Comprehensive Guide to Series 3 Exam Preparation, Exams of Nursing

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Commodity Exchange Act 1936 "CEA" - Governs the trading of US futures contracts, options on futures, options on physical commodities, certain retail fx contracts, as well as security futures products. Commodity Futures Trading Commission CFTC - CFTC administers the CEA independent government agency created in 1974 The mission is to foster open, transparent, competitive, and financially sound markets, to avoid systemic risk, and to protect users and their funds, consumers, and the public from fraud, manipulation, and abusive practices related to derivatives and other products subject to the CME SEC - options on securities, indices of securities, non-exempt securities and fx traded on national securities exchanges Commodity Futures Modernization Act CFMA - 2000 provided for the trading of security products under a joint CFTC and SEC regulatory program Title XIII of the Food, Conservation and Energy Act of 2008 - extended CFTC powers, especially in fx

Dodd Frank Act of 2010 - Expanded the Fed's regulatory authority over non- depository financial institutions Introduces more stringent capital requirements Introduces changes in OTC derivatives regulation Requires Swap Dealers and Major Swap Participants to register with the CFTC and/or SEC Futures Commission Merchant FCM - any individual or business entity that solicits or accepts future or options on futures orders and accepts any money, securities, or property to margin, guarantee, or secure any resulting trades or contracts Independent Introducing Brokers IB - any person, other than a person registered as an Associated Person (AP) of an FCM, who solicits or accepts orders for futures or futures options but who does NOT accept money from customers. Guaranteed IB works with only one FCM. Not Guaranteed can work with many but must meet financial requirements Commodity Trading Advisor CTA - generally, an individual or organization who for compensation or profit, directly or indirectly, advises others as to the value of or the advisability of trading futures or options on futures

Commodity Pool Operator - person or organization that operates or solicits funds for a commodity pool Associated Person AP - any person associated with an FCM as a partner, officer, or employee in any capacity involving the solicitation or acceptance of customer orders (other than in clerical capacity) or the supervision of any person so engaged, and persons associated with IBs, CTAs, or CPOs Swap Dealer SD - hold themselves out as a dealer in swaps or secuties swaps or makes a market in those or regularly enters into them as an ordinary course of business or engages in activity causing the person to be commonly known as a dealer or market maker Major Swap Participant MSP - maintaining a substantial position or having a substantial counterparty swap exposure or is a financial entity maintaining a substantial position and is highly leveraged Swap Execution Facility SEF - person operating a facility that offers a trading system or platform with more than one participant

Swap Data Repositories - provide a central facility for swap data reporting and recordkeeping. All swaps, cleared and uncleared, MUST be reported to registered SDRs Rule 2-29 - pre-approval for use of reprints of articles used for promotional materials. NFA Rule 2-30 - Know your customer AP Registration remains into effect untill - 1. revoken or withdrawn 2. revocation or withdrawal of the sponsor's registration 3. cessation of the AP's association with the sponsoring registrant Changes in Exchange rules fixing max daily price limits - must be approved by CFTC AP Registration - Does NOT require registration with an SRO such as Finra, as opposed to FCMs and IBs Hypothetical Performance by an NFA member - must have the disclaimer specified in NFA Rule 2-

Experience Gaps - ALL gaps must be explained BASIC - Is the background information system available on the NFA website Trading Manager - Any person, other than a CPO, with authority to allocate pool assets to CTAs or investee pools is a "trading manager" Right of Appeal NFA Arbitration - there is NO right to appeal, BUT any party may ask the panel to modify their decision NFA Hearing Committe or Hearing Panel - complaints issued by the NFA are heard by them Hypothetical trading results - MAY NOT be presented for any trading program that has at least 3 MONTHS of actual client or prop trading results Rule 2-29 - NFA Members are responsible for the content and requirements relating to reprints of articles used as promotional material

Financial Reports for FCMs - must file monthly. year end report must be certified by an independent public accountant Customer Claims under CFTC reparations program - must be made within 2 years FCM can solicit, accept orders to buy or sell futures or options on futures and accepts funds to margin, secure or guarantee such contracts - NOT IBs or CTAs NFA does the registration functions of the CFTC - Retention of promotional material - NFA requires 3 years from date of last use Futures customer funds - can only be held ONLY by futures commission merchants and futures clearinghouses Extracted Trading Results - Permitted only when the CTA or CPO's previous Disclosure Document designated the percentage of assets that would be committed toward the particular component of the overall trading program

CTA Performance info on Disclosure Document - 1. performance of offered program 2. performance info for all other accounts directed by the CTA 3. performance info for all other accounts directed by each of its trading principals NFA Arbitration allows for written submissions when: - 1. aggregate amount of the claims, exclusive of interest and cost, do not exceed $5,000 2. the agg amt of the claims... are more than $5 but less than $10 and no party requests an oral hearing

3. the panel has consented to the written agreement of the parties to waive oral hearing The NFA is - A futures industry self-regulatory organization Hypothetical perfomance in advertising - is permitted provided it is accompanied by a qualifying statement. it does NOT need an example of a hypothetical trading loss CTA disclosure must include business background of trading advisor and principals

• 5 years Seeking independent verification of applicant's info (customers) - Is NOT required by NFA rule 2-

IB must open and carry each customer's account - on a fully disclosed basis with its carrying broker Who has responsibility to obtain Rule 2-30 Customer info and risk disclosure? - The NFA Member SOLICITING the account FCMs and IBs when receiving a customer complaint must - make and retain a record of the date, the AP that serviced the account, a general description of the material and what, if anything, action was taken Limits on speculative market position - are established by CFTC and NFA only in order to handle discretionary accounts, an associate member that is NOT registered as a CPO, CTA, or an associate person of a CTA or CPO must - have been continuously registered and have worked as an AP for at least 2 years Electronic statements are ok only if - the customer gives written consent in a statement that contains electronic disclosure required by the NFA

Special Offset instructions may NOT be accepted by - Discretionary accounts directed by the FCM, IB or one of their APS Offsetting must be with FIFO except - for hedge accounts, day trades and accordance with specific customer instructions S&P Contract Multiplier - $ NYSE Index multiplier - $ when hedging you are able to LOCK the spot at the time the contract is initiated - FALSE. you lock the futures price S&P Futures Gain/Loss calculation - # contracts * Point Gain * Contract multiplier For T-Bonds gain/loss analysis - #contractsprice change$31.25. for example: buy 10 futures at 115 -10/32 sell at 114 22/32. loss is 20/32 formula is 102031.25 = $6, GBP fx tick is $6.25 - $6.

Fisher Equation of Risk Parity - Generally high interest rates are associated with high inflation. if a forward curve for a currency is at a discount (Backwardated) it means that the US$ is appreciating vs that currency. This is because US has lower interest rate than that currency How many contracts to hedge stock positions? - (Value of Portfolio * beta)/cash pricemultpilier ($250 for S&P, $500 for NYSE) commercial paper contract size - $1 million eurodollar decimal example - Buy 94.21 - Sell 94.09 = -.0028 ; Sell94.02 - Buy93. = 0029 -.0028+ .0029 = .0001 on a $1mm contract this spread would have gained $25.00 $1mm.0001*90/ Bull Spread - Long the short end and short the long end because the assumption is that a rising price level will have a proportionately greater effect on the nearby rather than the deferred futures position Switch - transfering a position from one month to another

Intramarket Spread - also called a Time Spread. long one month and short another month in the same futures market in the same exchange how to choose spreads - 1. annualize the spread differential 2. buy the contract with the lowest price relative to the other leg of the spread Futures Spreads - ALWAYS involves equal quantities in the two legs Quoting intramarket spreads - Customary to quote in terms of the contract that is at a Premium Spreads - OJO must have a long and a short trick questions Margins for spreads - Are lower than for outright positions regardless of whether or not they are done in a single transaction Intermarket (Intercommodity) Spread - Trades in two different futures markets, which may or may not be on the same exchange

Intrinsic Value - Call options must be lower than futures. put options must be higher than futures Commissions - OJO deduct to gains, ADD to losses Eurodollar contracts must always be multiplied by .25 - when using the contract method. or, $25/point if using the point value method Multiplier with ratios - OJO. when applying a multiplier, 1/32 is ONE point. always convert to ratios Buying stock index futures and call options - INCREASES stock market exposure T-Bill Tick - 1 tick = .5 index point 1 tick = $12. so, for example, loss .86=86 index points = 172 ticks (86/.5) times $12.5 = gain or loss T-Bill Index - $25 per point. NOT to confuse with ticks

hedge vs speculative - if both cash and futures are long or short, the futures is speculative, not hedge Ratio Spread - Ratio Call: buy low strike and sell high strike and always selling more than buying, using different strikes in the same expiration month Ratio put: buy higher strike, sell more of the lower strike Bunched (bock) Orders - CTA must maintain specific allocation procedure's; ensure all customer accounts have the correct allocations; review each trading program at least once a quarter Disclosure must have performance data current as of a date - NO MORE than 3 months preceding the date of the document Ethics training - 4 hours of initial training and then one hour every 3 years NFA and CFTC can issue subpoenas - SEC needs to approve the sale of interest in Commodity Pools to the public -

CTA disclosure must include business background info on the trading advisor and each principal that participates in trading or operational decisions or supervises for - 5 years BASIC - Background information system on the NFA website Offset instructions cannot be accepted - from an account controller for accounts directed by an FCM, IB or any of their APs. in short, discretionary accounts Limits - established by CFTC AND the futures and options exchanges CPO that registers with SEC also must provide - Statement of Additional Information NFA Arbitration has no right to appeal - but you can ask the panel to modify its decision CPO pools with less than $500,00 must - provide financial account stmt at least QUARTERLY

in order to handle discretionary accounts, an Associate Members Non-Registered as CTA, CPO or AP - must have been continuously registered with the NFA and worked as an AP for two years disclosure statements must - follow the CFTC format CPO disclosure statements must - provide performance disclosure for the most recent 5 years and year to date Registering as a AP is contingent on the sponsor employing the applicant within 30 days - CFTC provides no-action letter for foreign stock index futures - FCMs file financial reports - Monthly and an annual certified by an independent CPA Fees by FCM - if not determined on a per-trade or a round-turn basis an explanation and examples of the fees in terms of the per-trade and round-turn basis, including as needed a reasonable range of prices, must be provided

CPO registration - its required if total gross capital contributions to all the operators pools is more than $400,000 AND there are more than 15 persons in any one pool A reportable position under CFTC regulations is computed as - the total long or short position in any one month in any one market on any one exchange must study how to calculate amounts to meet margin - are transaction costs a factor in determining carrying costs - I don't think so, confirm how old must a CPOs disclosure doc be? - Open Interest is....... - total Shorts or Longs do you need an uptick to sell futures short? - NO OJO careful with trick per contract vs total -

spread is ALWAYS Front month minus Back Month - Arbitrage allows for virtually riskless profits - to hedge a planned purchase - buy call options only IN THE MONEY options have intrinsic value - Margin calculations - OJO per contract vs total - Excess margin can only be withdrawn up to the INITIAL margin Req - Margin bonds - initial margin $2000 on one Tbond. Maintenance margin $ initial price 100 10/32 where does price have to go to be called for additional margin: down $500 which is 16/32. 100 10/32 minus 16/32 is 99 26/32, so you need 1/32 more.... 99 25/

equity is the amount above the INITIAL margin requirement - Variation Margin must be paid in cash - it is the unrealized gain or loss on open positions margins exercise - initial margin IN CENTS/#oz = cents/oz - maintenance margin IN CENTS/#oz = #cents = 1 tick (.5c/oz) price must change the seller of a put or call has to notify that the buyer has exercised the option - time value of an option is the premium minus the intrinsic value - the seller of a put receives a LONG futures position if the put is exercised - synthetic short - long a put and short a call replicate a long put - short futures plus long call

butterfly spread - four options, all calls or all puts, with three different strike prices and the same expiration strangle - one call one put same expiration, same market, different strikes straddle - one call one put same expiration same strike same market to take when you expect market to stay flat a put option gives the right for its holder to acquire a short futures position at the options strike price - conversion - long futures matched by sytnhetic short (long put and short call) a put grantor is assigned a long position in the futures contract when the option is exercised - net premium on tbond spreads is $15.625?? - OJO. trick. sometimes they add info that is not relevant! think through before starting to calculate -

option reverse conversion - long call, short put and short futures membership in an exchange is only for INDIVIDUALS - When a futures trade involves one client establishing a new position in the market and another client offsetting an existing position, open interest is unchanged. - tracking error - The risk related to the difference between the stock composition of a portfolio and the composition of the selected index is termed tracking error. foreign currency swaps - simultaneous spot and forward transaction Point Value - contract size X minimum price fluctuation In a "full carry" market the futures price exceeds the cash price by the cost of carrying the cash commodity until the expiration of the futures contract. A hedger who is long the cash and short the futures market would find this a favorable basis situation. -

A buying hedge means short the cash and long the futures. In an inverted market the cash price exceeds the futures, and the futures are therefore purchased at a lower price than the cash. Since at expiration cash and futures converge, a buying hedge in an inverted market offers a favorable basis and is usually more financially advantageous than a buying hedge in a carrying charge or flat market. - Time Value - is the option's premium minus the option's intrinsic value. notification is when the exchange notifies the seller that the buyer has exercised his option - for margin on Tbonds - use $31.25 * the number of 32nds needed to cover the difference in the initial and maintenance margins. ie initial $2000, maintenance $1500. price needs to drop by $500 to have margin call. drop of $500 on a 100,000 tbond is 16/32 - or 500/31.25=16 intrinsic value - cash minus future SELL stop limits are elected when there are trades or offers AT OR BELOW the stop price. BUY stop limits are elected when there are trades or bids AT OR ABOVE the stop price. -

A limit order to sell is placed above the current price. OJO, notice difference with sell STOP limits - net cost of carry is negative when short term interest rates are lower than long term - local traders can trade their own and others' accounts. called "dual traders" - congestion area - prices move sideways GTC - Good till cancelled if one is LONG the commodity and short the future you are LONG the basis - Short the basis - having a fixed price commitment to sell without owning the deliverable commodity

A short hedge involves selling a futures position. Since at the expiration of the futures contract the futures and cash prices (for par delivery) converge, in a carrying charge market such convergence favors a short futures position. - Careful between selling and buying for purposes of adding or substracting futures gains/losses to obtain effective price - trick question: ojo with full vs partial hedges when calculating effective prices - a selling hedge protects unsold inventory - when comparing spreads dont forget to ANNUALIZE - OJO. DON"T answer questions if the entire number is not legible - OJO per contract vs total!!!!!! - when in doubt do the long hand math -

for a hedge position - you MUST have a short and a long Bearish vertical spread - sell lower strike price put NFA performs the registration function for CFTC - In accordance with CFTC regulations, all IB-introduced accounts must be carried on a fully disclosed basis with a carrying FCM. - The CFTC provides the language for risk disclosure - All of the following are required to be reported on a CFTC Form 40 (Statement of Reporting Trader): (a) the trader's name, address, and business telephone number; (b) the trader's principal business and occupation; and (c) the FCMs, IBs, and foreign brokers carrying the trader's futures accounts. - Any person claiming an exemption from CTA or CPO registration must ANNUALY reaffirm the application notice of exemption within 60 days of the calendar year end. -

NFA Rule 2-8 (Discretionary Accounts) requires, among other things, that an AP exercising discretion over a customer's account have been continuously registered for a minimum of two years and have worked in that registered capacity for that period of time. This requirement may, in the NFA's discretion, be waived upon a showing of equivalent experience. - FCMs are required to file financial reports on a monthly basis. The year-end financial report must be certified by an independent public accountant - A CTA, in its Disclosure Document, must disclose the performance of the offered program; the performance information for all other accounts directed by the CTA; and the performance information for all other accounts directed by each of its trading principals. - selling hedge protects inventory - AP has nothing to do with designated exchanges - you CANNOT inform a customer that a AML inquire has begun -