Track & Error Flashcards
John buys a Eurodollar futures contract at 95.00 and sells it the same day at 95.04.
What’s the profit made by John?
(95.04 - 95) * $2,500 = $100 (for 4 basis points)
Basis Point (BP) Value of a Eurodollar futures contract is $25. This’s because a 1% annual (360) interest rate move leads to a 0.25% impact on the actual dollar value of the Eurodollar futures contract as the underlying security is a $1,000,000, 90-day LIBOR deposit.
Based on the cotnract value of $1 million, a 1% change in interest rate will lead to 0.25% * $1 million = $2,500 change.
So the change per basis point (0.01%) = $2500/100 = $25
John buys S&P 500 Index at 3,500 points (Day 1). The initial margin is 10% and the maintenance margin is 9%. The value per point is $250.
John deposited the initial margin at the time of taking the position. He also deposited $10,000 and $12,000 on day 2 and day 3, respectively.
The index moved to 3,450 on Day 2, 3,390 on Day 3, and 3,400 on Day 4.
What’s the margin balance at the end of Day 4? Presume that margin calls were issued, if required, and John stopped up the margin balance, if required.
$84,500
Jane has a forex trading account. When should the bank give a warning regarding her initial margin balance?
The warning should be given when the margin balance falls below the initial margin (NOT maintenance margin).
In the US Treasury Futures, the invoice price =
Settlement Price x Conversion Factor (CF) + Accrued Interest
The price quote for 2-year T-note Futures is in terms of ____
percent of par to 1/4 to 1/32nd of 1% of par (US$15.625 rounded up to nearest cent)
The Stop Order trigger condition can be defined by ____
Stop Series
Stop Price
Stop Price Reference Type
Stock Price Condition
SGX-DC provides clearing for which of the following trades?
A. OTC commodity trades registered via the SGX OTC Trade Registration Platform
B. Products listed on SGX-DT
C. OTC financial derivatives trades registered via industry-used trade registration system.
D. All of the above
D
John is worried that the fuel prices may rise significantly once the economy picks up.
Currently, he buys crude oil at $70 per barrel (the spot price) and has contracted to sell to his customers at $73 per barrel over the next 6 months.
The 6-month crude oil futures contracts are trading at $69 per barrel.
If John buys crude oil futures at $69, and the spot and futures prices after 6 months are $67 and $68, he will make _____ per barrel net.
If he buys the contract at $69 and the futures price falls to $68, he will lose $1 per barrel in the futures trade.
However, his profit in the cash market will increase to $73 - $67 = $6 per barrel.
Therefore, he will make $5 per barrel on a net basis.
The GBP/SGD spot rate is 1.865. The 1-year interest rates for SGD and GBP are 3% and 1% respectively.
What’s the 1-year (360 days) outright GBP/SGD rate?
1-year outright GBP/SGD = 1.865 (Spot Rate) * (1+3%)/(1+1%) = 1.9019
Countery Currency: SGD
Base Currency: GBP
Jane thinks that S$ is going to appreciate against the USD over the next 6 months. She should ____
A. Selling bonds she owned
B. Short-selling bond calls
C. Overweight on interest-sensitive stocks
Go overweight on interest-sensitive stocks
If S$ is expected to appreciate, domestic interest rates are likely to fall, bond prices rise. Therefore, selling bonds or short-selling bond calls is not an appropriate strategy.
Compared to a market weighted index, an equally-weighted index comprising of the same stocks will always have a ____ exposure to smaller market cap stocks and ___ exposure to large-cap stocks
Greater
Lesser
There’s ____ uptick rule for short-selling Equity Index Futures.
NO
Borrowing shares is ____ allowed in the case of short-selling Equity Index Futures.
NOT allowed
The S&P/Case-Shiller Home Price Index is a series of indices representing _____ different metropolitan statistical areas.
10
What are the SGX-DT products eligible for mutual offset with CME?
Nikkei 225 Index Futures (NK)
USD Nikkei 225 Index Futures (NU)
SGX FTSE Emerging Market Index Futures (FEM)
SGX FTSE China H50 Index Futures (FCH)
If the contract interest rate for a 3-month Eurodollar futures contract is 2.5% per annum, what is the contract IMM Index?
100 - 2.5 = 97.5
John takes a clendar spread position by selling 1,000 June 2020/September 2020 Eurodollar spread.
The June 2020 contract was quoted at 98.5 and the September 2020 was quoted at 98.2 at the time of taking the position.
At the time of closing the position after 2 weeks, the quotes were 98.8 and 97.9.
What’s the payoff for John?
John selling 1,000 June 2020 at 98.5 and close by buy it at 98.8 (a loss of 30 basis points)
The loss = (98.9-98.5) * 100* 1,000 * $25 = $750,000
John bought September 2020 at 98.2 and sell at 97.9
The loss = (98.2-97.7) * 100 * 1,000 * 25 = $750,000
Tottal loss = $750,000 + $750,000 = $1.5 million.
The spread widened from 30 basis points (98.5-98.2) to 90 basis points (98.8-97.7).
The steepening of the curve resulted in a loss in the short calendar spread position.
Calculate the number of contracts required for a delta-neutral hedge of the interest rate on a 270-day loan for US$10 million using Eurodollar futures.
The interest payment is due in 270 days. The prevailing interest rate is equal to 5%.
Assume that the interest rate on the loan is correlated one to one with the Eurodollar rate.
Basis point value (BPV) of the $10 million, 270 day loan = ($10 million x (270/360)) * 0.01% = $750
Discounted value of the BPV = $750 / (1+5%*270/360) = $722.9
BPV of a Eurodollar futures contract = $25
Therefore the number of contracts required = $722.9 / $25 = 28.92 or 29 contracts
ABC Limited expects to borrow $10 million for 2 years at 3-month LIBOR fixed premium in March 2020.
The premium is reset quarterly. ABC wants to use Eurodollar futures for hedging.
For hedging purpose, the loan is broken into 8 quarterly strips with 1st 90-days locked in.
How can ABC hedge against interest rate increases over 8 quarterly loan reset dates if it expects the yield curve to steepen?
of contracts to hedge = BPV of loan (7 quarters * 90 = 630 days) / contract size = $1,750 / 25 = 70
BPV of loan = $10,000,000 * (630 days / 360) x 0.01% = $1,750
So ABC should sell 70 contracts.
If ABC expects the yield curve to STEEPEN, it should stack the short hedge in the DISTANT futures (December 2021 contract) because short-term yields are expected to decline relative to long-term yields.
Eurodollars futures price will move in the opposite direction.
If ABC will be borrowing money, it must _____ Eurodollar futures to hedge against any ___ in interest rates.
Sell
increase
Jane hedges her equity portoflio for 3 months by short-selling S&P500 futures at 3,300 (value of each point being $250).
The spot prices at the time of hedging and after 3 months are 3,310 and 3,360 respectively.
The futures price after 3 months is 3,355. The value of the stock portfolio at the time of initiating the hedge was USD 10 million.
The beta of stock portfolio is 2.00.
Ignoring dividend payout on the S&P 500 index and transaction costs, what is the overall value of Jane’s portfolio net of the loss in the futures contract hedge?
of Contracts required for the hedge = ($10 million / (3,300 * 250)) * 2 = 24 contracts
The loss in the short position = 24* $250 * (3,355 - 3,300) = $330,000
The gain in the portfolio = ((3,360-3,310)/3,310)100)2 = 3.021%
Therefore, the value of the portoflio at the end of 3 months = (1+3.021%) * $10 million = $10,302,100
Net of the heding loss, the portoflio value = $10,302,100 - $330,000 = $9,972,100
A trader buys a calendar spread of futures contracts and the long-term interest rates rise more than the short-term interest rates.
He will ____ on the nearer leg and _____ on the further leg
If the long-term interest rates rise more than the short-term interest rate, the price of long-term contract dropped more than the short-term contract
Calendar spread is composed by buy short-term contract + short long-term contract
Suffer a loss on the nearer leg and make a profit on the further leg
The TED spread is used as an indicator of _____ because U.S. T-bills are considered risk free, while the rate associated with the Eurodollar futures reflects _____
Credit risk
the credit ratings of corporate borrowers
In the 130/30 long-short strategy used by hedge fund mangers ______
Outperformers in the portfolio are 130% of the AUM (Long)
Underperformers in the portfolio are 30% of the AUM (Short)
If a consumer has taken housing loan from a bank at floating rate and he expects the rates to go up. What alternatives does he have to cover the risk?
To hedge against the risk of increase in interest rates, the consumer can ______ (2 ways)
Sell interest rate futures as the interest rates increase, the interest rate futures will fall, giving a profit in the short hedge.
Alternatively, he can buy interest rate call options to profit from the rise in the value of the option if interest rate rises.
The profits will partly offset the higher borrowing costs.
Immunization is ____ (form) of hedge and is done for ____
What’s the objective of immunization hedge?
Strong-form cash hedge; done for a currently held cash position
To minimize the variance in the expected total returns of a portfolio
Inventory hedge is for _____
vs.
Strong-form hedge
Covering risks related to assets to be held for an indefinite period of time
Covering risks on assets to be held for a given investment period
PQR Limited has taken a loan of $1 million on a fixed interest rate of 5% per annum from X Bank.
LMN Limited has taken a $1 million loan on a floating rate of LIBOR+1% from Y bank.
PQR prefers a floating rate and LMN prefers a fixed interest rate. Therefore, they enter into an interest rate swap (IRS) where PQR agrees to pay LMN LIBOR+0.5% per annum and LMN agrees to pay PQR 4.5% per annum (both cash flows based on $1 million).
Analyze the cash flow
PRQ: Pay Fixed interest rate of 5% (X Bank) + LIBOR + 0.5% (LMN) - fixed rate of 4.5% fixed received from LMN = Pay 1% + LIBOR
PRQ’s liability increases or decreases with LIBOR, $10K for each percent movement
LMN: Pay LIBOR + 1% (To Y Bank) + Receive LIBOR + 0.5% from (PRQ) + Pay fixed rate of 4.5% to PRQ = Locked 5% per annum
The cash flows between PQR and LMN are netted. Therefore, if LIBOR is 3%, PQR pays 3.5% or $35k to LMN and LMN (always) pays $45K to PQR.
What factors must be considered for evaluating the sutiability (viability) of an arbitrage opportunity? (3)
Brokerage
Initial margin
Basis risks
John has shorted 100 shares of ABC Limited at $15.00 per share. To hedge his short position, he buys ABC’s call option with a strike price of $16 at $1.5 per share.
What’s the maximum gain per share possible in this position?
For maximum gain, ABC’s share price goes to zero.
Then John makes $15 on his short position. However, he has paid $1.5 or the call option which expires worthless if ABC’s share goes to zero.
Therefore, the maximum gain per share = $15 - $1.5 = $13.5
What’s a bear put debit spread involves?
Long ITM put and a short OTM put
What’s a bull call spread?
Long ITM call + Short OTM call
What’s long straddle? vs. Long Strangle?
- Long Straddle: Buy the call and the put for same strike price/underlying/time to expiry
- Long Strangle: Buy OTM call and PUT
What’s the appropriate strategy to hedge a long position with great volatility with expectation of declining price?
Buy ATM put option
Selling call or put options (significant loss potential) may turn out to be risky because of the security’s expected volatility.
Jane buys 1,000 shares of PQR Limited at $50. PQR is a volatile stock and it is known to fall significantly post its earnings release. The next earning release is due in a 5 weeks.
The current market price of PQR shares is $51 and the premium for its $50 call and put options is $3 per share (lot size 100 shares, expiry in 2 months).
If Jane wants to hedge her long stock position, what should she do?
A. Sell the 1,000 shares and book $1,000 profit.
B. Sell 10 lots of call options with a strike price of $50.
C. Sell 10 lots of put options with a strike price of $50.
D. Buy 10 lots of put options with a strike price of $50.
D
PQR is a volatile stock with large movements post major events (i.e. earnings release). Therefore, it makes sense to hedge the position with an ATM put option.
In the event of a significant fall, the profit in the long put position will offset the loss in the long stock position.
Selling the shares is not a way to HEDGE a stock portfolio.
Selling call or put options (significant loss potential) may turn out to be risky because of the security’s expected volatility.
John buys 1000 shares of PQR Limited at $100. John believes that the stock price of PQR will rise over the long-term.
A few days after the purchase, a brokerage report forecasts a 3% correction in the stock after the quarterly results (due in 7 days) are announced.
John believes that the correction will be temporary and the stock will rebound within a few weeks.
He wants to take advantage of the temporary fall. The current market price of PQR shares is $99 and the premium for its $100 call and put options is $2 per share (lot size 100 shares, expiry in 14 days). What should John do?
A. Sell the 1,000 shares and book $1,000 loss
B. Sell 10 lots of call options with a strike price of $100.
C. Sell 10 lots of put options with a strike price of $100.
D. Buy 10 lots of put options with a strike price of $100.
B
Uncovered call is ___strategy
Bearish
Straddles can be purchased in case of a ____ outlook
Neutral
Covered call writing is a ____ strategy
Neutral
What’s a bear CALL spread? What’s the market view of a bear CALL spread?
Buy OTM call and Sell ITM Call
Expect a moderate decline in the underlying
What’s a bear put spread? What’s the market view of a bear PUT spread?
Buy ITM Put and Sell OTM Put
Expect a decline in the underlying
What’s a debit bull spread? It’s called “debit bull spread” because ____
When is a debit bull spread used? (Market View)
A debit bull spread is a bull call spread.
It includes buy a ITM call (lower strike price, higher premium) and sell a OTM call (higher strike price, lower premium).
Bull call spreads involve taking a debit (net outflow, paying a premium for the spread)
Market Outlook: Price to moderately go up
Bull call spread vs. Bear call spread
Bull call spread: BUY ITM Call + Sell OTM Call
Bear Call spread: BUY OTM Call + Sell ITM Call
Bull put spreads is also called ____ because ____
It involves _____
Bull put spread is also called (credit bull spread). It involves taking credit (net inflow = premium)
BUY OTM put (lower premium) + Sell ITM put (higher premium)
Diagonal spreads are created using options of ____ (security) ____ (strike price) and _____ (expiration dates).
A diagonal spread is a combination of ____ and ____spreads.
Same
Different
Different
Vertical and calendar
What’s a ratio spreads? What’s the market view? (2:1 ratio spread)
What’s the downside and upside?
The investor sell 2 options for every 1 long option.
Calls in a call ratio spread and puts in a put ratio spread.
Ratio spreads are a market neutral strategy where the investor expects little movement in the underlying share price in the near term.
The upside is limited but there’s potentially unlimited risk on the downside (in the case of calls), due to the net short position when the ratio position is established.
If equity puts are used, the maximum theoretical loss is when the share price reaches zero.
Index options are settled in ___
Cash
Interest rate options are settled in ___
Cash
Currency options are structurally ____ as currency futures contracts
the SAME
Options on futures tend to enjoy _____ liquidity than the options that required actual delivery of a cash instrument.
Greater
Expiry date of bond options is ____ the maturity of the underlying bond.
before
Bond options are mostly traded ___.
OTC
The rights in a bond option can be exercised ____ the expiration date.
on or before
Interest rate options are ____ style options
European options
Interest rate options allow a borrower to _____
Interest rate options allow a lender to _____
- fix interest rate at a particular call strike price to avoid paying higher interest expense when they worry about rising interest rates.
- fix interest rate at a particular put strike level to protect earnings at a particular level when interest rates are falling.
An interest rate option gives the option buyer the right but not the obligation to ____
make (call) or receive (put) known interest rate payment.
What does it mean for an investor buys an interest rate PUT option on SIBOR with an exercise price of 2.0%?
This means that at expiration, if the prevailing SIBOR rate is lower than 2.0%.
The investor will exercise his option and will receive 2.0% in lieu of the prevailing SIBOR rate.
John believes that S$ will appreciate against the USD. John should:
A. Sell USD and buy S$
B. Buy USD and sell S$
C. Buy call options that give him the right to buy USD
D. Sell call options on S$.
A
Payment of dividend _____ the price of the call option as _____
Decrease
The underlying share price falls when the share becomes ex-dividend
Higher strike price mean ____ option price
Lower
Market price - strike price = Intrinsic Value (option price)
Fall in risk-free interest rates makes the call option more ____
valuable
Jane believes that the stock price of PQR will rise significantly over the next few weeks.
The current market price is $100 per share and Jane wants to buy 10,000 shares.
However, she only has $100,000 and cannot purchase the desired quantity.
The lot size for call and put options on PQR’s stock is 100 shares. The premium for the call and the put options for $100 strike price is $3 per share.
If Jane is an aggressive investor, she should:
A. Sell 100 lots of put options on PRQ’s shares with a strike price of $100.
B. Sell 100 lots of call options on PRQ’s shares with a strike price of $100.
C. Buy 100 lots of call options on PRQ’s shares with a strike price of $100.
D. Buy 100 lots of put options on PRQ’s shares with a strike price of $100.
C
What is the best situation for payoff of short position in put options is ____
Zero
Payoff = - (Strike - market price)
Payoff of short positions in put options cannot be negative
A call holder can ____ the option to reduce his loss due to ___
exercise
cost of the option
What is the intrinsic value of the put buyer?
Strike price minus market price, or zero (whichever is greater)
Characteristics of the payoff graph of a put option at expiry include:
A. Upward slope of a long put before the exercise price
B. A horizontal line after the exercise price for a short put
C. A horizontal line before the exercise price for a long put
D. None of the above
C
Synthetic Long position on an asset can be created by _____ because _____
According to the put-call parity
C + PV (X) = P + S
S = C + PV (X) - P
Buying the call, short-selling the put and LENDING the present value of the exercise price
Price of an option is a value equal to or greater than _____ based on whether ______
equal to or greater than its intrinsic value based on whether the time value is greather than 0
If the thoeretical value of an option changes by minus 5 cents per day, its theta is ____
-0.05
Theta is usually displayed as a _____ measure (time period)
1-day or 7-day measure
In the case of a Credit Default Swap, the holders provide _____ and the bank ____
Provide guarantee on credit default by companies
Bank pays the premium for the guarantee
Holders of CDS stand to _____ in the case of any reference entity defaults.
lose a significant amount
Structured notes are usually a combination of ______
Two or more underlying financial instruments
The coupons received from a bond in a structured note can be used for purchasing ______
Options contract
Issuers should AVOID using _____ in PHS (The Product Highlights Sheet)
Technical terms and disclaimers
If a structured note is issued by a special purpose vehicle, it’s ____
A. illegal
B. off-balance sheet from the bank’s perspective
C. the investors still have recourse to the bank in the event of a default
D. All of the above
B
A 1-year structured deposit linked to MSCI Singapore index has a participation rate of 30% above the strike price of 500. If the MSCI is at 495 and Jane invests $500,000 in this structured deposit (1 month remaining to maturity), what will she receive upon maturity if the index is fixed at 520 on the maturity date?
Jane’s gain 520 - 500 = 20. With a participation rate of 30%, the gain is 20*30% = 6.
The amount received = (1+6/500) * $500,000 = $506,000
The offer for a debenture structured note is exempted from prospectus requirements if _____ (3)
The offer is made only to institutional investors, accredited investors and made for a minimum consideration
Under the SFA, an accredited investor includes ___
- An individual whose ____
- A corporation _____
- Trustee _____
- An individual whose net personal assets exceed in value $2 million or income in the preceding 12 months is not less than $300,000
- A corporation with NET assets exceeding $10 million in value
- Trustee of such trust as the authority may prescribe, when acting in that capacity
Structured deposits must meet _____ as define under the _____
the definition of deposit as define under the Banking Act
Structured deposits are similar to structured notes as they _____
a debt obligation of the bank
Unlike structured notes, structured deposits are a type of ____ and are NOT _____
deposit
debentures
A Bermudan swaption is ____ option, where the ____ is obligated to enter into an underlying swap on _____ exercise dates during the life of the swaption.
Unlike an American swaption which _______, a Bermudan swaption _____
an interest rate option
Seller
various
can be exercised anytime during the life of swaption
can ONLY be exercised on the rate fixing dates
A Variable Maturity - Multi - Callable RAN is a RAN ______.
The note holder will _____ as he’ll be ______
The note issuer will have the right to ____
embedded with callable features at each interest fixing date.
Receive a higher yield as he’ll be SELLING a Bermudan Swaption on top of buying a RAN.
Terminate the structure on the various rate fixing dates if the implied forward rate proves to be higher than the strike fixed rate, which then exposes the holder to reinvestment risk.
Callable Range Accrual Notes (RANs) are likely to have ___ yields as compared to non-callable RANs because ____ .
Higher
because the call feature makes them riskier
An inverse floater note is a structured note that ______
The initial coupon is _____ than a bank deposit rate.
If interest rates go up, the coupon is ____ by the ____
Pays coupons which are inversely linked to a floating interest rate index.
Higher
Reduced by the leveraged increase of the interest rate, which is determined by a leverage factor.
Product description: Structured note linked to XYZ Ltd stock price, Reference underlying asset: XYZ Ltd shares, Notional Investment: USD 1,000,000, Purchase price of ELN: USD 850,000, Maturity: 100% notional sum if XYZ share price is at or above the strike price on the fixing date, OR XYZ shares if XYZ share price is below the strike price on the fixing date, Tenure: 1 year, Current XYZ share price: USD 9.00, Strike Price: USD 8.50. Based on the above data, which of the following statements is/are FALSE?
The yield of the ELN in the best-case scenario is 15%
If the price of XYZ on fixing date is USD 8.5, the investor will lose USD 50,000
If the price of XYZ on fixing date is USD 8.00, the investor will get 125,000 shares of XYZ
If the price of XYZ on fixing date is USD 12.00, the investor will make USD 350,000
ALL 4 are FALSE.
If the price is at or above the strike price, the investor will get US$1,000,000 on maturity.
Therefore, he’ll make a maximum profit of US$150,000 on US$850,000 = 17.65%
If the price of XYZ on fixing date is below the strike price, the investor will get shares based on notional amount and the strike price, which is equal to US$1,000,000 / US$8.5 = 117,647 shares.
The investor will be able to sell these shares at US$D in the market to get US$941,176 = US$8 * 117,647
The notional amount in an equity-linked note is $100,000, the ELN price is $0.99, the strike price is $5, and current price of the underlying is $5.35. What is the breakeven price?
If the price drops below the strike price, the investor will get $100,000 / 5 = 20,000 shares
The breakeven price = $99,000 / 20,000 = $4.95
The fixing date of an equity-linked note is usually ____
2 business days from the maturity date
A worst of ELN pays a ___ yield and / or has ____ strike level as compared to a normal ELN because _____
higher
lower
it is much more risky, with exposure to a decline of not just a single stock or index
An accumulator involves a ____ and a ____ on the underlying asset.
Long Call
Short Put
The unfunded structure replication method of an structured exchange-traded fund is a type of _____ method
Swap-based
Exchange-traded commodities (ETC) are ____ (types) issued by ___ to _____.
ETCs are special type of ____ which are backed by _______
Debt Securities issued banks to track the performance of commodities
ETN which are backed by securities or physical assets such as gold
Risks of trading in options include ____ risks (4 types)
Counterparty risks (in OTC options)
interest rate risk
market risk
liquidity risk
Jane wants to invest in bonds that have very low interest rate sensitivity. Jane should invest in bonds that are:
short-term with high coupons
____ (short/long-term) bonds with ____ (low/high) coupons and ____ initial yields are _____ to interest rate
Short-term bonds with high coupons and high initial yields are less sensitive to interest rate
In which scenarios will a swaption seller also be required to pay the floating interest leg of the swaption?
if interest rate becomes negative
In the case of Receive-Fixed Interest Rate Call Swaption if the investor is the swaption seller exercise of the option implies _____
Exercise of the option implies selling protection against decrease in interest rates.
Reinvestment risk is greatest for bonds with _____ (4 characteristics)
large coupons, higher coupon payment frequency, long maturities, selling at a premium.
If the interest rate volatility increases significantly, the value of a callable bond _____ because ______
Declines as investors required higher yield and thus lower bond value.
The value of call option increases when interest rate volatility increases, which will reduce the value of the callable bond because the bond holders will have sold a call option component to the issuer
They main types of risks involved in trading futures include _____ (3)
credit risks, market risks and settlement risks
Counterparty risks of Futures are ____ because _____
negligible because futures are exchange-traded
An Equity-Linked Structured Note comprises of a zero-coupon bond and a long position in a call option on an index with 100% participation rate. The zero-coupon bond is issued at a 7% discount to face value, and is redeemed at par on maturity after one year. The value of the call option doubles till maturity. What is the total return to the investor during the year?
The PV of Zero-Coupon bond = $100/(1+7%) = $93.46
The amount invested in the call option = 100 - 93.46 = 6.54
The call option doubles in value to $13.08. Thus, profit from the call is $6.54
Therefore, the return on investment = $6.54/$100 = 6.54%
Regarding the factors impacting the participation rate in a classic equtiy-linked note (Zero-coupon bond + a long position in a call option), which of the following statments is FALSE?
A. Higher maturity reduces the participation rate
B. Use of up & out barrier increases the participation rate
C. Higher discount rate will increase the participation rate
D. None of the above
A.
All else being equal, a higher maturity period will increase the discounting factor and hence increase the discount, which lowers the issue price.
Therefore, more money will be available for investing in the return coponent (call option), which means that the participation rate will be higher.
Similarly, higher discount rate will increase the participation rate.
The use of up & out barrier will increase the participation rate because the cost of a shorter maturity knock-out call option is cheaper than that of a conventional call option.
From the investor’s perspective, the best time ot invest in Equity-Linked Structured Notes with zero-coupon bond and long position in a call option is when ______
The interest rates are high and the volatility of the underlying asset is low.
This’s because higher interest rates will lower the PV of the zero-coupon bond and provide more funds for the purchase of the call option.
Also, lower volatility will make the cost of equity options cheaper for the investment product (thereby increasing the participation rate).
The face value of a Zero-coupon bond is $50 and the discount rate is 8% with 2 years to maturity. If the call premium on a 2 year KO Barrier contract for an underlying index is $10, what is the participation rate?
The issue price of the bond = 50/(1+8%)^2 = 42.87
Therefore, the discount (the amount available for investing in the $ call) is 50 - 42.87 = 7.133
Hence, the participation rate = 7.133/10 = 71.33%
Mark-to-market valuation of auto-callable structured products is _____
avoided
In the case of an Equity-Linked Exchange-Traded Fund (ETF), the likely minimum investment amount is ____
1 board lot
The back-end redemption and switching fees in an Equity-Linked Structured Fund ranges between ____
2% - 3%
The key variables impacting the outcome of investment in Equity-Linked Structured Notes include _______ (2)
interest rates and the volatility of the underlying asset
The likely minimum investment amount in a Equity-Linked Structured note is ____.
SGD50,000 or higher
The upfront brokerage in an Equity-Linked Exchange-Traded Fund is _____
<1%
The slope of the pay-off diagram of a Reverse Convertible with a zero-coupon bond and a short put is _______
Flat at and above the strike price of the option, and upward sloping below the strike price of the option
The payoff diagram of the discount certificate is similar to ____, which is _____
Reverse Convertible with zero-coupon bond and short put option
Below strike price: upward sloping
At and above the strike price: Flat
What’s the upside/downside of a Reverse Convertibles comprises a zero-coupon bond and a short put option?
The positive upside pay-out is capped.
The full extent of the investment amount is exposed to downside risk.
For a call barrier option, the barrier level is _____ the strike price.
For a put barrier option, the barrier level is _____ the strike price.
Higher than or equal
Lower than or equal
A Single Barrier Call/Put Option will expire worthless (get knocked out) if ____
Call: Spot price is above the knock-out price
Put: Spot price is below the konck-out price
For Double barrier options, the expectations are that _____
The profit potential is ____
Underlying will remain in a RANGE.
Capped
____ a major risk in barrier option as they’re _____
Counterparty riks
OTC products
For barrier option, there’s a high risk of _____if ______
loss premium if barrier conditions are breached (i.e. knock-OUT event occurs or if there’s NO knock-in event).
