Getting Started - Mathematics Required For The Examination

Mathematics Required For The Examination
Math on the Series 3 entails nothing more than addition, subtraction, multiplication and division. One does, however, need to read word problems carefully in order to understand which operations are required to arrive at a solution and why.

For example, say you had to compute an initial margin that is 25% higher than the maintenance margin. You are told that the maintenance margin is $500. You would need to multiply $500 times 1.25 (that means knowing that 25% is the same as 0.25, and that you have to add 1 to that to account for the $500 starting point) to arrive at $625.

To compute profits or losses from trades, you'll have to multiply the number of contracts by the number of units per contract by the price per unit. We will spend a great deal of time on this in Chapter 11: Test Taking.

You will also need to understand numerical concepts that may appear at first blush counterintuitive. For example, if the basis – an important concept from Chapter 6: Hedging – goes from -6 cents to -3 cents, you need to know that it is going up rather than down.

Lastly, you will need to understand ratios. They are nothing more than division. But you may well be asked to compute the return on equity if your trade earned $100 gross profit on an investment of $25. If you answered "$4," that's incorrect. First of all, the answer will be a percentage, not a dollar figure. Secondly, you have to subtract that $25 investment out of the $100 profit to make a fair comparison. The formula, then, is ($100-$25)/$25. (This also presupposes that you know to perform the function in the parentheses before moving on.) So we come up with $75/$25, which can be expressed as 3, but is more correctly written as 300%, when asked for a return on equity figure.

General Theory
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