Series 3
Field Manual

Cash forward vs futures

The clearing house is what makes futures transferable. It stands between every buyer and seller, so you never need to find your original counterparty to get out.

Basis grade, corners, squeezes

• The basis grade is the standard deliverable grade. Better grades deliver at a premium, worse grades at a discount.
• Allowing substitute grades exists to expand deliverable supply and make a corner harder.
• A corner (or squeeze) is one party accumulating nearly all available cash supply so shorts must pay their price to deliver.
• Exception: soybean oil and meal have no premium/discount grades — basis grade only. Beans, wheat and corn do.

Exchange committees

Who trades what

Exchange groups and fungibility

• CME Group: CBOT, CME, Globex, Kansas City, Minneapolis, NYMEX, COMEX.
• ICE: ICE Futures U.S., Europe, Singapore, Endex.
• Contracts are interchangeable within a group because they clear at the same clearing house — CME clears CME, ICE Clear clears ICE.
• Practical example: buy five E-mini S&P and sell one full-size S&P on Globex to flatten.

Clearing house mechanics

• Becomes buyer to every seller and seller to every buyer — this is what kills counter-party risk.
• Most clearing houses collect margin on the member's net position — 30 long and 20 short means margin on 10 net long.
• Positions are settled daily against the exchange settlement price (a price within the closing range, not necessarily the last trade).
• Money owed is due before the opening of the next business day. In a volatile session the clearing house may call intraday, and that call must be met within one hour.
• Additional margin from a price move is called variation margin.

CFTC vs NFA

Membership

• Mandatory for FCMs, IBs, CPOs, and CTAs who direct or place trades.
• APs become associate members.
• Exempt: floor brokers and floor traders (still exchange-regulated), and CTAs who neither direct nor place trades.
• Members may not do futures business with a suspended member, or with a non-member who is required to be one. Exempt from registration = exempt from membership, and membership is then optional.

Opening the account

• Collect: name, address, occupation, annual income, net worth, prior trading experience, age. The customer is the sole source — no duty to verify independently.
• NFA Rule 2-30: ask individuals to verify annually; update on response.
• A principal or supervisor must approve the account before the AP can trade it.
• If the customer refuses to give more than name, address, age and occupation, you may still open it — make a written record of the refusal.
• Customer dies → cancel all open orders and liquidate open positions; then wait for the executor.

Discretion

• Needs a written power of attorney; revocation must also be written; discretion dies with the customer.
• Not discretion if the customer specifies commodity, month, quantity, and buy or sell — only price and time were left to you.
• A principal must review each discretionary trade by the following day.
• Two consecutive years as a registered AP — waived if the person is a CTA.
• Third-party discretion is barred unless the FCM holds the written grant plus a signed disclosure-document receipt, or the parties are family.

Reporting to pool participants

• Annual report to each participant, 3 copies to the CFTC within 90 days of fiscal year end, certified by an independent CPA.
• Records on request: mailed within 5 business days.

Records and confirmations

• All member records: 5 years (first 2 readily accessible).
• Promotional material plus its approval record: 5 years from last use. Written material needs prior approval by a partner or officer.
• Trade confirmation to the customer within 1 business day; monthly statements, or quarterly if the account is dormant with no open positions.
• Orders time-stamped on receipt with account and order number; option orders also stamped on transmittal.
• For a pool, the FCM confirms to the CPO only, not to each participant.

Discipline — the penalty numbers

An Appeals Committee may increase, decrease, or set aside a Regional Committee penalty. A respondent may settle without admitting or denying. A regulatory complaint against a member becomes public record; ordinary customer complaints do not.

Reparations vs arbitration

Filed within 2 years of the event; decision within 30 days of the hearing; not appealable, enforceable in court. Reparations go to a CFTC administrative law judge and may be appealed to the Commission.

Reporting levels vs position limits

Bona fide hedging includes economically related commodities: sugar futures against corn-syrup exposure, corn futures bought by a cattle feeder.

AML, ethics, continuity

• NFA Rule 2-9 / USA PATRIOT Act. Four pillars: written policies, independent testing, a designated compliance officer, and ongoing training.
• CIP — verify identity, then check the customer against the Treasury OFAC SDN list. A match means block all transactions and notify law enforcement immediately.
• Report cash of more than $10,000 in a single day; report $5,000 or more if the activity is suspicious.
• Ethics training also lives under Rule 2-9 — flexible in frequency and method, but documented.
• NFA Rule 2-38 — a written business continuity plan naming at least two contact persons.

Crop year and the feed ratio

• The crop year runs harvest to harvest. Corn: Sep 1 – Aug 31. Wheat: Jun 1 – May 31.
• Price is normally lowest at harvest — everyone sells at once to repay loans and buy next year's inputs — so July wheat usually trades under the preceding May, which still reflects the old, depleted crop year.
• That flips if the old crop was huge and the new harvest looks poor.
• Hog-corn ratio = bushels of corn equal to 100 lb of live hogs. High ratio = hogs dear, corn cheap → feed the corn to hogs. Low ratio → sell the corn instead.

Volume and open interest

• Volume counts one side. Ten contracts bought means ten sold; volume is 10, not 20.
• Open interest rises when a new long meets a new short.
• Open interest is unchanged when an existing holder is simply replaced by a new one.
• Open interest falls when an existing long sells to an existing short — both leave.
• Open interest peaks at harvest, when elevators and farmers put hedges on, and drains as hedges are lifted.

Normal (carry) market

• Deferred months progressively higher. Also called a carrying-charge or premium market. Cash is under futures.
• Caused by oversupply — harvest selling pushes cash and the near month down while deferreds hold up.
• The cap: a distant month can trade over a near month by no more than full carrying charges. Beyond that, traders buy the near, take delivery, store it, and deliver against the distant month for a locked profit — and that arbitrage pulls the spread back.
• The cap does not hold for perishables, where you cannot carry the commodity forward.

Inverted market (backwardation)

• Near months higher, deferreds progressively lower. Also called a discount market. Cash is over futures.
• Caused by shortage — users bid aggressively for whatever cash exists and buy the near month to secure supply. Deferreds assume the shortage resolves.
• No cap. There is no arbitrage that limits how far the near month can trade over the distant one, because carrying cash forward into a lower-priced sale only loses money.

Convergence

• Cash and futures must converge by the first delivery day.
• If they have not, arbitrage exists — and the arbitrage itself forces convergence.
• Congestion is price trapped between support and resistance with no breakout.

Contract specifications

Deliverable T-bonds must mature in at least 15 years and not be callable for 15 years. The bonds are government-backed; the futures contract is not.

Short-term rate futures

• Five contracts: T-bills, domestic CDs, Eurodollar time deposits, AMERIBOR, SOFR.
• Priced on an index: 100.00 − the rate. A rate of 8.25% quotes as 91.75.
• So rates down → price up. Rates up → price down.
• 1 basis point = $25 because $1,000,000 × 0.01% × ¼ year = $25. Months are Mar/Jun/Sep/Dec, and there is no daily limit.
• SOFR is built on actual Treasury repo transactions and replaced LIBOR after 2023 — a better benchmark precisely because LIBOR was estimated rather than transacted.
• AMERIBOR = overnight unsecured funding across all 50 states and Puerto Rico, on the CBOE, in 7-day and 3-month contracts.

Foreign currency

• Rates are set in the Interbank Market — unregulated and decentralized, banks dealing with banks.
• Spot settles in two business days; anything longer is a forward.
• A currency future is quoted as US dollars per one unit of the currency. Contract value = quote × units. SF at .7500 × 125,000 = $93,750.
• What moves a currency: demand for the country's goods, balance of payments, affluence, foreign investment, monetary and fiscal policy, direct intervention — plus politics, war, and embargoes.

Who pays less

• Hedgers pay less than speculators, for three reasons: an offsetting cash position, better ability to actually make or take delivery, and easier-to-verify financial condition.
• Hedge margin covers only the hedged quantity. Long 3,000,000 bushels of cash but short 3,250,000 in futures → hedge margin on 3,000,000, speculative margin on the 250,000 excess.
• Spreads get lower margin because the two legs move together — a 10-cent loss on the long leg offset by an 8-cent gain on the short leg is a 2-cent problem, not a 10-cent one.
• Excess equity above original margin may be withdrawn, or used to margin new positions — pyramiding.

Commissions

• Round turn covers the buy and the sell together; a half turn is one side.
• Commissions are negotiable between firm and customer.
• A spread costs roughly 70% of two separate trades — but only if both legs are put on in the same session.
• Transfer your open position to a new FCM and you pay the new firm a full round turn anyway.

Leverage math

Worked: buy wheat at 2.50 with 12 cents margin, sell at 2.57, $30 commission.

• Margin = 5,000 × $0.12 = $600
• Gross = 5,000 × $0.07 = $350; net = $320
• Return = 320 ÷ 600 = 53.3%

A 2.8% price move produced a 53% return. That gearing is the whole reason margin questions carry so much weight.

The speculation model

• Commissions subtract from gains and add to losses. They never help.
• If the question gives total commissions for several contracts, divide down to a per-contract round turn first.
• For a rate of return, use profit per contract ÷ margin per contract — do not multiply by contract size or contract count. Those cancel.
• Exchange position traders pay no commission (sometimes a small fee), so a question naming a position trader in the pit is telling you to ignore commissions.

Subtracting 32nds — the borrowing trick

Short 7 T-bonds at 105-14, cover at 102-21, total commissions $385.

• You cannot take 21/32 from 14/32, so borrow a whole point: 105-14 becomes 104 and 46/32 (32 + 14 = 46).
• 104-46 − 102-21 = 2 points and 25/32.
• 2 × $1,000 = $2,000, plus 25 × $31.25 = $781.25 → $2,781.25.
• Commission per contract = $385 ÷ 7 = $55 → net $2,726.25 × 7 = $19,083.75.

Short-term futures and percentage moves

Buy 20 Eurodollars at 93.60, sell at 94.70, $5,000 margin, $40 round turn.

• Move = 1.10 = 110 basis points × $25 = $2,750 per contract.
• Net $2,710 × 20 = $54,200; return = 2,710 ÷ 5,000 = 54.2%.

Percentage-move questions: long 40 soybean contracts at $6.20, price rises 6%, margin $2,500.

• $6.20 × 6% = $0.372 per bushel → × 5,000 = $1,860 per contract.
• Return = 1,860 ÷ 2,500 = 74%. Most of the other numbers in that question were decoration.

Crush and crack

• That 10 : 9 : 12 ratio is the actual processing yield. The crusher locks his margin when it is favorable.
• Reverse crush — sell beans, buy oil and meal. Used when the margin is negative and the plant shuts down.
• The crack — buy crude, sell heating oil and gasoline. Reverse crack flips it.
• Beans (or crude) are always alone on one side; the products are always together on the other.

Reading a spread

Mechanics worth knowing: spread orders go on one ticket, and the CBOT does not accept stop orders on spreads — market or limit only.

NOB and the yield curve

30-year bond futures against 10-year note futures. The bond has longer duration, so it moves more per unit of rate change.

Which hedge, and why

A hedge is a temporary substitute for a cash transaction you will make later. It does not remove risk — it swaps price risk for basis risk and hands the price risk to a speculator.

Secondary benefits the manual lists: hedgers get better credit terms from lenders, and can run on thinner margins, which lowers consumer prices.

Basis, precisely

• Cash below futures = "10 under" = negative basis. Cash above = "5 over" = positive. It is always cash relative to futures, never the reverse.
• Strengthening = becoming more positive (−10 → −9, or +9 → +10).
• Weakening = becoming more negative (−9 → −10, or +10 → +9).
• Your basis is measured against the month you actually hedged in, not necessarily the nearest month. Two elevators buying the same cash wheat can have different bases.

Choosing the month

• Default rule: hedge in the first expiration month after the cash position will be lifted.
• Beyond that, pick the month where the basis change is likeliest to favor you. Long the basis and expecting near futures to rally harder than deferreds? Hedge in the deferred month.
• You are never stuck: hedges can be switched forward, so a hedger gets multi-year protection out of contracts that only list 12 to 18 months out.
• Bona fide hedging covers economically related commodities — sugar futures against corn syrup, corn futures bought by a cattle feeder.

Currency hedging — get the side right

Worked: an American importer owes SF 500,000, franc at .6167, September futures .6572. Contract size 125,000 → buy 4 contracts. Franc rises to .6377 cash, .6752 futures. Unhedged cost would have risen $10,500; the $9,000 futures gain cut the damage to $1,500 — the basis moved 30 points against him, and that gap is the entire cost of the hedge.

Interest-rate hedging

• Anchor: rates and bond prices move inversely, and the further from maturity, the larger the price swing for the same rate move.
• Holding bonds, or committed to issuing debt later? You lose if rates rise → sell T-bond futures.
• Planning to buy bonds with money arriving later? You lose if rates fall → buy T-bond futures.
• Cross-check on the arithmetic: an 8% bond in a 9% world must fall to about $990 with one year left, but to roughly $935 with ten years left.

Two risks, one tool

• Index contracts have a multiplier, not a delivery size, and settle in cash.
• Full-size S&P 500 multiplier $250; E-mini $50; five minis offset one full contract.

Sizing the hedge

• $500,000,000 portfolio, June S&P at 3022.30, multiplier $250.
• 3022.30 × 250 = $755,575 per contract.
• 500,000,000 ÷ 755,575 = 661.7 → sell 661.
• Always round DOWN to a whole contract.

Short hedge protects a portfolio you already hold (or buy in-the-money puts). Long hedge locks in today's market for cash arriving later (or buy in-the-money calls).

Rights, obligations, moneyness

Options are written on the futures contract, not on the cash commodity. Calls are in the money above the strike; puts are in the money below it.

Bond option premiums quote in 64ths: a premium of 1-32 means 1 and 32/64 points = $1,500.

Premium

• Intrinsic = the in-the-money amount, and never below zero.
• Out of the money or at the money → the premium is all time value.
• Time value grows with time remaining and volatility, and decays as expiration approaches.
• At-the-money options carry the most time value of the three moneyness states.
• American style exercises any time; European style only on the business day before expiration.

Delta

How much the premium moves per $1 move in the underlying futures.

High-delta options need fewer contracts but cost more; low-delta options need more contracts but may hedge more cheaply.

Calendar vs vertical

Butterflies and condors

A condor earns less than a butterfly but over a wider price range, and loses less on a big move.

Straddles, strangles, and option margin

• Long straddle — buy the call and the put at the same strike; wants movement. Short straddle wants stillness.
• Strangle — same idea with different strikes. Short strangle breakevens: call strike + premiums, put strike − premiums. Profit capped at the premium, risk unlimited.

Worked: corn at $6.70, futures margin $0.50/bu, sell the $6.60 put at $0.25, 5,000 bu.

• Futures margin $2,500 + premium $1,250 = $3,750
• OTM by $0.10 → deduct 50% × $0.10 × 5,000 = $250
• Total = $3,500

The only two formulas you need

That second line replaces both textbook formulas and works for producers and users alike.

Who wants basis to do what

Conditions and duration

• IOC — immediate, partials allowed, remainder cancelled.
• FOK — all of it now or cancel, no partials. FAK allows partials.
• AON — entire order or nothing; typically long duration.
• Switch — rolls to a later month and costs a full round turn.
• EFP — ex-pit swap of cash and futures between two hedgers.

Mechanics

• Recalculated daily off the settlement price, which is not always the last trade.
• Hedge margin < spec margin; over-hedged quantity pays spec margin. Spread margin is lower still.
• Only excess equity may be withdrawn; using it for new positions is pyramiding.
• Spread commission ≈ 70% of two trades if both legs go on the same session.

The two product spreads

The Crush — buy 10 soybeans, sell 9 oil and 12 meal.

The Crack — buy crude, sell gasoline and heating oil.

Where is the sentiment?

NOB

• 30-year bond futures against 10-year note futures. Bonds move more per unit of rate change.
• Long-term rates falling faster → long T-bond, short T-note.
• Curve steepening → buy the note, sell the bond. Flattening → sell the note, buy the bond.
• CBOT takes no stop orders on spreads; both legs go on one ticket.

Rights and obligations

Calls are in the money above the strike, puts below. American exercises any time; European only the business day before expiration.

Premium anatomy

• Intrinsic is the in-the-money amount; zero if at or out of the money.
• Time value rises with time remaining and volatility; at-the-money options hold the most.
• Long option margin = 100% of the premium. Short = premium + futures margin − 50% of the OTM amount.

Direction and formulas

Volatility plays

Whoever pays premium needs movement; whoever collects needs stillness. The iron condor is the exception that catches people — a credit strategy that wants nothing to happen.

Open interest

• Price and OI moving together = technically strong.
• Moving opposite = technically weak.
• Volume counts one side only.

Normal vs inverted

• Normal / carry: distant months higher, cash under. Premium is capped at full carrying charges — storage, insurance, interest.
• Inverted: distant months lower, cash over. No cap on how far the near month can trade over the distant one.
• Cash and futures must converge by the first delivery day; if not, arbitrage forces it.

Elasticity and speculators

Speculators add liquidity, narrow spreads, and — the exam's position — reduce volatility. They absorb the risk hedgers shed.

Account opening

• Risk disclosure signed and dated at or before opening — first account only.
• A client who refuses personal information may still be opened; record the refusal.
• Everyone signs a margin agreement; a principal approves before the first trade.
• Transfer (supplementary) agreement lets the FCM move funds to a securities account; without it, written approval for each transfer.
• Customer dies → cancel open orders, liquidate positions, wait for the executor.

Limits — two different things

Discretion, allocation, registration

• Bunched orders: allocation need not be specified at entry, but must be done by the CTA or manager before the end of the day, on a fair, equitable, non-preferential basis.
• Discretion needs 2 years as an AP — unless the person is a CTA. Written POA, reviewed by the next day, dies with the customer.
• An AP may be dually registered with both firms' approval; sponsors are jointly and severally responsible.
• Only FCMs and CPOs may hold customer funds.