Final Flashcards
Which of the following would explain the change in an option’s premium as a result of increasing interest rates and assuming all other things remain constant?
It will increase the value of calls and decrease the value of puts
What is the definition of a stop limit order?
An order with two prices given, the first activates the order and the second giving a specified price of better
When trade details are input incorrectly, this can result in a wide range of problems. Which of the below would not be seen directly as one of these problems?
Counterparty settlement failure
When a futures contract draws towards expiry the difference between cash and future price should come towards zero. This is called?
Convergence
Which of the following is a soft commodity?
Coffee
The general procedure for the payment of OTC options is when?
T+1
The fair value of S&P 500 index future is 805 points, yet the S&P 500 future is currently trading at 800 points. What would a risk averse investor do in the given situation?
Buy the future, sell the cash asset
index credit default swap would be closely related to a/an:
Total return swap
The EDSP will be calculated on:
Last trading day
Cash settled contracts are settled on a ‘net payment’ basis, whch means net cash payments are based on:
Marked-to-market price
block trade
It allows members and their wholesale clients to transact business as bilaterally agreed transactions without delay and with certainty of price and execution
Soybean contracts can be traded on which of the following markets?
CME group
If a borrower is uncertain of interest rates, which exchange traded position would protect them if interest rates rise?
Short future
Which of the following represents the seller of an american style payer swaption?
An obligation, at any time up till the option’s expiry, to enter into a swap and pay floating rate
Which one of the following is an intra-market spread?
Buying June cocoa and selling September cocoa
Which of the following is the best definition of a Rollercoaster swap?
The notional will rise and fall repeatedly, in line with the seasonal borrowing requirements
Which of the following is false regarding the London Metal Exchange?
Open outcry only
You would exercise a puttable bond when:-
- Interest rates rise
Which event will have a greater impact on the forward BID/OFFER spread between GBP/EUR?
An increase in the UK interest rates of 0.5%
What is the last notice day in a futures contract?
Last day to state an intent to deliver
What is making it increasing difficult to differentiate the over-the-counter market in derivatives from the exchange-traded market?
Use of technology in straight through processing of trades
More collateral may be called by the bank at various times during the life on an interest rate swap. Which of the following would best explain why this occurs?
The reset date is approaching
A company wishes to raise capital but also believe interest rates will fall. Which of the following will provide protection if there is this change in interest rate?
Callable bond
An investor holds a short position in South American soybean futures. Which is the last day upon which the investor can close out their position?
The last trading day
Which of the following is a matching system on ICE futures Europe?
Trade registration system
If a clearing house member defaults what will the clearing house do first cover a loss?
Use the margin money and collateral received from the defaulting member
As the delta of an option increases it should be expected that:
The seller’s variation margin increases
Which of the following describes a vanilla interest rate swap?
An exchange of cash flows at the end of a period to which the interest rate relates
Where do Dax futures trade?
Eurex
A 3 month call option and a 3 month put option on the same stock have the same premium and the same strike price of $30. The current stock price is $31 and interest rates are 10% pa. An arbitrageur should:
Buy the call, sell the put and sell the stock
Selling futures against the delivery of the underlying asset such as cocoa is which type of strategy?
Hedging
Why might a broker give up a client trade to another clearing member?
Client has an agreement with another firm to clear all their trades
Payout of a credit spread option is based on which of the following?
Actual spread and agreed strike rate
Which of the following market participants would offer their clients research information?
Brokers
Which of the following market participants are most likely to trade as principal?
Market makers
block trade
Transactions can be completed without delay and with certainty of price and execution
The purpose of FpML is primarily?
To automate the flow of information across the derivatives network independently of underlying software and hardware
An investor is looking to close out their long position should prices fall below a specified price, but also wish to restrict the price at which they are content to sell but are happy to accept a better price. As their broker, which of the following order types would be entered into the exchange to achieve their aims?
Stop limit order
What is the MAIN purpose behind a government bond issue?
To finance the shortfall between Government income and expenditure
From the holder’s point of view which of the following statements about Delta is TRUE?
Delta for a call is positive and is negative for a put
The rules set out in CFTC Part 30 prohibit:-
Dealing for a US investor outside of the US without an exemption.
A UK fund manager wishes to hedge against adverse price movements in the assets held in her portfolio. Which of the following would she do?
Sell futures
Which of the following swaps has its floating leg fixed against a point on the swap curve?
Constant maturity swap
portfolio with a value of $5.5m has a Beta relative to the Standard and Poor’s 500 of 1.05. How many S&P 500 contracts, quoted at 1650 points, are required to fully hedge this position?
The CME S&P 500 Index contract is valued at US $250 per index point.
14 Contracts
Which of the following is the difference between a Flex option and an OTC option? A FLEX option:
Has a lower credit/counterparty risk
Which of the following will cause an option premium to rise?
Increase in time to expiry
A stop order:
Once the price is reached, the deal must be done
An investor who anticipates a change in basis would use which one of the following spreads?
Horizontal
An EDSP would not apply to which one of the following?
CBoT mini Dow put
Which of the following is a difference between equity warrants and equity call options?
The arena and method of trading
if a one-year interest rate swap is brought together with a five-year interest rate swap, this would in effect create which of the following:
Deferred start swap
If a firm does not treat clients fairly or adhere to the best executon rules, this is likely to result in which of the following?
Damage the firm’s reputation
Which of the following is part of the mutual guarantee as opposed to the independent guarantee?
Other member’s contributions to the default fund
Which of the following regulatory requirements would allow a US client to place trades on a US exchange via a non-US firm?
US authorisation
A part paid shares is only partially paid for at issuance.
The balance is owed to a future date as determined by the board of directors.
Exchanges have specific sets of rules and regulations which are dependent upon:
The member’s status and role
If company X defaults on a contract with company Y soon after the trade was registered with a clearing house, who in the first instance will be affected?
The clearing house
What does strong basis indicate?
High demand on the cash asset
Which of the below is a characteristic of an OTC market compared to an exchange traded market?
Positions are less easily closed out
Which of the following would not be considered in working out an order’s priority on the order book?
Security
Two companies enter into a futures agreement and later one enters into some financial trouble. What is the resultant risk to the other company if both companies are clearing members?
As long as the clearing house is solvent, there is no counterparty risk
Which of the below is not how implied volatility would be calculated?
Calculated from past movements in the underlying price over a set period
Which of the following is TRUE of a UK Treasury Bill?
They are typically issued for 91 days
The Securities Exchange Commission dos NOT regulate which of the following?
The CME
If a company is liquidated which of these scenarios is most accurate?
Shareholders will be entitled to all assets that are left after others have settled their claims.
If Japanese interest rates are rising faster than European interest rates, which of the following intermarket spreads would be profitable?
Sell JGBs and buy German Bund
Exchanges can have many trading platforms, in an open outcry environment, who is responsible for the verification and reporting of cross trades?
Pit observers
EFP would be best explained as:-
Simultaneous exchange of physical for a future or simultaneous exchange of the future for physical
description of a user commodity swap
The exchange of fixed cost for a price based on a commodity
Which one of the following does not have an obligation?
The holder of a put option
Which of the following is NOT true of the LME?
There is a liquid market in ring ‘seats’
Which of the below would be used in calculating the cost of carry on an index future?
Index price, interest, dividends and time
An investor buys a 100 strike call option with an expiry date in April and simultaneously sells 120 strike call option with an expiry date in May. What has the investor created?
A diagonal spread
Which of the following is the best description of MiFID in relation to derivative markets?
It extends the scope of the passport to include a wider range of services and outlines when home or host state rules apply
Which of the following is true of a covered short call?
The writer is holding the underlying asset
An investor performs an arbitrage trade to profit from a price discrepancy between the September copper future and the December copper future. What type of arbitrage trade is this?
Intertemporal
Which position would be required in a basis trade if an investor is long a future?
Short the cash
An investor buys a 300p call for a premium of 10p and sells a 275p call for a premium of 20p. What is their strategy?
Bear call spread
Since 1984, A US exchange has had a link with which non US exchange?
Singapore
What is an Exchange For Physical (EFP)?
An off-market transaction that involves the swapping of an OTC position for a futures position.
What name is given to the process where the exchange’s clearing house becomes the counterparty to both the buyer and seller of futures contracts post trade?
Novation
What does a portfolio’s beta indicate?
Volatility of the portfolio relative to a market benchmark
An unexpected hurricane hits an area covered by a weather derivative. Which of the following is the most likely result?
The derivative will move suddenly in price
Which term is used to indicate the price used when a position is closed out, the price used at delivery or to settle a position in cash upon expiry of the contract?
EDSP (Exchange Delivery Settlement Price)
Which of the following allows an investor to transfer their sterling exposure on a specific investment to a dollar exposure?
- Asset swap
According to put/call theorem if the premium of the call is considered cheaper relative to the put, which of the following strategies would benefit most?
Buy the call, sell the put and sell the future
A speculator believes there is going to be stability in the Euro:Dollar market which of the following strategies would they undertake?
Sell a straddle
What is the role of the clearing house in relation to settlement?
Guarantee the performance of the contract
equity swap?
It is a swap that allows an investor to exchange the returns on an equity investment for a return on another non-equity or equity-based investment
Which of the following is correct in an Alternative Delivery Procedure (ADP)
The Clearing house will liquidate the contracts as per the agreed ADP
What type of margin may be repaid to an investor when they have an open position?
Variation
An investor buys a short sterling interest rate future for June delivery and sells a short sterling interest rate future with a September delivery date. How will London SPAN treat these two positions within the portfolio?
Initial margin will be reduced because the two positions largely offset each other
Which positions can be combined to construct a synthetic short call?
Short underlying and short put
If you expected the FTSE index to fall in price and Ydawn shares to rise, which of these are you most likely to do?
Go short on the FTSE and buy a call on Ydawn
A “give up” is:
Where the trade is allocated to the originating firm through the UCP
Political instability in which country is likely to have an impact on the price of gas?
Ukraine
What type of clearing house member can clear for themselves and their clients only?
Individual
Which of the following is TRUE of a warrant?
Which of the following is TRUE of a warrant?
The AffirmXpress is operated by whom?
DTCC
Which of the following would Bclear be used for?
Trade processing system for equity contracts
What is the main advantage of using an Inter-Dealer Broker?
Anonymity
There is a severe frost in Brazil. The likely impact on coffee would be:
Prices will increase
Which of the following combinations would be true with regard to options positions?
A call is the right to buy and will be exercised if at expiry the current price is higher than the strike
A put is the right to sell and will be exercised if at expiry the current price is lower than the strike
purpose of a haircut?
It reflects the bank’s perceived risk of holding a specific asset
Which of the following would be the best definition of a Flex trade?
It gives any exchange member the freedom to customise the trades with respect to the strike/exercise price and expiration date
Which of the below exchanges allows trading of options on equity indices?
LSE Derivatives
