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Derivatives > Mock 1 > Flashcards

Mock 1 Flashcards

1
Q

The main use of aluminium is:

A

Transport

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2
Q

When a clearing house is independent and a member defaults, whose resources are used to cover the default?

A

The clearing house

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3
Q

FRA: Forward Rate Agreement

A

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

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4
Q

On which exchange are traded average price options (TAPOs) available?

A

LME

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5
Q

Delta

A

is a measure of a change in price of the option premium relative to a change in the price of the underlying asset.

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6
Q

Hedgers are MOST affected by:

A

Changes in basis

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7
Q

What is the benefit of trading OTC?

A

Flexibility

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8
Q

How would you hedge your equity position?

A

Take the opposite position in your equity futures to the one you hold in equity itself

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9
Q

Which of the following is most likely to only act as a price taker?

A

Asset manager

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10
Q

A clearing house is likely to reduce the level of initial margin if which of the following occurs?

A

The contract volatility decreases

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11
Q

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:

A

Basis trading

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12
Q

Which of the following is true of equity warrants?

A

Some issues may be exercised on a daily basis

The subscription price is agreed at the time of issue

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13
Q

Which of the following describes a block trade?

A

A large deal conducted away from the previous market price

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14
Q

Which of the following BEST reflects the margin process on the theoretical inter-market margining system?

A

Premium margin plus risk margin

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15
Q

When does the premium of an option on an equity index need to be settled?

A

By the next business day

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16
Q

What is the motivation for conducting a horizontal spread with call options?

A

To profit from time decay

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17
Q

A broker must have a formal written agreement

A

in place to offer a credit line beyond 5 business days.

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18
Q

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?

A

Narrow

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19
Q

Which of the following futures contracts is not physically delivered?

A

Brent crude

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20
Q

What is tick value?

A

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

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21
Q

Which of the following exchanges using the electronic order book system called Select?

A

LME

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22
Q

Which ONE of the following represents the normal procedure for a derivatives transaction?

A

Client A, Broker A, Broker B, Matching, Clearing

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23
Q

If a member does not want the automatic exercise of in-the-money options on expiry, who needs to be notified?

A

No one. Automatic exercise is an ‘opt-in’ facility

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24
Q

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?

A

Intra day

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25
Q

A short hedger of crude oil futures is all of the following except:

A

Long of the future and short cash crude oil

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26
Q

diagonal spread

A

different strike prices and different expiries.

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27
Q

On which of the following exchanges are energy derivatives traded?

A

NYMEX

ICE

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28
Q

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?

A

Value-chain

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29
Q

When is collateral for OTC traded options most likely to be called?

A

If the option moves in-the-money

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30
Q

Gold, silver, copper and crude oil contracts are available in the US on which of the following exchanges?

A

CME

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31
Q

Which of the following best represents the benefits of a covered short put position?

A

Extra return in a stable market and some protection from a rising market

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32
Q

Which of the following statements are true in respect of maintenance margin?

A

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

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33
Q

The CFTC Part 30 exemption allows:

A

Non-US brokers to trade on non-US exchanges on behalf of US client

34
Q

Who is responsible for financing a clearing house’s default fund?

A

Clearing members

35
Q

Once activated, stop orders

A

become market orders

36
Q

Which of the following is TRUE of an option premium over time if interest rates, volatility and other factors remain the same?

A

The premium decreases

37
Q

Put the following actions in order from first to last relating to a holder deciding to exercise an option:

A

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

38
Q

A long put option position has potential for:

A

Limited profit and limited loss

39
Q

If basis is positive, a commodity market is said to be:

A

In backwardation

40
Q

Which of the following options would be described as being the most geared?

A

Deeply out-of-the money options

41
Q

Which of the following positions creates a synthetic short call option?

A

Short the underlying and short a put option

42
Q

Which of the following are characteristics of open outcry markets?

A

They are traded on a trading floor
They ensure a transparent market
Traders must shout their bid and offer prices

43
Q

If the futures contract were trading significantly below its fair value, an arbitrageur would execute a:

A

Reverse cash and carry arbitrage

44
Q

Which of the following is operated by ICE Clear Europe?

A

Mutual guarantee

45
Q

Which of the following would be considered one of the main purposes of a regulator?

A

Helping firms manage operational risk

46
Q

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?

A

Less margin will be called from the house account only

47
Q

Which of the following best describes the purpose of price limits?

A

Prevent the market moving too far too fast during a trading session

48
Q

Which of the following is responsible for publishing the ‘list of deliverables’ for a bond futures contract?

A

The exchange

49
Q

basis swap

A

is where one floating rate is exchanged for a different floating rate.

50
Q

single currency

A

basis swap is where all payments are in the same currency.

51
Q

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?

A

To deliver excess collateral to the value of 10%

It is the obligation to return the margin back to the original level.

52
Q

A closing transaction

A

describes one which closes out an open position.

53
Q

An investor who considers short-dated call options to be trading at excessive implied volatilities would consider a:

A

Horizontal spread

54
Q

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?

A

Long call

55
Q

The price at which an EFP is agreed is:

A

Any price which is mutually agreeable

56
Q

Which of the following is TRUE of gamma?

A

A decrease in gamma would reflect more stability in option deltas.

57
Q

The most likely place to find exchanges where trading firms can purchase seats and exercise voting rights is in which of the following countries

A

The US

58
Q

Which of the following additional pieces of information is required for suitability assessment?

A

The client’s investment objectives

59
Q

An investor buys a bond with a BBB- credit rating. Why would they take out a credit default swap on the bond?

A

To protect the investor from a credit event

60
Q

Which of the below describes the relationship between reward and risk?

A

Would expect a higher reward for higher risk

61
Q

Which of the following is used to notify an option writer of a requirement to deliver?

A

Assignment notice

62
Q

Which of the following is not true of both initial and variation margin?

A

Can be paid as cash or collateral

63
Q

Which one of the following is a credit derivative?

A

Credit spread option

64
Q

A currency trader anticipates yen will weaken against the dollar. Which of the following should he choose?

A

Buy a yen put

65
Q

Rho

A

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.

66
Q

Delta

A

measures the sensitivity of the premium to changes in the underlying asset. Delta is positive for bullish positions.

67
Q

If the Bank of England lowers its base rate and the market rallies, which of the following portfolios will benefit most?

A

Positive Delta, negative Rho

68
Q

Which of the following is true of aternative delivery procedures (ADP) offered on some physically delivered contracts?

A

The clearing house will have no obligations to guarantee the performance of the contract under ADP

69
Q

PIPS are always

A

the 4th and 5th significant figures.

70
Q

Many proponents of the principles-based approach feel that the key advantage over rules-based regulation is:

A

Flexibility

71
Q

Which of the following is the best definition of an exchange delivery settlement price?

A

The price established on the last trading day on which a final variation margin will be paid

72
Q

In the context of futures and options exchanges, which of the following are characteristics of a liquid market?

A

Large volumes traded
Narrow bid/offer spreads
Large open interest
Ease of trading in and out of positions

73
Q

What is the objective of client categorisation to ensure?

A

Clients are categorised based on their specific service requirements

74
Q

Which of the following best describes a position limit?

A

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

75
Q

In the event of an abnormal yield curve, what is the impact on gilt prices?

A

Long-dated gilts have a higher price than short-dated gilts

76
Q

The client asset rules insist that a firm reconcile a client’s assets on a regular basis. For what reason is this reconciliation required?

A

To ensure that the firm can meet any calls on these assets

77
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

78
Q

A spread trade

A

involves two puts OR two calls

79
Q

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?

A

The floating amount payable is equal to the price of the metal produced

80
Q

Which of the following in relation to margin would not have to be disclosed to a retail client before conducting a transaction?

A

The amount of margin payable by the client

81
Q

Which of the following situations would result in backwardation in cocoa futures?

A

A poor harvest reducing supply of cocoa

82
Q

Which of the following actions would a broker take if a client misses a variation margin call?

A

Cover the amount using the house account

Derivatives (15 decks)

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