AFMA Core: Exam tips Flashcards
What are the key features of the 2 main types of financial markets in Australia
- OTC
2. Exchange traded
Explain the difference between primary and secondary market
Primary: Issuance for the first time
Secondary: subsequent transactions
What are the key differences between debt and equity markets; and why might you choose one over the other as a corporate?
Choose one over the other due to costs - when interest rates are low use debt markets, if high use equities
Name some key participants in the Australian Financial markets
Central banks, wealthy individuals, governments, corporates
Describe the following:
- intermediation
- portfolio management
- risk management
- proprietary trading
blah blah blah
What is a money broker
Money broker:
- brings together buyers and sellers of currency
- Brings together borrowers & lenders
- Shows best bid/offer to market place
- Charges a commission
- Never act as principles (never trade on own account)
Exam QN:
If you have invested at 7% and inflation is 2.5% what is the nominal rate of inflation
Ans; 7%. Do not be tricked into adding inflation to the nominal rate
Identify the 5 broad sectors of the economy
- Government
- State government
- Corporations
- Large wealthy individuals
- Households
When does cost push inflation occur
When the price of goods and sevrices is rising (eg oil)
What is demand led inflation
Demand outstrips supply (esp in low interest rate environment)
What is the main measure of inflation in Australia
CPI
Explain TWI
Trade Weighted Index: basket of currencies against which the A$ is measured.
What is the core premise of technical analysis (note - around 8 questions in exam will be on this)
Technical analysis: \
- identifies critical pricing levels
- price discounts everything (all information is already incorporated)
- Price is moving trends, why - history repeats
- Supply is NOT a core premise
Placing orders under technical analysis
- if price is above support, buy, if price is above resistance, sell
Describe Commonwealth Government Security
Cwlth Govt Sec = debt instrument issued by Aus Govt. Pay FV for bond, receive fixed coupons
Describe outright forward transaction
Outright fwd trx; set a rate now for 1 month’s time. Risk = spot exchange risk and interest rate differential between currency pair for the term of the contract
Descrive overnight index swap
OIS: interest compounded daily
Describe preference share
Prefs are paid out before ordinary shareholders
When do issuers issue fixed vs FRN format
Fixed: issue when rates are low
FRN: issue when you think rates are going down. Usually at a margin to reference rate eg BBSW
Interest Rate Options:
3 types
3 types interest rate options:
- Cap (protect against rates going higher)
- Floor (protect against rates going lower)
- Collar (look for cheaper premium
Forward rate agreement
1 forward date vs another
Exam QN: You have a borrowing facility which requires monthly interest payments over the next 12 months. You are ocncerned about rising interest rates and you wish to hedge against the possible exposure using a series of options. Which of the following is most suitable: a) swaption b) floor c) cap d) forward
Exam ANS:
c) cap
(worried about rates rising, therefore use cap)
List 3 commodities traded in the world market
- gold (comex)
- tin (london metals exchange)
- tapas oil
Exam Qn: You are a large corporate client of Bank A. The bank suggests issuing a long term debt product. This product has no fixed interest coupon payments, instead the coupon is set at a amrgin above a short term reference rate. This product is known as: a) interest indexed bond b) bond c) zero coupon bond d) floating rate notes
Exam ANS:
d) FRN
Exam QN: The latest balance of payments figures have been released. What type of indicator are these figures: a) leading b) lagging c) coincident d) none of the above
exam ANS:
(b) lagging
Exam QN:
Under the purchasing power of parity theory (PPP) a country’s competitiveness depends on:
a) commodity price
b) infrastructure and exchange rate controls
c) cost of production and exchange rate
d) vulnerability to attacks by speculators
Exam ANS:
c) cost of production and exchange rate
Possible Exam Question:
News headline; inflation rate is out of control vs trading partners. how would the A$ react
Possible exam answer:
A$ would depreciate if AUS inflation out of control vs other countries (due to the change in balance of payments)
Exam QN:
Which of these transactions would take place in a primary market?
a) the purchase of a Treasury note at a yield of 4.75% with a maturity of Feb 2012
b) ABC securities issued to BOZ Brokers Pty Ltd who are the underwriters of the issue
c) Blue Bank buys USD 10m at spot AUD / USD 1.0505
d) all of the above
Exam ANS:
b) ABC securities issued to BOZ Brokers Pty Ltd who are the underwriters of the issue
(note: FX is not primary or secondary.)
Exam QN:
Assume the government is adopting a neutral fiscal policy. This indicates that:
a) inflation is high
b) the budget is balanced
c) taxes are high
d) the short end of the curve is being affected by monetary policy
Exam ANS:
b) the budget is balanced
Possibloe exam QN:
The Federal Government announces its 1st budget surplus in many years. How will this affect borrowings for corporates
Possible exam ANS:
Costs will go down (less supply of government bonds, therefore less crowding out)
Possible exam qn:
Describe Non Deliverable Forwards
Possible ANS, non deliverable forwards:
- no delivery of principle
- used for cufrrency with exchange control regulations
- customer should do their underlying spot FX transaction for same value date as their NDFs
Limit types
- External (set by regulators; determine max risk limit for banks
- Board set trading (open position) limits (transaction; intraday; open positions; lending/borrowing mismatches; day and overnight limits)
- Counterparty limits (set by credit department)
- Stop loss limits (set by line/desk managers)
List 5 order types
- limit order
- market order
- stop loss order
- order at specified price
- order with discretion