Mock 1 Flashcards
The main use of aluminium is:
Transport
When a clearing house is independent and a member defaults, whose resources are used to cover the default?
The clearing house
FRA: Forward Rate Agreement
An OTC forward contract that determines an interest rate to be paid or received on an obligation beginning at a start date sometime in the future
On which exchange are traded average price options (TAPOs) available?
LME
Delta
is a measure of a change in price of the option premium relative to a change in the price of the underlying asset.
Hedgers are MOST affected by:
Changes in basis
What is the benefit of trading OTC?
Flexibility
How would you hedge your equity position?
Take the opposite position in your equity futures to the one you hold in equity itself
Which of the following is most likely to only act as a price taker?
Asset manager
A clearing house is likely to reduce the level of initial margin if which of the following occurs?
The contract volatility decreases
The purchase of a futures contract at the same time as the sale of the underlying asset in the cash market is best described as:
Basis trading
Which of the following is true of equity warrants?
Some issues may be exercised on a daily basis
The subscription price is agreed at the time of issue
Which of the following describes a block trade?
A large deal conducted away from the previous market price
Which of the following BEST reflects the margin process on the theoretical inter-market margining system?
Premium margin plus risk margin
When does the premium of an option on an equity index need to be settled?
By the next business day
What is the motivation for conducting a horizontal spread with call options?
To profit from time decay
A broker must have a formal written agreement
in place to offer a credit line beyond 5 business days.
If short-term interest rates were expected to fall, what effect would this have on the spread between two delivery months on a futures contract with an underlying asset in good supply?
Narrow
Which of the following futures contracts is not physically delivered?
Brent crude
What is tick value?
The product of multiplying tick size by contract size
The profit or loss caused by a one tick movement in price on one futures contract
Which of the following exchanges using the electronic order book system called Select?
LME
Which ONE of the following represents the normal procedure for a derivatives transaction?
Client A, Broker A, Broker B, Matching, Clearing
If a member does not want the automatic exercise of in-the-money options on expiry, who needs to be notified?
No one. Automatic exercise is an ‘opt-in’ facility
The market suddenly becomes more volatile causing the price of futures contracts to drop sharply. Which of the following types of margin will be required from a member with a large long futures position?
Intra day
A short hedger of crude oil futures is all of the following except:
Long of the future and short cash crude oil
diagonal spread
different strike prices and different expiries.
On which of the following exchanges are energy derivatives traded?
NYMEX
ICE
An investor performs an arbitrage trade to profit from a price discrepancy between a Brent crude oil future and a refined oil future. What type of arbitrage trade is this?
Value-chain
When is collateral for OTC traded options most likely to be called?
If the option moves in-the-money
Gold, silver, copper and crude oil contracts are available in the US on which of the following exchanges?
CME
Which of the following best represents the benefits of a covered short put position?
Extra return in a stable market and some protection from a rising market
Which of the following statements are true in respect of maintenance margin?
It is a system of margining operated by a number of derivative exchanges, particularly in the US
When an account falls to the maintenance margin level, it must be replenished by the client up to the original initial margin level
Maintenance margin arrangements can be operated in the UK between brokers and their clients
The CFTC Part 30 exemption allows:
Non-US brokers to trade on non-US exchanges on behalf of US client
Who is responsible for financing a clearing house’s default fund?
Clearing members
Once activated, stop orders
become market orders
Which of the following is TRUE of an option premium over time if interest rates, volatility and other factors remain the same?
The premium decreases
Put the following actions in order from first to last relating to a holder deciding to exercise an option:
The broker completes an exercise notice and forwards it to the clearing house
Upon receipt of the exercise notice the clearing house assigns it to a member firm
The broker receives an assignment notice from the clearing house and allocates it to a client who holds a position as a writer
The writer receives an assignment notice from the clearing house and must then honour their obligations
A long put option position has potential for:
Limited profit and limited loss
If basis is positive, a commodity market is said to be:
In backwardation
Which of the following options would be described as being the most geared?
Deeply out-of-the money options
Which of the following positions creates a synthetic short call option?
Short the underlying and short a put option
Which of the following are characteristics of open outcry markets?
They are traded on a trading floor
They ensure a transparent market
Traders must shout their bid and offer prices
If the futures contract were trading significantly below its fair value, an arbitrageur would execute a:
Reverse cash and carry arbitrage
Which of the following is operated by ICE Clear Europe?
Mutual guarantee
Which of the following would be considered one of the main purposes of a regulator?
Helping firms manage operational risk
When a clearing house calculates a net margin call after marking to market, which of the following best describes the effect on the clearing members?
Less margin will be called from the house account only
Which of the following best describes the purpose of price limits?
Prevent the market moving too far too fast during a trading session
Which of the following is responsible for publishing the ‘list of deliverables’ for a bond futures contract?
The exchange
basis swap
is where one floating rate is exchanged for a different floating rate.
single currency
basis swap is where all payments are in the same currency.
A client receives a margin call after an adverse movement in the position of 10%. The initial margin was set at 5%. What will be the obligation of the client?
To deliver excess collateral to the value of 10%
It is the obligation to return the margin back to the original level.
A closing transaction
describes one which closes out an open position.
An investor who considers short-dated call options to be trading at excessive implied volatilities would consider a:
Horizontal spread
A fund manager planning to increase his exposure to equity but still awaiting cash from a client could hedge this exposure using which ONE of the following?
Long call
The price at which an EFP is agreed is:
Any price which is mutually agreeable
Which of the following is TRUE of gamma?
A decrease in gamma would reflect more stability in option deltas.
The most likely place to find exchanges where trading firms can purchase seats and exercise voting rights is in which of the following countries
The US
Which of the following additional pieces of information is required for suitability assessment?
The client’s investment objectives
An investor buys a bond with a BBB- credit rating. Why would they take out a credit default swap on the bond?
To protect the investor from a credit event
Which of the below describes the relationship between reward and risk?
Would expect a higher reward for higher risk
Which of the following is used to notify an option writer of a requirement to deliver?
Assignment notice
Which of the following is not true of both initial and variation margin?
Can be paid as cash or collateral
Which one of the following is a credit derivative?
Credit spread option
A currency trader anticipates yen will weaken against the dollar. Which of the following should he choose?
Buy a yen put
Rho
measures the change in option premium with a 1% change in interest rates. If your position Rho is positive, you want interest rates to increase, resulting in increased position value. If position Rho is negative, you want interest rates to decrease, resulting in increased position value.
Delta
measures the sensitivity of the premium to changes in the underlying asset. Delta is positive for bullish positions.
If the Bank of England lowers its base rate and the market rallies, which of the following portfolios will benefit most?
Positive Delta, negative Rho
Which of the following is true of aternative delivery procedures (ADP) offered on some physically delivered contracts?
The clearing house will have no obligations to guarantee the performance of the contract under ADP
PIPS are always
the 4th and 5th significant figures.
Many proponents of the principles-based approach feel that the key advantage over rules-based regulation is:
Flexibility
Which of the following is the best definition of an exchange delivery settlement price?
The price established on the last trading day on which a final variation margin will be paid
In the context of futures and options exchanges, which of the following are characteristics of a liquid market?
Large volumes traded
Narrow bid/offer spreads
Large open interest
Ease of trading in and out of positions
What is the objective of client categorisation to ensure?
Clients are categorised based on their specific service requirements
Which of the following best describes a position limit?
A limit set by an exchange as to the maximum amount of open contracts that a member firm may hold at any one time, and which must be complied with by that firm
In the event of an abnormal yield curve, what is the impact on gilt prices?
Long-dated gilts have a higher price than short-dated gilts
The client asset rules insist that a firm reconcile a client’s assets on a regular basis. For what reason is this reconciliation required?
To ensure that the firm can meet any calls on these assets
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
A spread trade
involves two puts OR two calls
When a metal producer enters into a fixed for floating commodity swap to protect themselves from uncertainty in prices (agreeing to receive a fixed price in return for paying a floating price), which of the following is NOT true?
The floating amount payable is equal to the price of the metal produced
Which of the following in relation to margin would not have to be disclosed to a retail client before conducting a transaction?
The amount of margin payable by the client
Which of the following situations would result in backwardation in cocoa futures?
A poor harvest reducing supply of cocoa
Which of the following actions would a broker take if a client misses a variation margin call?
Cover the amount using the house account
