures and the long put as a substitute for short futures and the risk limited to the premium, the breakeven point and the profit and return on equity, the long call to protect long futures, the long futures- short call (covered call), conversions and reverse conversions (reversals).


Option Spread Strategies / Calculations

Know all the possible ways to Call and Put Bull and Bear spreads, calendar and Arbitrage spreads.


Part 2

Regulations

Have general knowledge of CFTC registrations and NFA memberships for all the associated people involved in the Commodity and Futures trading arena, opening a futures account, verbatim risk disclosure statement, commodity customer agreement, as well as, discretionary accounts and written authorization, review requirements and AP minimum experience required. Position reporting requirements set by the CFTC and exchanges, daily reports and the boundaries of speculative position limits and who is eligible for exemptions.


FCM/IB Regulations for guaranteed and independents, the responsibilities of guarantor FCM and rules for acceptance of customer funds. Regulations on net capital, financial reporting, the collection of margin deposits and customer complaints. Time-stamping, promotional material and disclosure requirements by FCM and IBs required for costs associated with future transactions. Regulations covering CPO/CTA disclosures, records and promotional materials. Arbitration and NFA disciplinary procedures including, formal complaints, letters, hearings, appeals, member responsibility actions, penalties, fines, cease and desist orders and expulsion and the CFTC enforcement of such violations.


As you can see, the information for the Series 3 Test is extensive. Without a proper study guide, like the Mometrix Series 3 Study Guide, a person could get lost in all the rules and regulations. That’s why we are here, to help you retain the information you need in order to make the best grade possible!


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Last updated: 06/15/2017
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