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Mock 3 Flashcards

1
Q

An investor is long ten futures contracts and long ten put contracts. To offset market risk from this position, the investor should:

A

Sell ten call options

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2
Q

If the interest rate is less than the dividend yield on a FTSE 100 index future:

A

The futures price will be less than the cash price

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3
Q

Which of the following features of an exchange traded option is negotiable?

A

Premium

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4
Q

What will be the impact of an increase in interest rates on cost of carry?

A

Increase

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5
Q

Which ONE of the following is not a major exchange traded metal derivative in the UK?

A

Platinum

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6
Q

Which of the following are uses of futures?

A

Arbitrage
Speculation
Hedging
Cash and carry

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7
Q

Which of the following would you normally expect to be negative from the long’s point of view?

A

Put option deltas

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8
Q

The significance of the arbitrage channel is:

A

That transaction costs outweigh the profit from an arbitrage transaction within this range

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9
Q

Which of the following is the best description of a swaption?

A

The holder can exercise the option and enter into a swap

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10
Q

Put the following actions in order from first to last relating to a holder deciding to exercise an option:

A

The broker completes an exercise notice and forwards it to the clearing house
Upon receipt of the exercise notice the clearing house assigns it to a member firm
The broker receives an assignment notice from the clearing house and allocates it to a client who holds a position as a writer
The writer receives an assignment notice from the clearing house and must then honour their obligations

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11
Q

A time deposit commonly offered to consumers by banks and other financial institutions for a period of 3 to 6 months is the best description of which of the following:

A

Certificate of Deposit

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12
Q

In a contango market, if a trader expects the spread to widen he should:

A

Sell the nearby contract and buy the deferred contract

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13
Q

Which of the following is the best description of a closing contract on the LME?

A

Closing-out of a position to realise a profit on a contract on the settlement date

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14
Q

An investor who hedges his position in the cash market by taking an equal and opposite position in the futures market is most exposed to:

A

Movements in the difference between the price of the cash asset and future’s price

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15
Q

A clearing house is likely to reduce the level of initial margin if the following occurs:

A

The contract volatility decreases

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16
Q

Under which of the following conditions might a broker pay margin money to a customer?

A

As a result of marking-to-market

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17
Q

In order to satisfy good delivery in relation to LME contracts, the physical asset must be issued from:

A

LME approved warehouses

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18
Q

Which of the following would be a motivation for undertaking a covered short call?

A

Prices will remain stable

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19
Q

For what reason would you exercise a receiver swaption?

A

Because interest rates have dropped so the option is in-the-money

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20
Q

Fair value

A

Fair value = cash + costs of carry

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21
Q

Which of the following factors leads to the spread on forward foreign exchange quotes being wider than on spot quotes?

A

Time

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22
Q

If an equity option’s delta increases which of the following is true?

A

Margin required of writer of option increases

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23
Q

Which of the following best describes the purpose of the FCA’s push towards Treating Customers Fairly (TCF)?

A

An agenda that helps consumers achieve a fair deal in the retail market

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24
Q

Interbank deposit rates are used to determine which of the following?

A

Interbank borrowing rates

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25
Which of the following is the best definition of the closing range?
Which of the following is the best definition of the closing range?
26
Which of the following investments would create a diagonal spread?
An investor buys a call option and simultaneously sells another call option with a different strike and different expiry
27
Which organisation would provide an independent guarantee?
The clearing house
28
In relation to a credit spread option, which of the following would be a credit spread?
The difference in a yield on a particular asset and a risk free asset
29
Which of the following describes a down and in form of a barrier option?
A knock in option, that is activated when the asset price falls to or below the pre-determined level
30
Which of the following exchanges are most likely to have arbitrage trades occurring between the two?
ICE and NYMEX
31
Which of the following events is covered by a credit default swap?
Bankruptcy of the firm that issued the bond
32
A client provides initial margin to their broker of £10,000 and the customer agreement has a margin call level of £8,000. Variation margin payments reduce the balance down to £7,750. Which of the following is TRUE?
The client will be required to make a payment of £2,250
33
Which of the following is NOT a possible consequence of inadequate monitoring of an open derivatives position?
Position closed-out by another counterparty
34
A bank asking a client for more collateral in respect of their open-positions is equivalent to:
A margin call
35
A market in backwardation is best described as:
A possibility exists to agree to buy the asset for delivery at a future date at a lower price than the asset is currently trading in the cash market
36
A possibility exists to agree to buy the asset for delivery at a future date at a lower price than the asset is currently trading in the cash market
Register with the CFTC
37
Why are spread margin rates at ICE Clear Europe lower than initial margin rates?
Spreads have less perceived risk
38
Which of the following risks may a bank take on deliberately?
Market and credit
39
The reason behind UK-based Recognised Investment Exchanges recording the time of trades conducted on-exchange is:
The FCA require all RIEs to maintain an audit trail of on-exchange transactions
40
Price transparency means:
The availability of the price information to market participants
41
How would you describe the risk associated with buying a futures contract?
Limited to the futures price
42
A company has issued a fixed coupon bond and now expects interest rates to fall. Which of the following swaps is the most suitable?
Enter a receiver swap
43
Which of the following is untrue of the London FX market?
Trading takes place in one central location in London
44
Which of the following is NOT used in calculating closing futures prices on ICE Futures?
The weighted average of the prices traded during the last ten minutes of trading
45
In which of the following ways do the rules between the UK and the US differ in relation to client asset/money accounts?
UK rules on client money allows segregation or non-segregation whereas all US client's money must be held in a segregated account
46
Which of the following would best describe a credit line?
- It is a pre-established amount of credit extended to the investor by the member firm and that the investor can draw against as needed.
47
Which option pricing model uses the 'volatility smile' as its pricing basis?
SABR
48
You are a ring dealing member of the London Metals Exchange and have quoted one of your clients a price over the telephone. What response should you provide if the client requests a 'second opinion'?
Inform the client that real-time prices from the floor are available from quote vendors
49
An investor who has a long-position in an asset would hedge their position by:
Selling a futures contract
50
How does ICE Futures adjust for exchange rate fluctuations, if the EDSP and contract price of a universal stock future are in different currencies?
The EDSP and contract currency are never different
51
What is the name of the system that calculates margin payments of options and futures portfolios?
Standard portfolio analysis of risk
52
Which of the following best describes the reason for principles-based regulation in respect of client categorisation?
To ensure products are more suitable for clients
53
An investor has a two-month floating rate loan and wants to hedge interest rate exposure without entering into any further contractual obligations. Which of the following is the most suitable hedge?
Interest rate option
54
Which of the following describes spread margin?
A reduced rate of margin for offsetting position
55
What spread trade would make sense in the following situation? An investor expects that the Eurozone yield curve would rotate and flatten at the long end.
Sell the euribor future and Buy the bund future
56
When does the clearing house become counterparty to a trade?
When the trade is registered
57
Which of the following statements about clearing members of an exchange is false?
General clearing members may use non-clearing members to clear trades on their behalf
58
Which of the following factors has the greatest effect on determining the coupon rate on a corporate bond?
Credit rating of the company
59
When an investor holds a call option on a particular asset, which of the following best describes the contract created?
The holder has the right to buy the asset from the writer
60
If forward rates are due to flatten the yield curves would become more:-
Horizontal
61
Which of the following is an example of an intra-market spread?
Long September lead futures contract, short a December lead futures contract
62
A steepening yield curve means that:
Long term rates are rising faster than short term rates
63
Which of the following BEST describes the motivation for gearing?
Higher risk for higher return
64
An investor who buys a call with a higher strike and sells a call with a lower strike has created which of the following positions?
A bear call spread
65
The popularity of OTC derivatives trading has increased because of:
Diversity due to flexibility over contract specifications
66
Which one of the following would create a synthetic equity fund in combination with a holding of a cash deposit?
Long future
67
Which of the following types of margin would allow future margin payments to be deducted from initial margin?
Maintenance margin
68
An investor holds an OTM put option. The value of the underlying rises by 20%. What would you expect to happen to the value of the option?
Decrease
69
The popularity of OTC derivatives trading has increased because of:
Diversity due to flexibility over contract specifications
70
All of the following are applicable to the FCA's principle-based approach EXCEPT:
They centralise the responsibility of regulation on to the FCA. The FCA's principle-based approach sets down high level objectives for firms to achieve. The rationale is that it will promote innovation, allow increased accessibility to the regulations and allow firms to focus on objectives rather than prescriptive rules. The responsibility for following these regulations remains with the firm.
71
Why would a fund manager holding a BBB-rated corporate bond would invest in a credit derivative?
To protect himself against a downgrade of a bond
72
In an open outcry market what is the market price?
Current bid/offer quotes
73
Which ONE of the following applies to a writer of an option on a future?
Receives full premium on the earlier of exercise or expiry
74
Which of the following is the change of the premium of an option with respect to changes in the underlying?
Delta
75
Which of the following trades on exchange primarily as a principal?
Market maker
76
One of the main purposes of regulators is to reduce which of the following?
Systemic risk
77
A warrant traded on the LME:
Confers legal ownership of the asset
78
Which of the following pairs of investments could an investor engage in to create a synthetic long-call?
Buy in the cash market, buy a put
79
Which of the following creates a synthetic long call?
Long the underlying, long a put
80
A cumulative preference share has a 6.5% coupon and the dividends have not been paid in the last five years. Which of the following best describes the rights of the preference shareholders?
The dividends for the last five years are still payable to the preference shareholders
81
Which of the following is the SEC not responsible for?
NYMEX
82
What are the main differences between an interest rate swap and a currency swap?
The principal amounts of a currency swap are transferred between the counterparties but not transferred between counterparties of an interest rate swap The periodic payments of a currency swap are made gross but in an interest rate swap are paid ne
83
In what state would the market be if there was adequate supply and storage?
Contango
84
Which of the following is the best definition of a cross-trade?
A broker takes both sides of the deal
85
Taking into account offsetting position, as a contract approaches delivery, which of the following types of margin is triggered?
Spot month margin
86
Which of the following exchanges operates a period of trading known as a kerb?
LME
87
A floor dealer working on an open outcry exchange carries out trades on behalf of another brokerage house. Once the trade is done, the floor broker passes the trade back to the originating firm. This is called:
A give-up
88
An investor wishing to undertake a long-strangle would do which of the following trades?
Buy a put and a call with different strikes, but the same expiry month
89
Which of the following is a feature of a hedge fund?
High performance fees
90
Which of the following best describes the difference between maintenance margin and variation margin?
Variation margin is used by clearing houses and maintenance margin is used by brokers
91
What is the purpose of position limits?
To prevent the investor from becoming over exposed to the underlying cash asset
92
The purchase of a futures contract at the same time as the sale of the underlying asset in the cash market is best described as:
Basis trading

Derivatives (15 decks)

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