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M6A > Exotic Options > Flashcards

Exotic Options Flashcards

1
Q

For a call barrier option, _____ is the call price. The call price is ______ the strike price.

For a put barrier option, _____ is the call price. The call price is ______ the stike price.

A

Barrier level, higher

Barrier level, lower

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2
Q

For Up & In calls and Down & In puts, these barrier options are like ______ until ____.

For Up and Out calls and Down & Out puts, these barrier options are like ______ until ____.

A

OTM European-style options until the barrier level is reached.

ITM European-style options until the barrier level is reached

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3
Q

Callabale Bull/Bear Contracts (CBBCs) are traded on the _______ with settlement on ____ days, just as that for a _____

A

Cash market of the exchange

T+3

Stock

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4
Q

______ issue CBBC.

CBBCs are independent of ______

A

Investment Banks

Underlying asset and the exchange on which they are listed

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5
Q

Changes in price of a CBBC is _______ with the changes in the ______ as ______

The magnitued of relative movement depends on the ____, which is _____.

A

very much in accordance with the changes in the underlying asset as the delta of the CBBC is approximately equal to 1.

Conversion ratio which is the number of underlying assets that each unit of CBBC is required to buy or sell.

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6
Q

What does 5:1 mean (conversion ratio of CBBC)?

A

5 units of a CBBC control 1 unit of the underlying asset

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7
Q

For a Bear CBBC Contract, the MCE (mandatory call event) occurs if ______

For a Bull CBBC Contract, the MCE (mandatory call event) occurs if ______

A

Spot price touches or moves above the Call Price

Spot price reaches or declines below the Call Price.

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8
Q

The Effective Gearing of CBBC is the same as ______ because _____

A

Simple gearing because delta is equal to 1.

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9
Q

Gearing Ratio of CBBC =

A

Underlying Asset Price / (Price of CBBC x Conversion Ratio)

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10
Q

If the effective gearing of CBBC is 5 times, it means _____

A

1% change in underlying price will result in increase/decrease of the CBBC price by 5%

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11
Q

Gearing ratio is higher if _________

A

the strike price is closer to the spot price of a CBBC’s underlying asset, leading to more flucutuations in the price and higher risk of the CBBC being called

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12
Q

What’s N-CBBC

A

Call price = Strike PRICE

Residual value on termination is zero

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13
Q

What’s R-CBBC?

A

Call price is different from strike price, and a small amount of cash is paid as residual value on termination

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14
Q

What are the characteristics of CBBCs?

Bull Contract: Market View, Call Price & Strike Price, Mandatory Call Event Occurs (knock-out)

Bear Contract: Market View, Call Price & Strike Price, Mandatory Call Event Occurs (knock-out)

A
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15
Q

What are theoretical factors affecting CBBC pricing? (3)

A

Price movement of underlying asset

Strike Price

Financial cost

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16
Q

Financial Costs include ______. (3 types) These costs are ____ for CBBCs with _____, and passed on to the _____.

A

Issuer’s cost of borrowing, adjustments for dividends, and the issuer’s profit margin.

higher for CBBCs with longer maturity

investor by the issuer

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17
Q

What’s theoretical price of a bull/bear contract?

A

Bull Contract = [(Underlying Asset Price - Strike Price) + Financial Cost] / Conversion Ratio

Bear Contract = [(Strike Price - Underlying Asset Price) + Financial Cost] / Conversion Ratio

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18
Q

What are market factors affecting CBBC pricing? (3)

A

Liquidity of the underlying asset

Demand and supply of the CBBC

Issuer related factors

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19
Q

What’s the delta for Bull/Bear CBBC Contracts?

A

Bull: +1

Bear: -1

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20
Q

if MCE occurs

Residual Value for a Bull CBBC Contract =

Residual Value for a Bear CBBC Contract =

A

(Settlement Price - Strike Price) / Conversion Ratio

(Strike Price - Settlement Price) / Conversion Ratio

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21
Q

if there’s no MCE, the investors can hold the CBBC until maturity. At maturity,

Matuiry value for a Bull CBBC Contract =

Matuiry value for a Bear CBBC Contract =

A

(Settlement Price - Strike Price) / Conversion Ratio

(Strike Price - Settlement Price) / Conversion Ratio

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22
Q

The MCE Settlement Price in a Bull Contract is _____

The MCE Settlement Price in a Bear Contract is _____

A

not lower than the minimum trading price of underlying asset between the period of MCE up to the next trading session

not lower than the maximum trading price of underlying asset between the period from the MCE up to the next trading session.

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23
Q

For CBBC expires at maturity, the MCE Settlement Price =

A

Closing price of the udnerlying asset on settlement day

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24
Q

Similarities and Difference between Knock-Out products and Structured warrants or other products

Underlying Asset

Trading method

Bullish View

Bearish View

Strike Price

Call Price

Mandaotry call mechanism

Implied Volatility

Maturity

Holding Cost

Margin Requirement

Duration

Maximum Loss

A
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25
Q

What’s the impact of implied volaitility on CBBCs vs. Structured Warrants?

A

CBBCs: Insignificant to pricing

Structured Warrants: Impacts pricing

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26
Q

Wht’s holding cost of CBBCs vs. Structured Warrants?

A

CBBCs: Financial costs are deducted daily

Structured Warrants: Time dcay

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27
Q

When early termination (mandatory call mechanism) occurs for CBBCs?

A

Bull: Underlying asset price < Call Price

Bear: Underlying asset price > Call Price

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28
Q

Brokerage commissions and finance charges are _____ for CFDs.

In Singapore, no _____ be paid on CFD contracts.

A

Low and competitive

Stamp duty

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29
Q

CFDs has ____ Expiry Date.

A

NO

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30
Q

CFDs are settlted _____

A

always in cash only

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31
Q

What are three main business models used by CFD providers?

A

Market-maker model

Direct market access model

Exchanged-traded CFD model

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32
Q

What’s the mostly used CFD business model in Singapore?

A

DMA

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33
Q

Exchange-Traded CFDs is _____ model that is available in _____

A

Uncommon

Australia

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34
Q

All CFD orders are considered to be ______

A

GTC

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35
Q

What are three types of orders for equity CFDs in Singapore?

A

Limit orders

Market-to-limit orders

Market orders

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36
Q

Stop Entry orders of CFDs can be used to _____

A

Exist a short CFD position.

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37
Q

For a short CFD investor, a stop order or a BUY Stop can set a ____ on the position at a price ____.

On the other hand, a long CFD investor can place a Buy Stop order to _____

A

stop-loss target

above the existing price

enter the market at a price above the existing price, i.e. on a breakout.

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38
Q

Those who are long CFDs ____ a financing cost, while those who are short on CFD contracts _____ financing.

A

incur

get a financing charge benefit

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39
Q

For short CFD positions, the investors receive interest for _____

A

Deferring of the sale proceeds

40
Q

Difference betwen CFDs and Futures

  1. Trading Plarform
  2. Maturity & Expiry date
  3. Financing Cost
  4. Dividends
A
41
Q

What’s CFDs pair trading strategy?

It involves _____

This’s a _____ strategy that aims to _____

A

One long and One short position in CFDs

Market-neutral strategy that aims to exploit a percevied deviation in the underlying share prices from historical trends and expectation of a reversion of the price to the normal trend in the short-term.

42
Q

The two positions of CFDs pair trading ____ the risks, and the investor gains if _____

A

offset the risk

profit on one position is more than the loss on the other

43
Q

ES (Extended Settlement) Contract Specifies _____

A

Quantity

Security

Price for final settlement

Future date for contract maturity or expiry

44
Q

If an ES contract is held to maturity without an offsetting position, the settlement is by _______

A

physical delivery

45
Q

Hedgers can use ES contracts for ______ by _______ to ______

Arbitrageurs can ______

A

Managing their cash market exposure by a long position in the underlying stock and a short position in the ES contracts to lock in prices.

Take advantage of market inefficiencies by taking simultaneous trades that offset each other to capture risk-free profits.

46
Q

The buy-in of ES starts on the day ______

It starts at _____ (price)

A

after the due date, i.e. last trading day or LTD+4 day by Central Depository Pte Ltd

two min. bids above the previous day’s closing price, the current last done price or the current bid, whichever is the highest.

47
Q

SGX set ____ margins in fxied tiers based on ____.

Members may set _____

A

Outright and spread margins

Volatility of the stock

higher margin requirements

48
Q

_____ are important criteria for SGX selecting stocks for ES.

A

Trading volume and market cap

49
Q

ES contracts commence trading on ____ (day).

Each ES series has a tenor of _____ days.

This ensures _____ to enable customers to ____.

A

25th of the month preceeding the spot month

35

overlap period to enable customers to roll over their positions

50
Q

For margins imposed by Member to customer on ES contracts, _____ are exlcuded from margining.

Despite this, the margin calculation by ____ includes _____ because _____

A

Contra contracts

CDP includes the contra contracts because settlement between CDPand Member for the contracts occurs only on LTD+3

51
Q

Apart from the brokerage fees, ES contracts are also subject to the following charges_____ (2 types)

A

A clearing fee of 0.04% of the contract value, limited SGD600

GST on brokerage and clearing fees

52
Q

ES contracts provide opportunities for arbitraging between _____

A

the ES market and the ready market

53
Q

Investors of ES are able to trade spreads between ____ more easily than in the _____

A

stocks

ready market

54
Q

Initial Margins for the new trade of ES may be deposited _____ (when)

A

in advance or within 2 market days from the trade date if the trading member or representative beleives that the margin will be deposited within such time.

55
Q

The initial margin of ES is calculated as ______

A

By multiplying the maintenance margin by the IM:MM ratio stipulated by SGX or the Member

56
Q

Maintenance Margin is calculated by ______ based on ____ (price)

A

multiplying the margin rate with the value of the ES contract based on the last traded price of the underlying in the ready market

57
Q

Variation Margins are not required for _____

A

contra trades

or if the Member allows the customer to book a gain or loss after executing an offsetting trade in an existing position

58
Q

____ is a must for ES contract

A

Outright margin

59
Q

Spread Margining is referred to _____

A

If an investor holds both a long and a short position in ES contracts of different contract months of the same underlying security, he’s only required to deposit one side of the maintenance margin and not two separate maintenance margin amounts

60
Q

Acceptable forms of ES margin collateral (5 types)

A

Cash

Government Securities

Bank Certificate of Deposit

Gold Bars or approved Gold Certificate

Selected common shares

61
Q

Valuaiton of the collateral for ES is based on ____ prescribed by _____

A

hiar-cut rates

SGX

62
Q

Differences among ES Contracts with Contra and Margin Financing

  1. Leverage
  2. Financing Cost
  3. Short Selling
  4. Borrowing Cost
A
63
Q

Knock-in barrier options are ideal for ____

Knock-out barrier options are ideal for _____

A

Speculating Large market moves

Speculating small moves in a sideways market

64
Q

Barrier Reverse Convertibles appeal to investors _____.

A

Looking for income.

65
Q

The Barrier Reverse Convertibles contain ____, and the investor is taking ___ risk.

A

Investors are effectively long a bond/money market instrument and short a knock-out put option.

Selling the put option, the investor is is taking downside risk

66
Q

Investors of Barrier Reverse Convertibles are paid _____ at maturity if _____

A

principal plus coupon

the barrier is never breached

67
Q

The coupon in a Barrier Reverse Convertible is paid _____

A

regardless of market direction of the underlying

68
Q

Investors of a Barrier Reverse Convertible have a ____ view on direction of the underlying.

They expect ____ and do not expect _____

A

Neutral

falling volatility

underlying to breach the barrier during product lifetime.

69
Q

Investors in bonus certificates are generlaly _____ on underlying but are looking for ____ if markets are flat or slightly down.

A

bullish

yield enhancement

70
Q

Bonus of Bonus certificates is available as long as _____

A

the underlying is above the barrier

71
Q

If underlying of a bonus certificate is below the barrier, investors have ____ exposure to the downside.

A

1:1

72
Q

The exposure in a bonus certificate is similar to _____ with the benefit of a bonus if ____

A

Direct investment in the underlying, with the benefit of a bonus if underlying performance is flat or slightly negative.

73
Q

In a bonus certificate, Barrier is usually observed ____ throughout the term of the product.

A

Continuously

74
Q

In the bonus certificate, if underlying is below the barrier, investors have ____ exposure to the downside.

A

1:1

75
Q

Generally, the ____ the strike price is to the spot price of a CBBC’s underlying asset, the ____ will be the gearing ratio of the CBBC.

A

closer

higher

76
Q

For category N-CBBC, the call price is equal to its ___.

The CBBC holder will not ______

A

strike price.

The CBBC holder will not receive any cash payment once the underlying asset price reaches or exceeds the call price (when MCE occurs and the CBBC is called).

77
Q

Price of a Callable Bull/Bear Contract is NOT adjusted for ____ because ____

A

regular share dividends

they’re taken into account by the issuer as part of the funding cost

78
Q

At the end of each day, all open positions in ES contracts will be revalued or marked to their respective ____ prices by ____

A

Valuation

CDP

79
Q

In arriving at the Valuation Price of an Extended Settlement (ES) contract BEFORE the LTD, the SGX will take into account _____

After the LTD, when the ES contract has stopped trading, _____ will be used for marking-to-market.

A

the last traded price, the bid-offer spread at the close of the market and price data derived from pricing models, as selected or established by SGX from time to time

the closing price for the underlying

80
Q

Excess Margin in case of a customer for an Extended Settlement Contract is the Customer Asset Value in excess of ____

A

The sum of Initial margin and Variation margin (Additional Margins)

81
Q

Memebers may allow their customers to withdraw Excess Margins provided such withdrawal will not _____

A

cause the deposited collateral or Customer Asset Value to be less than zero

82
Q

A 6-month (125 business days) accumulator with a strike price of S$1.60, with daily observation and 1,000 shares to be acquired per day may help an Investor to get ____ shares for _____

A

1251,000=125,000 shares for $1.6125,000=$200,000.

83
Q

A Range Accrual Note (RAN) based on interest rate is a ____

If the closing interest rate on a parrituclar day is ____ of the range, ___ interest may accrue.

A

Structured fixed income product

If the closing interest rate on a particular day is below the lower end of the range, a lower or zero interest may accrue

84
Q

RAN basd on the HSI:

The range is the range between ____ barrier and ____ barrier

The range is based on ____

___ volaility in HSI may lead to ____

A

Knock-out barrier and accrual barrier

Spot price

Higher volatility may lead to higher expected yield

85
Q

The contract size for Eurodollar Futures is ____.

A

USD 1,000,000

86
Q

The upside of RAN is _____

A

Limited to the maximum coupon rate

87
Q

Credit Linked Notes (CLNs) are constructed based on ____

A

The credit default swaps linked to one or more reference entities (a company or companies).

88
Q

CLNs are ____ (type) products. The principal sum is ____.

They can be settled by ____

A

OTC

Not guaranteed

cash or physical delivery

89
Q

Auto-callable structured products normally offer ___ yields to investors to ____.

A

Auto-callable structured products normally offer HIGHER yields to investors to compensate for the risk of the product being called before maturity.

90
Q

Auto-callable structured products can be constructed using _____ options (type)

A

American / Bermudan

91
Q

What’s the common requirement for both Equity CFDs and Equity Futures contracts?

A

Margin and Leverage requirements

92
Q

Investors and directors of listed companies must also note that ES transactions can amount to a change _____, and should comply with ____.

A

Interest in the underlying security

Companies Act (especially sections 164-166)

SFA (Division 2 and 3 of Part VII)

Listing Rule 704 of the SGX-ST Listing Manual.

93
Q

The trading schedule of ES contracts is _____.

A

Fixed

94
Q

ES contracts are ____ products (type)

A

Leveraged

95
Q

The First Trading Day of ES Contract is _____

A

25th of the month that is immediately preceeding the contract month

M6A (5 decks)

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