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M6A > Warrants & Structured Products > Flashcards

Warrants & Structured Products Flashcards

1
Q

At-the-money warrants have a delta of around ___.

It means that ____

A

0.5

1 cent increase the underlying price will lead to 0.5 cent change in the warrant value

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2
Q

Call wrrants with highe strike prices result in ____, but are not suitable if _____

A

High strike price

A small change in price is anticipated

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3
Q

Call Wrrant IV =

Put Warrant IV =

A

Call = Max {0, (S-X)/n}

Put = Max {0, (X-S)/n}

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3
Q

IV (Intrinsic Value) is zero for _____ (type of warrants)

A

OTM and ATM warrants

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4
Q

CP (Conversion Price) for Call Warrant

CP (Conversion Price) for Put Warrant

A

Call CP = X + nWP

Put CP = X - nWP

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5
Q

The warrant premium is mainly its ____

A

time value

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6
Q

Premium of warrant is ____

A

Difference between the price of warrant and its intrinsic value.

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7
Q

Premium of Call Warrants

Premium of Put Warrants

A

Call Warrants Premium = nWP + X - S

Put Warrants Premium = nWP + S - X

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8
Q

If expressed in percentage, premium is _____

A

the percentage by which the underlying share price should move by maturity so that the investor breaks even

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9
Q

Premium (%) of Call Warrants

Premium (%) of Put Warrants

A

Premium (%) of Call Warrants = [(nWP+X-S)/S] * 100

Premium (%) of Put Warrants = [(nWP+S-X)/S] * 100

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10
Q

In both put and call warrants, exercise expenses are payable by _____ to the _____

A

warrant holder to the warrant agent

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11
Q

Cash settlement of a call warrant:

Cash settlement of a put warrant:

A

Calll = (S-X)/n per warrant

Put = (X-S)/n per warrant

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12
Q

New Exercise Price of Structured Warrants =

A

New Exercise Price = Old Exercise Price x Adjustment Factor

Adjustment Factor = (P-SD-ND)/(P-ND), where

P = the last cum-date closing price of hte underlying

SD = Special dividend per share

ND = Normal dividend per share

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13
Q

Adjustment for Share Buy Backs / Cancellations of the underlying stocks of structured warrants:

New Exercise Price =

A

New Exercise Price = Old Exercise Price * Adj. Factor 1 * Adj. Factor 2

Adj. Factor 1 = Existing Shares /Number of shares on an ex-basis

Ad. Factor 2 = (P-CD) / P, where

P = the last cum-date closing price of the underlying

CD = Cash distribution per share held immediately prior to the Capital Reduction/Buyback

New Conversion Ratio = Old Conversion Ratio * Adjustment Factor 1 * Adjustment Factor 2

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14
Q

Adjustment for Share Splits of the underlying stocks of structured warrants:

A

New Exercise Price = Old Exercise Price * Adjustment Factor, where Adjustment Factor = Existing Shares / Number of shares on an ex-basis

New Conversion Ratio = Old Conversion Ratio * Adjustment Factor

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15
Q

For each currency translated warrants, the settlement amount =

For instance, a structured warrant on the Hang Seng Inde is traded in Singapore, the underlying currency HKD is different from the settlement currency SGD

A

MAX {0, Underlying Currency 1 * [(Refrence Level - Exercise Level)/n] x Exchange Rate (Settlement Currency / Underlying Currency)}

MAX {0, HKD 1 * [(Refrence Level - Exercise Level)/n] x Exchange Rate (SGD/HKD)}

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16
Q

The Conversion value or parity value of a convertible bond is _____

Conversion value =

A

its value if it’s converted immediately

Conversion value = market price of share * conversion ratio

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17
Q

What’s the min. value of convertible bond?

A

Greater of its conversion value or its value without the conversion option, i.e. the straight value

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18
Q

Market conversion premium per share for a convertible bond =

A

Market conversion price - share price

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19
Q

What’s Premium of Convertible Bond over straight value?

A

= (market price of convertible bond / straight value) - 1

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20
Q

For warrants, the downside risk of the warrant is ____

A

the value of warrant

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21
Q

For convertible bonds, the downside risk is _____

A

the difference between the convertible price and the staight bond value

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22
Q

The payback period, without factoring the time value of money, for a convertible bond is calculated as ____

A

Premium payback period = market conversion premium / income differential per share

Income differential per share = [coupon - (conversion ratio * dividend per share)] / conversion ratio

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23
Q

What’s the participation rate of a structured products?

A

The percentage increase in the structured product’s return for every 1% increase in the performance of the reference asset

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24
Q

If warrants issued as an attachment to a bond, they help ____ the coupon paybale to the holders.

This’s because ____

A

Decrease

The bond issue is made more attractive by the option to buy shares

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25
Q

Warrants can be listed and traded ____

A

Seperately

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26
Q

A zero strike warrant is essentially a _____ has an exercise price of ___, which means that it’s always _____.

The cash settlement and warrant price are euqal to ____

A

Synthetic Stock

Zero

In-the-money

the underlying security’s closing price.

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27
Q

In Singapore, company warrants can be exercised _____ (at what time)

A

anytime before expiry

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28
Q

In the case of convertible bonds, the downside is _____.

The downside of a convertible bond is ______.

The market value conversion per share can be considered as ______

A

Not fixed.

The downside of a convertible bond is the difference between the convertible price and the straight bond, and the value of the straight bond is not a constant.

the value of the embedded call option

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29
Q

Parity value of a convertible bond is _____

A

Market price of the underlying share x conversion ratio

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30
Q

What’s the market conversion price or conversion parity price?

A

The effective price that an investor pays for SHARES, if the investor purchases the convertible bond and converts it into shares

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31
Q

The market conversion price can be seen as a ____ price as _____

A

Breakeven price

Once the actual share price increase above the market conversion price, any further increase would result in an increase in the convertible bond’s price.

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32
Q

Gearing ratio of a warrant =

A

Share price / (Warrant price * Conversion ratio)

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33
Q

Investors expecting a small move in the underlying asset price should buy warrants which are _____ (type), while investors expecting a large move can buy _____.

A

ATM or Slightly ITM

OTM (as they’re cheaper)

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34
Q

In the name of a structured warrant, strike price shown ____

A

after the name of the underlying instrument if it’s an index

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35
Q

In the case of warrants, the premium is usually expressed as a percentage of _____

A

UNDERLYING share price

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36
Q

In case of a call warrant, the premium is = (2 ways)

A
  1. Warrant price - Intrinsic Value
  2. Conversion price - market price of the underlying

Call warrant premium = nWP + X - S and nWP + X = Call Warrant Conversion Price

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37
Q

All structured warrants listed on SGX-ST have the ____ style of expiry settelemnt (_____ contracts).

A

Asian

path-dependent contracts

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38
Q

Jane purchased an Asian call option (strike price $102) on the shares of PQR Limited when the spot price was $100 per share. The premium paid was $1 per share. The settlement price is determined based on the arithmetic average of the month end closing prices for the 3 months. PQR stock prices at the end of the 1st, 2nd and 3rd month are $109, $104, and $96.

The net profit/loss of Jane is ____

What if it’s a plain vanilla call option?

A

Net profit = Intrinsic value - premium paid = (103-102) -1 = 0

Jane breaks even.

Had it been a plain vanilla call option, the option would have been out of the money on the expiry date (spot price of $96 is less than the strike price).

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39
Q

In A discount certificate, exercise price is ____ the issue price.

At maturity, if the underlying asset’s closing price on expiration or valuation date(s) is at or above the exercise price, the holder will receive _____

If the closing price is below the exercise price, then the holder will receive ____

A

Above

A cash settlement equal to the exercise price

A cash settlement equal to the Value of the Underlying on the expiration or valuation date(s).

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40
Q

Under the Financial Advisors Act, one of the criteria to determine whether an individual is an HNWI or not includes that total net personal assets of the person should exceed _____ in value or the equivalent in foreign currencies.

A

S$2 million

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41
Q

Structured products that have a conversion feature to another currency or type of asset, are _____

A

NOT principal protected

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42
Q

Jane wants to hedge against a rise in GBP by investing in a Dual Currency Investment (DCI). What is the possible problem with this hedging strategy?

A

The GBP may rise significantly and she may not be able to buy GBP at a good rate when she subsequently needs the GBP

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43
Q

Jane’s daughter is studying in the United States. She wants to buy USD/SGD at 1.35 for her son’s education expenses. A one-year (365 days) dual currency investment (DCI) is available at 5% per annum with a strike price of USD/SGD 1.35. She invests SGD100,000 in the DCI when the USD/SGD spot rate is 1.37.

What is the USD/SGD breakeven point for Jane if she invests in the DCI?

If USD/SGD spot rate is 1.360 upon expiry of the DCI, what amount will Jane get back at maturity?

A

If USD/SGD is below the strike price on maturity, Jane will get USD77,778 = 100,000 * (1+5%) / 1.35

For breaking even (getting back the initial SGD 100,000), the USD/SGD rate should be = 100,000/77,778 = 1.2857

If USD/SGD spot rate is 1.360 upon expiry of the DCI, what amount will Jane get back at maturity?

Since the USD/SGD spot is above the strike price, Jane will get the 5% yield = 100,000 * (1+5%) = SGD105,000

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44
Q

Based on the following data for a Dual Currency Investment, which of the following statements is/are TRUE? Investment sum: SGD 200,000, Base currency: SGD, Alternate currency: USD, Tenor: 1 year, Interest rate: 8%, Strike price: USD/SGD 1.3500 (current rate: USD/SGD 1.3900). USD sum to be received if spot rate goes below the strike price: USD 160,000

  1. The breakeven USD/SGD exchange rate for the investor is ____
  2. The investor will receive ____ if the put is not exercised
  3. If USD/SGD is 1.15 at maturity, the investor will receive ____
  4. As long as the USD/SGD remains at ____, the investor will not lose money.
A
  1. USD160,000/SGD200,000 = USD/SGD 1.25
  2. SGD 200,000 * (1+8%) = SGD$216,000
  3. At USD/SGD 1.15, this will transalte into SGD 1.15 * 160K = SGD184K
  4. remains at or above the breakeven point of 1.25 (which is below the strike price)
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45
Q

In a Constant Proportion Portfolio Insurance (CPPI) product, Cusion Value =

A

Cusion Value = Total portfolio - Floor Value

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46
Q

In a Constant Proportion Portfolio Insurance (CPPI) product, Allocation to Risky Asset =

A

Allocation to risky asset = Multiplier * Cushion Value

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47
Q

In a Constant Proportion Portfolio Insurance (CPPI) product, Multiplier =

A

Multiplier = Allocation to Risky Asset / Cushion Value

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48
Q

In a CPPI product, as the investment moves towards maturity, the floor value approaches ____

A

100% of the principal sum

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49
Q

In a CPPI product, Crash Size =

A

Crash Size = 1/Multiplier

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50
Q

The CPPI strategy involves a ____ allocation between risk-free and risky assets. It provides protection to _____

A

Dynamic

protection to the capital initially invested

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51
Q

DPPI is similar to CPPI. Unlike CPPI, however, _____

A

The MULTIPLIER of DPPI is a variable instead of being a constant.

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52
Q

Under CPPI, ____ is calculated at regular intervals.

A

a floor value of the total portfolio

53
Q

Structured products with principal preservation features can still be considered _____ depending on_____

A

High risk depending on the investment grade of the underlying fixed income securities

54
Q

Brokers sometimes provide ____ financing against structured products

A

Short-term

55
Q

Structured products are _____ and need to ____ to avoid losses

A

illiquid and need to be held till maturity to avoid losses

56
Q

____ makes a payment to the bank in case of default of the reference entity in a Credit Default Swap.

A

Issuer

57
Q

A structured note is in the form of _____ or ______

A

A debenture or a structured deposit

58
Q

All debentures are _____ debts

A

Senior, unsecured and unsubordinated

59
Q

In Singapore, the principal sum of the structured deposits, with or without interest, must be ____

A

repaid in full at maturity

60
Q

If financial advice is given for sale of a structured deposit ______ (regulation) need to be followed unless the investor is an _____ (4)

A

FAA

Accredited investor

High net worth individual

Overseas investor who is not a Singaporean or a Singapore permanent resident

Institutional investor

61
Q

Constant Proportion Portfolio Insurance (CPPI) is a _____ that aims to ______.

It involves ________

A

Trading Strategy that aims to ensure a fixed minimum return at all times or on a specified future date.

It involves continuous non-discretionary rebalancing of portfolio allocation between risky and safe assets based on a formula or mathematical algorithm.

62
Q

Sharpe Ratio is ____

Sharpe Ratio =

A

a risk-adjusted measure of performance

The ratio = (Return of the portfolio - risk-free rate) / Standard deviation of the portfolio returns

63
Q

What are excluded from TER (Total Expense Ratio)?

A

trading fees

interest expense

brokerage fees

64
Q

TER (Total Expense Ratio) =

A

Total cost of the fund / Total assets

65
Q

SICAV is _____ fund (type)

A

open-ended CIS / Umbrella fund

66
Q

VaR is measured in three variables which are ____

A

amount of potential loss

probability of that loss

time frame

67
Q

___ and ____ is used to measure volatility

A

Standard deviation or variance between returns of the asset or fund

68
Q

Depending on the financial techniques involved in creation, structured funds can be classified into two categories, namely, _____

A

those which are based on derivatives

and those which are based on techniques derived from portfolio insurance

69
Q

Fund Trustee should ensure that proper accounts are maintained and ____ is audited.

The unit holders should get the semi-annual report within ____ from the end of the relevant period and also receive the annual report within ____ from the end of relevant period.

A

CIS

2 months

3 months

70
Q

Any breaches should be intimated to the MAS within _____ days after the breach comes to notice of Trustee

A

3 business days

71
Q

Schemes that are only offered to institutional investors are _____ schemes.

In an offer to institutional investors, ____ and ____ is not required.

A

NOT restricted schemes

prospectus and information memorandum

72
Q

Restricted schemes are those ____ (3 types of investors)

A

offered only to accredited investors, other relevant persons, and those who subscribe with SGD 200,000 or more per transaction

73
Q

Alternative Assets ETFs focus on alternative assets, mainly _____

These ETFs provide a ____for _____

A

listed hedge funds

secondary market for hedge funds that are less liquid

74
Q

ETNs are ____ issued by ____ and are not subject to _____

A

debt securities

banks

diversification requirement

75
Q

ETC are _____ issued by ____.

ETC is a type of ____ backed by _____

A

debt securities issued by banks

ETN backed by securities or physical assets, i.e. gold

76
Q

The bid-offer spread is impacted, among other things, by _____

A

the cost of hedging

77
Q

The _____ framework can be used to evaluate country risk.

A

PESTLE

78
Q

___ risk accentuates the transactional risk

A

Currency Risk

79
Q

Issuer risk is a part of ______ risk

A

counterparty

80
Q

Structured warrant holders re exposed to ____ risks

A

issuer risk and the credit rating risk of the issuing bank

81
Q

What are three main types of risks involved in trading?

A

Market risks

Credit risks

Settlement risks

82
Q

What’s DV01?

A

Dollar value per basis point is the dollar change in price with respect to the yield of a fixed-income security or a swap.

83
Q

Modified duration measures ____

Modified duration increases with ______

A

the sensitivity of the bond price to changes in interest rate

increase in time to maturity

fall in coupon rates

fall in bond yields

84
Q

A VaR statistic has three components, namely ____

A
  1. relatively high level of confidence, usually 95% or 99%
  2. a time period
  3. an estimate of investment loss in dollars or in percentage
85
Q

In the case of a classic structured product: Equity-Linked Structured Note

The discount sum =

A

$100 - PV

PV = $100/(1+r)*T

PV = Present Value

r = rate of interest

T = number of periods

86
Q

____ options can be used to reduce the maturity term and holding period in order to mitigate investment risks.

A

Exotic options such as “up-and-out” barrier call option

87
Q

The negative effects of mark-to-market valuation are _____ for auto-callable structured products if _____

A

avoided

if the product is redeemed due to the call event

88
Q

Reverse Convertibles consist of ____

The upside is _____

The downside is _____

A

A low-risk and a high-risk component and is suitable for those investors who are looking for higher yield

A zero-coupon bond and a short put option is used.

The upside is capped at the premium from the option and the discount sum from the zero-coupon bond.

However, the downside risk is significant as far as the short-put option is concerned.

89
Q

The discount certificate is made up of ____

A

A long position zero-strike call option and a short call position on a given stock that is either ATM or OTM

90
Q

The discount certificate’s structure is governed by ______ model based on the _____ principal.

A

options pricing model based on the put-call parity principal

91
Q

The put-call parity principal of a discounted certificate can be represented as ____

A

Put-call parity: C + PV (X) = S + P

Bond (Note) + Short Put (Reverse convertible) = Long Call (Zero Strike) + Short Call (Discount Certificate)

92
Q

There’s ____ difference in the secondary trading of ETFs on exchange for physical and swap-based ETFs.

A

NO

93
Q

Primary liquidity of ETFs relates to ______

A

the creation and redemption process

94
Q

The creation/redemption process in an ETF can be done ______

A

in-kind with the underlying securities

95
Q

In the context of risks associated with structured products, the structured product is considered the issuer’s _____

Currency risk can be a type of ____ risk

There’s default risk associated with ______ risk

A

liability

return

principal risk and return risk

96
Q

Shock absorbers _____ when markets experience significant volatility.

It ____ halt trading completely.

A

SLOW DOWN trading

DOES NOT

97
Q

Market (systematic) risk refers to _____.

Market risk is _____ as counterparty risk, which is a ____ risk

A

Price movements in the financial markets and its influence on the asset’s price

NOT the same

product-specific risk

98
Q

Which type of bonds are less sensitive to interest rate?

A

Short-term bonds with high coupons and high initial yields

99
Q

The ISDA 1 classifies credit default as ____ (6 types)

A

Bankruptcy

Obligation Acceleration

Obligation Default

Failure to Pay

Repudiation/Moratorium

Restructuring

100
Q

A pay-fixed swap options protects the investor against _____

If the structured product involves shorting an interest rate put swaption, investors are liable to ____

The pay-fixed swaption buyer will exercise the swaption when _____

The losses to the swaption SELLER are ____and dependent on ____

A

interest rate increase

Pay out a FLOATING rate when the option is exercised by the buyer.

when the market rate is higher than the strike rate.

unlimited and dependent on how high the floating rate is when the option is exercised.

101
Q

If the structured product involves shorting an interest rate call swaption, investors of the structured product are liable to _____

A

pay out a fixed rate when the option is exercised (i.e. selling protection against decrease in interest rates) while receiving the floating rate in the swap.

In normal cases, the loss to swaption seller is limited to the fixed rate when the floating rate declines to zero when the option is exercised by the swaption buyer.

In rare market conditions where negative interest rates occur, the investor may have pay the floating interest leg of the swaption as well.

102
Q

In the case of Receive-Fixed Interest Rate Call Swaption, if the investor is the swaption seller, exercise of the option implies _____

The investor pays ____ and receives ____

Investor’s loss is ______

A

selling protection against decrease in interest rates.

PAYs fixed rate and Receives a floating rate.

Investor’s loss is limited to a predetermined FIXED rate when option is exercised.

103
Q

If the value of the call option in a callable bond increases, the value of the callable bond will ____ because _____

A

decrease

the bond holders will have sold a call option component to the issuer

104
Q

The Modified Duration measures _____.

A higher modified duration implies ____

A modified duration of 5 means _____

A

The bond price’s sensitivity to changes in interest rate.

A higher modified duration implies that a security is more interest rate sensitive.

If the YTM of Bond decrease by 1%, its value will increase by 5%

105
Q

What’s “duration” of the bond?

A

It’s the weighted average time to maturity of a bond in present value terms

106
Q

For fixed income securities, _____ is a better measure for interest rate risk as it reflects _____

A

DV01 (Dollar value per basis point)

the dollar, rather than the percentage change, in price with respect to the yield of a fixed-income security or a swap.

107
Q

VaR is more widely used for ____

VaR reflects ____

A

measuring risk for a specified portfolio of financial assets

the potential loss amount

108
Q

A higher modified duration implies that a security is more interest rate sensitive. It reflects ______

A

the greater risks of longer-dated exposures compared to shorter-dated ones.

109
Q

Open contracts limit is determined after studying the contract’s ______ and _____.

More volatile contracts are subject to a _____ open contract limit.

Different open contracts limit can be set for _____ trades

A

volatility and estimating the expected maximum LOSS

smaller

outright and spread trades

110
Q

Outright and spread trades can have ___ open contract limit

A

Different

111
Q

If the 1-day 99% VaR of a portfolio is $100,000, it means

A

the portfolio is 1% = 100% - 99% likely to fall by more than $100,000 over a 1-day period

112
Q

Maximum loss limit is set for each trader/trading group in terms of _____ maximum losses. (frequency)

A

weekly and monthly

113
Q

By setting a lower VaR, the portfolio size has to be ____ and/or _____ have to be reduced.

A

Lower

Highly correlated risks

114
Q

What’re two methods to restrict gamma?

A
  1. Limiting the absolute change in DELTA
  2. Applying risk tolerance amounts expressed as maximum loss, both for a given moment in the spot price.
115
Q

Delta (change in the asset price) limits are normally set in terms of ______ currency amount

A

USD or the local currency amount

116
Q

Theta is limited by ______

A

potential loss over a specified period, such as a 1-day period.

117
Q

Gamma, vega and theta are sometimes controlled together by _____

A

setting the maximum loss for all THREE COMBINED

118
Q

In an equity-linked structured note having a zero-coupon bond and a long position in a call option, the participation rate can be ______ than 100%.

This’s becasue ______

A

less than, equal to or more than

The discount sum can be less than, equal to, or more than the call option price.

119
Q

The barrier level in a up & out knock-out equity option is calculated as _____

A

a pre-decided percentage above the strike price of the option

120
Q

The recurring management and administration fees in an Equity-Linked Structured Fund ranges between _____

A

1%~2%

121
Q

The upfront sales commission in an Equity-Linked Structured Fund ranges between _____

A

3%~5%

122
Q

The yield from a Reverse Convertibles comprised of a zero-coupon bond and a short put is sum of ______

A

Sum of the accretion of interest from the bond and the premium income

123
Q

For an Equity Discount Certificate, the premium received from the sale of the calls _____

A

partially offsets the amount paid for purchase of a zero-strike call option

124
Q

For an Equity Discount Certificate, the amount paid for purchase of a zero-strike call option is partially offset by _____

A

the premium received from the sale of the calls

125
Q

For an Equity Discount Certificate, the amount paid by an investor is ____ than that paid for a similar Reverse Convertible.

A

less

126
Q

At maturity of an Equity Discount Certificate, ____ is received.

A

Face value of the certificate

127
Q

The equity discount certificate consists of ______.

The upside pay-out of discount certificate is _____ as ______.

On the downside, the _____ component of the discount certificate exposes the investor to ______ with ______ at risk.

A

A long position zero-strike call option and a short call position on given stock with a strike that is ATM or OTM.

Capped as the product gets knocked out when the asset price rises and breaches the barrier level.

short call; FULL adverse movement of the stock price, with the entire amount of the investment capital at risk

128
Q

Exercise of warrants ____ the company earnings per share

A

dilute

129
Q

Commodity warrant structured and marketed by _____ (institutions) are generally _____ settled.

A

Banks

cash

130
Q

The demand for structured products has grown due to ____ interest rate environment.

A

Low

131
Q

What is the meaning of cushion in the context of a structured fund?

A

The proportion of the fund’s assets that can be exposed to risk without risking the preservation feature.

M6A (5 decks)

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