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Derivatives > Final > Flashcards

Final Flashcards

1
Q

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?

A

It will increase the value of calls and decrease the value of puts

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2
Q

What is the definition of a stop limit order?

A

An order with two prices given, the first activates the order and the second giving a specified price of better

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3
Q

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?

A

Counterparty settlement failure

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4
Q

When a futures contract draws towards expiry the difference between cash and future price should come towards zero. This is called?

A

Convergence

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5
Q

Which of the following is a soft commodity?

A

Coffee

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6
Q

The general procedure for the payment of OTC options is when?

A

T+1

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7
Q

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?

A

Buy the future, sell the cash asset

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8
Q

index credit default swap would be closely related to a/an:

A

Total return swap

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9
Q

The EDSP will be calculated on:

A

Last trading day

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10
Q

Cash settled contracts are settled on a ‘net payment’ basis, whch means net cash payments are based on:

A

Marked-to-market price

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11
Q

block trade

A

It allows members and their wholesale clients to transact business as bilaterally agreed transactions without delay and with certainty of price and execution

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12
Q

Soybean contracts can be traded on which of the following markets?

A

CME group

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13
Q

If a borrower is uncertain of interest rates, which exchange traded position would protect them if interest rates rise?

A

Short future

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14
Q

Which of the following represents the seller of an american style payer swaption?

A

An obligation, at any time up till the option’s expiry, to enter into a swap and pay floating rate

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15
Q

Which one of the following is an intra-market spread?

A

Buying June cocoa and selling September cocoa

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16
Q

Which of the following is the best definition of a Rollercoaster swap?

A

The notional will rise and fall repeatedly, in line with the seasonal borrowing requirements

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17
Q

Which of the following is false regarding the London Metal Exchange?

A

Open outcry only

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18
Q

You would exercise a puttable bond when:-

A
  • Interest rates rise
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19
Q

Which event will have a greater impact on the forward BID/OFFER spread between GBP/EUR?

A

An increase in the UK interest rates of 0.5%

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20
Q

What is the last notice day in a futures contract?

A

Last day to state an intent to deliver

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21
Q

What is making it increasing difficult to differentiate the over-the-counter market in derivatives from the exchange-traded market?

A

Use of technology in straight through processing of trades

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22
Q

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?

A

The reset date is approaching

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23
Q

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?

A

Callable bond

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24
Q

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?

A

The last trading day

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25
Q

Which of the following is a matching system on ICE futures Europe?

A

Trade registration system

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26
Q

If a clearing house member defaults what will the clearing house do first cover a loss?

A

Use the margin money and collateral received from the defaulting member

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27
Q

As the delta of an option increases it should be expected that:

A

The seller’s variation margin increases

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28
Q

Which of the following describes a vanilla interest rate swap?

A

An exchange of cash flows at the end of a period to which the interest rate relates

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29
Q

Where do Dax futures trade?

A

Eurex

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30
Q

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:

A

Buy the call, sell the put and sell the stock

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31
Q

Selling futures against the delivery of the underlying asset such as cocoa is which type of strategy?

A

Hedging

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32
Q

Why might a broker give up a client trade to another clearing member?

A

Client has an agreement with another firm to clear all their trades

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33
Q

Payout of a credit spread option is based on which of the following?

A

Actual spread and agreed strike rate

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34
Q

Which of the following market participants would offer their clients research information?

A

Brokers

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35
Q

Which of the following market participants are most likely to trade as principal?

A

Market makers

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36
Q

block trade

A

Transactions can be completed without delay and with certainty of price and execution

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37
Q

The purpose of FpML is primarily?

A

To automate the flow of information across the derivatives network independently of underlying software and hardware

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38
Q

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?

A

Stop limit order

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39
Q

What is the MAIN purpose behind a government bond issue?

A

To finance the shortfall between Government income and expenditure

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40
Q

From the holder’s point of view which of the following statements about Delta is TRUE?

A

Delta for a call is positive and is negative for a put

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41
Q

The rules set out in CFTC Part 30 prohibit:-

A

Dealing for a US investor outside of the US without an exemption.

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42
Q

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?

A

Sell futures

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43
Q

Which of the following swaps has its floating leg fixed against a point on the swap curve?

A

Constant maturity swap

44
Q

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.

A

14 Contracts

45
Q

Which of the following is the difference between a Flex option and an OTC option? A FLEX option:

A

Has a lower credit/counterparty risk

46
Q

Which of the following will cause an option premium to rise?

A

Increase in time to expiry

47
Q

A stop order:

A

Once the price is reached, the deal must be done

48
Q

An investor who anticipates a change in basis would use which one of the following spreads?

A

Horizontal

49
Q

An EDSP would not apply to which one of the following?

A

CBoT mini Dow put

50
Q

Which of the following is a difference between equity warrants and equity call options?

A

The arena and method of trading

51
Q

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:

A

Deferred start swap

52
Q

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?

A

Damage the firm’s reputation

53
Q

Which of the following is part of the mutual guarantee as opposed to the independent guarantee?

A

Other member’s contributions to the default fund

54
Q

Which of the following regulatory requirements would allow a US client to place trades on a US exchange via a non-US firm?

A

US authorisation

55
Q

A part paid shares is only partially paid for at issuance.

A

The balance is owed to a future date as determined by the board of directors.

56
Q

Exchanges have specific sets of rules and regulations which are dependent upon:

A

The member’s status and role

57
Q

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?

A

The clearing house

58
Q

What does strong basis indicate?

A

High demand on the cash asset

59
Q

Which of the below is a characteristic of an OTC market compared to an exchange traded market?

A

Positions are less easily closed out

60
Q

Which of the following would not be considered in working out an order’s priority on the order book?

A

Security

61
Q

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?

A

As long as the clearing house is solvent, there is no counterparty risk

62
Q

Which of the below is not how implied volatility would be calculated?

A

Calculated from past movements in the underlying price over a set period

63
Q

Which of the following is TRUE of a UK Treasury Bill?

A

They are typically issued for 91 days

64
Q

The Securities Exchange Commission dos NOT regulate which of the following?

A

The CME

65
Q

If a company is liquidated which of these scenarios is most accurate?

A

Shareholders will be entitled to all assets that are left after others have settled their claims.

66
Q

If Japanese interest rates are rising faster than European interest rates, which of the following intermarket spreads would be profitable?

A

Sell JGBs and buy German Bund

67
Q

Exchanges can have many trading platforms, in an open outcry environment, who is responsible for the verification and reporting of cross trades?

A

Pit observers

68
Q

EFP would be best explained as:-

A

Simultaneous exchange of physical for a future or simultaneous exchange of the future for physical

69
Q

description of a user commodity swap

A

The exchange of fixed cost for a price based on a commodity

70
Q

Which one of the following does not have an obligation?

A

The holder of a put option

71
Q

Which of the following is NOT true of the LME?

A

There is a liquid market in ring ‘seats’

72
Q

Which of the below would be used in calculating the cost of carry on an index future?

A

Index price, interest, dividends and time

73
Q

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

A diagonal spread

74
Q

Which of the following is the best description of MiFID in relation to derivative markets?

A

It extends the scope of the passport to include a wider range of services and outlines when home or host state rules apply

75
Q

Which of the following is true of a covered short call?

A

The writer is holding the underlying asset

76
Q

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?

A

Intertemporal

77
Q

Which position would be required in a basis trade if an investor is long a future?

A

Short the cash

78
Q

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?

A

Bear call spread

79
Q

Since 1984, A US exchange has had a link with which non US exchange?

A

Singapore

80
Q

What is an Exchange For Physical (EFP)?

A

An off-market transaction that involves the swapping of an OTC position for a futures position.

81
Q

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?

A

Novation

82
Q

What does a portfolio’s beta indicate?

A

Volatility of the portfolio relative to a market benchmark

83
Q

An unexpected hurricane hits an area covered by a weather derivative. Which of the following is the most likely result?

A

The derivative will move suddenly in price

84
Q

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?

A

EDSP (Exchange Delivery Settlement Price)

85
Q

Which of the following allows an investor to transfer their sterling exposure on a specific investment to a dollar exposure?

A
  • Asset swap
86
Q

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?

A

Buy the call, sell the put and sell the future

87
Q

A speculator believes there is going to be stability in the Euro:Dollar market which of the following strategies would they undertake?

A

Sell a straddle

88
Q

What is the role of the clearing house in relation to settlement?

A

Guarantee the performance of the contract

89
Q

equity swap?

A

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

90
Q

Which of the following is correct in an Alternative Delivery Procedure (ADP)

A

The Clearing house will liquidate the contracts as per the agreed ADP

91
Q

What type of margin may be repaid to an investor when they have an open position?

A

Variation

92
Q

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?

A

Initial margin will be reduced because the two positions largely offset each other

93
Q

Which positions can be combined to construct a synthetic short call?

A

Short underlying and short put

94
Q

If you expected the FTSE index to fall in price and Ydawn shares to rise, which of these are you most likely to do?

A

Go short on the FTSE and buy a call on Ydawn

95
Q

A “give up” is:

A

Where the trade is allocated to the originating firm through the UCP

96
Q

Political instability in which country is likely to have an impact on the price of gas?

A

Ukraine

97
Q

What type of clearing house member can clear for themselves and their clients only?

A

Individual

98
Q

Which of the following is TRUE of a warrant?

A

Which of the following is TRUE of a warrant?

99
Q

The AffirmXpress is operated by whom?

A

DTCC

100
Q

Which of the following would Bclear be used for?

A

Trade processing system for equity contracts

101
Q

What is the main advantage of using an Inter-Dealer Broker?

A

Anonymity

102
Q

There is a severe frost in Brazil. The likely impact on coffee would be:

A

Prices will increase

103
Q

Which of the following combinations would be true with regard to options positions?

A

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

104
Q

purpose of a haircut?

A

It reflects the bank’s perceived risk of holding a specific asset

105
Q

Which of the following would be the best definition of a Flex trade?

A

It gives any exchange member the freedom to customise the trades with respect to the strike/exercise price and expiration date

106
Q

Which of the below exchanges allows trading of options on equity indices?

A

LSE Derivatives

Derivatives (15 decks)

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