Real, exam-format questions with worked explanations — pulled straight from the Series 3 Prep bank. Answer them here, then create a free account to drill all 1,114 with spaced repetition and a timed simulator. New to the exam? Read the full Series 3 exam guide.
Market Knowledge · Fundamentals
1. A speculator who is SHORT one futures contract profits when:
- The futures price rises
- The futures price falls
- The basis weakens
- Open interest increases
Show answer & explanation
Answer: B. Short means you sold the contract first; profit comes from buying it back lower. Falling price = gain for the short.
Market Knowledge · Margin
2. In futures trading, initial margin is best described as:
- A partial payment toward owning the commodity
- A down payment financed by the broker
- A good-faith performance bond ensuring contract performance
- Interest paid to the clearinghouse
Show answer & explanation
Answer: C. Futures margin is a performance bond / good-faith deposit — NOT a down payment, since you own nothing yet. This is the classic distinction from securities margin.
Market Knowledge · Margin
3. When equity drops below the maintenance margin level, the variation margin call must restore the account to:
- The maintenance margin level
- The initial margin level
- A zero balance
- Twice the initial margin
Show answer & explanation
Answer: B. Once equity falls below maintenance, the call brings the account back up to the FULL initial margin level — not just back to maintenance.
Market Knowledge · P&L Math
4. Corn futures = 5,000 bushels, quoted in cents/bushel. You buy one at 432 and sell at 447. Gross profit is:
- $150
- $750
- $75
- $1,500
Show answer & explanation
Answer: B. Corn contract = 5,000 bushels, quoted in cents per bushel; each 1¢ move = $50.
Price change: 447 − 432 = 15 cents.
Per contract: 15¢ × 5,000 bu = 75,000 cents = $750.
Gross profit = $750.
Market Knowledge · P&L Math
5. T-bond futures = $100,000 face, traded in points and 32nds. You are long from 110-16 and price rises to 111-00. Profit is:
- $84
- $500
- $1,500
- $16
Show answer & explanation
Answer: B. T-bond contract = $100,000 face, quoted in points and 32nds; one full point = $1,000, so each 1/32 = $31.25.
Prices: 110-16 means 110 and 16/32; 111-00 means 111 and 0/32.
Price change: 111-00 − 110-16 = 16/32 of a point.
Value: 16/32 × $1,000 = $500.
Long profits when price rises, so profit = $500.
Market Knowledge · P&L Math
6. COMEX gold = 100 troy oz. If gold rises $12.40/oz, one contract's value changes by:
- $124
- $1,240
- $12.40
- $12,400
Show answer & explanation
Answer: B. COMEX gold contract = 100 troy ounces; each $1.00/oz move = $100.
Price change: $12.40 per ounce.
Value change: $12.40 × 100 oz = $1,240.
Contract value changes by $1,240.
Market Knowledge · P&L Math
7. Eurodollar futures = $1,000,000 notional; each basis point (0.01) = $25. You are SHORT one from 95.20 and it moves to 95.10. Result:
- $250 loss
- $250 gain
- $25 gain
- $2,500 gain
Show answer & explanation
Answer: B. Eurodollar contract = $1,000,000 notional; each basis point (0.01) = $25.
Price change: 95.20 → 95.10 = a drop of 0.10 = 10 basis points.
A short position gains when price falls.
Value: 10 bp × $25 = $250.
Result = $250 gain.
Market Knowledge · Basis
8. Basis is defined as:
- Futures price minus the strike price
- The cash (spot) price minus the futures price
- Initial margin minus maintenance margin
- The difference between two delivery months
Show answer & explanation
Answer: B. Basis = cash − futures. A strengthening basis means cash is gaining relative to futures.
Market Knowledge · Market Structure
9. In a normal carrying-charge market for a storable commodity, distant futures months typically trade at:
- A discount to nearby months
- A premium to nearby months reflecting storage, insurance and interest
- The same price as the cash market
- Below spot (an inverted market)
Show answer & explanation
Answer: B. Contango / normal carrying-charge market: distant months priced higher to cover cost of carry. The opposite is an inverted (backwardation) market.
Market Knowledge · Hedging Concepts
10. A wheat farmer harvesting in three months wants protection against falling prices. The appropriate hedge is to:
- Buy wheat futures (long hedge)
- Sell wheat futures (short hedge)
- Buy wheat calls only
- Do nothing — he is naturally hedged
Show answer & explanation
Answer: B. A producer who owns/will own the cash commodity SELLS futures (short hedge) to lock in a sale price against falling prices.
Market Knowledge · Hedging Concepts
11. A cereal maker that must buy corn in four months fears rising prices. To hedge it should:
- Sell corn futures
- Buy corn futures
- Sell corn puts
- Buy Treasury futures
Show answer & explanation
Answer: B. A future buyer of the cash commodity BUYS futures (long hedge) to lock in a purchase price against rising prices.
Market Knowledge · Spreads
12. In a carrying-charge market, a trader establishes a BULL spread by:
- Buying the nearby and selling the distant month
- Selling the nearby and buying the distant month
- Buying a call and a put at the same strike
- Buying two different commodities
Show answer & explanation
Answer: A. A bull spread expects the nearby to gain relative to the distant (spread narrows): buy the near, sell the far month.