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Derivatives > Mock 2 > Flashcards

Mock 2 Flashcards

1
Q

The number of options required to hedge is calculate using:

A

Value of portfolio / (put strike x Value per point of option)

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2
Q

All of the following are used to determine the priority by which orders on Euronext Derivatives’ Universal Trading Platform are executed except:

A

Underlying

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3
Q

Which of the following are true of the London FX market?

A

Spot rates are quoted as bid-offer spreads
Spot contract settlement is T+2
Trading of FX derivatives in London is OTC

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4
Q

Which of the following is true concerning US T-bonds?

A

They are all registered

They are not issued with a zero coupon

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5
Q

Which of the following statements regarding warrants is false?

A

They are only issued to existing shareholders

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6
Q

Which of the following is not true with regard to futures?

A

A short futures position is closed out by selling a future

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7
Q

Which type of margin increases as a contract approaches the end of the delivery month?

A

Spot month

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8
Q

Which of the below is subject to variation margin on a daily basis on future style options?

A

Both holder and writer

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9
Q

Which of the following is an unacceptable form of collateral for initial margin of a FTSE 100 contract for differences?

A

FTSE 100 equities

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10
Q

Which of the following statements about warrants is FALSE?

A

Pay regular dividends

Warrant holders have no dividend entitlements until exercised into shares.

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11
Q

Which of the following is true of equity traded options?

A

A call option’s exercise price can be above the share price

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12
Q

A trader is long a June call option with a strike of 4,000 and short a September call option with a strike of 4,000. This is best described as a:

A

Horizontal spread

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13
Q

Which of the following is an advantage of pooled funds?

A

Geographical diversification

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14
Q

If the long end of the euro curve is expected to flatten what would a trader do?

A

Sell euribor futures and buy bund futures

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15
Q

Which of the following best describes gearing in the context of futures?

A

The ability to make large profits or losses from relatively small initial margin requirements

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16
Q

An investor is long five September short sterling and ten December short sterling and wants reduced margin payments. Will this be allowed?

A

No reduction will be allowed

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17
Q

Which of the following is most likely to be assigned?

A

An in-the-money put close to expiry

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18
Q

What adjustment is made to the calculated SPAN scanning risk to adjust for offsetting futures positions?

A

Inter-commodity spread margin

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19
Q

How does a clearing house determine the level of a member’s contribution to the member default fund?

A

According to the volume of trades and initial margin requirements of the member

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20
Q

The cheapest-to-deliver is the gilt

A

with the HIGHEST implied repo rate.

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21
Q

The maximum movement in price between the end of one settlement day and the next would be known as:

A

The intraday range

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22
Q

What is shown on electronic/screen based trading systems?

A

Best bid/offer

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23
Q

On ICE Futures Europe what is meant by allocation?

A

It is the facility by which a trade is given up to a designated global clearer

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24
Q

A put option where the exercise price is lower than the underlying’s current value is said to be:

A

Out-of-the-money

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25
Q

Which of the following is TRUE regarding where a confirmation sits in the architecture of the ISDA documentation?

A

The specific terms of the confirmation override the details of the master agreement

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26
Q

The BTF - Basis Trading Facility - on ICE Futures is available for which of the following?

A

Gilt futures
Bund futures
JGB futures
Swap futures

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27
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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28
Q

Which of the following would not ensure that a derivative’s position was closed out if the market hit a particular level?

A

Market

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29
Q

Which of these is true for London?

A

Cleared derivative trades are subject to standard portfolio analysis of risk.

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30
Q

Which of the following best describes an arbitrage trade?

A

Holding a FTSE 100 portfolio and buying a FTSE 100 put

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31
Q

An investor believes that there will be a sharp move in an asset, either up or down, and wants to take advantage of this volatility. What is the most appropriate strategy to adopt?

A

Buy a call/buy a put, both at-the-money

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32
Q

Richmond is a fully invested investor who believes that the UK equity market is likely to fall in value. Richmond is considering a derivative strategy that would capitalise on this event but is concerned of incurring a large unexpected loss. He would, however, consider losing his initial stake as the price of the risk he is prepared to take on. Which of the following is the most suitable strategy?

A

Buying a put option on the FTSE 100 index

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33
Q

Certain exchanges allow exchange for physicals (EFP) on some of their contracts. Which of the following would NOT be a use for EFPs?

A

To swap one futures position for another

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34
Q

Tick value

A

Tick value = tick size x contract size.

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35
Q

Which of the following statements regarding tick value is incorrect?

A

It is the unit used to express ICE Future Europe’s options on futures strike prices

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36
Q

How often is variation margin applied on ICE?

A

Daily

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37
Q

Recent inflation data released in the UK has shown inflation has risen above the Monetary Policy Committe’s upper limit. Which of the following would you expect to happen to the prices of gilts and other fixed income instruments (including Treasury bills)?

A

Decrease, Decrease

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38
Q

The primary purpose for the issuance of UK government bonds is to finance what?

A

Excess spending

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39
Q

Which of the following are true regarding convertible bonds issued by a corporation?

A

They are a low-risk method of gaining exposure to the company’s share price

40
Q

What should be included in the calculation of an index future’s fair value?

A

Interest payments

41
Q

bull put spread

A

longing a put with lower strike and shorting a put with higher strike, both of the same expiry.

42
Q

For which of the following transactions will margin always be paid?

A

Buying futures
Short options position
Selling futures

43
Q

An interest rate future is currently showing a March/September spread of +25 ticks. If a trader sells the spread, which two of the following are true?

A

She sells the March future and buys September

She expects the yield curve to become flatter

44
Q

The correct calculation of the invoice amount for the cheapest to deliver (CTD) is as follows:

A

(EDSP x scale factor x price factor) + accrued interest

45
Q

Which of the following best describes a swaption?

A

An OTC option on a swap where the buyer has the right, but not the obligation, to swap one interest rate for another

46
Q

Which of the following meets the description associated with a binary option?

A

It pays a fixed amount or nothing at all

47
Q

Futures spread margin is lower than initial margin rates because:

A

The perceived risk of a spread is lower than a normal trade

48
Q

What is the motivation behind the following trade?
Long September 150 BigCo plc call at a 16p premium
Short December 150 BigCo plc call at a 19p premium

A

Exploiting an expected change in the relative difference between the two options’ time values

49
Q

HORIZONTAL SPREAD

A

exploits the differences in time value or volatility of the two options.

50
Q

Who acts as central counterparty to all transactions on SwapClear?

A

LCH Group

51
Q

Which of the following would allow a non-US firm to trade on behalf of a US client on the London markets without having to register with the US authorities?

A

CFTC part 30 exemption

52
Q

If short-term interest rates are less than the return on an underlying asset, a future will be at a discount to the cash price

If you sell an intramarket spread you will benefit if cost of carry increases
In a contango market cost of longer dated futures would be expected to be at a premium to short dated

A

Only a long hedge will benefit from basis weakening. If we assume the cash price remains constant, the long future in the hedge will be closed out by selling a future at a higher price if basis has weakened.

53
Q

Total premium paid

A

Total premium paid = Premium x contract size x No. of contracts

54
Q

In addition to initial margin being charged on open positions, a clearing organisation also charges spot month margin. Which of the following best describes spot month margin?

A

It is an additional rate of margin to cover the risk of default during the delivery process

55
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

56
Q

Which of the following regulates US stock indices?

A

SEC

57
Q

Which two of the following would receive the underlying upon exercise of the option?

A

Long call

Short put

58
Q

Which of the following bodies sets out processes and documentation for the OTC derivatives markets?

A

International Swaps and Derivatives Association

59
Q

Copper is traded on which of the following exchanges?

A

LME

60
Q

To secure exemption under CFTC Part 30, FCA members must do all of the following except:

A

Pay funds, the amount calculated in accordance with the size and business of the firm, into an escrow account at the NFA to cover any potential legal liabilities

61
Q

One of the main purposes of regulators is to reduce:-

A

Systemic risk

62
Q

Which of the following creates a synthetic short futures position?

A
  • Holding a put option and writing a call option
63
Q

Which of the following best describes a covered warrant?

A

The right to buy or sell shares created by an investment bank in tradable form

64
Q

On which of the following systems do Euronext’s commodity products, such as white sugar, trade?

A

UTP

65
Q

Which TWO of the following dates define the period of an interest rate swap?

A

The effective date

The termination date

66
Q

Against whom would a claim be raised in the event of a default pre-novation?

A

The counterparty broker to the trade

67
Q

If an option position is assigned who is responsible for selecting a writer?

A

The clearing house

68
Q

What happens to the premium on an at-the-money put option if the price of the underlying rises?

A

Decrease

69
Q

An exchange will monitor a member’s open interest:

A

Daily, to ensure that they may meet their delivery obligations

70
Q

What is the main source of information for an exchange price feed?

A

Exchange trading systems

71
Q

synthetic short position.

A

Selling a call and buying a put with the same strike

72
Q

Euronext’s UCP is used for all of the following functions EXCEPT:

A

Account reconciliation

73
Q

Which of the following would cause a reduction in supply?

A

If the price of a commodity falls to below the marginal cost of mining it

74
Q

George is uncertain over the direction of interest rates but wants to hedge against an increase in the borrowing rate on a loan he took out three months ago. Which of the following is the most suitable position to adopt (using options on interest rate futures)?

A

Buying puts

75
Q

The holder of a preference share would not:

A

Have pre-emption rights

76
Q

Which of the following is a benefit of OTC derivatives markets?

A

Opportunity to construct better hedges

77
Q

A ‘give up’ occurs when:

A

A non-clearing member of the exchange allocates a trade to a general clearing member in order for the trade to be novated through ICE Clear Europe

78
Q

An investor would like to purchase an option which gives them the right to buy or sell another option. Which would be a suitable choice?

A

A compound option

79
Q

bermudan option

A

option (call or put) where early exercise is restricted to certain dates during its life.

80
Q

chooser option

A

allows the holder to decide whether the option is a call or a put at a pre-determined time during it’s life.

81
Q

binary option (also known as a digital option)

A

pays a fixed amount, or nothing at all, depending

on the price of the underlying instrument at maturity.

82
Q

FRA

A

A forward contract that determines an interest rate to be paid or received on an obligation beginning at a start date sometime in the future

83
Q

The invoice amount paid by the long upon delivery of a bond future would NOT be affected by which of the following?

A

The size of the specific issue

84
Q

Which of the following best describes a bond where individual cash flows can be traded separately?

A

Strippable

85
Q

A UK firm has been trading commodity derivatives with the same client for over two years, but the activities have only come within the scope of commodity regulations in the last three months. Why might this be?

A

The client has started trading for investment purposes

86
Q

contango market

A

Nearby prices at a discount to forward prices

87
Q

A small bank owns a brokerage house. If the brokerage house defaults on futures, who is immediately responsible?

A

The clearing house

88
Q

A speculator seeks to go long at a level in the market below the prevailing level. Which of the following orders should she give her broker?

A

A buy MIT

89
Q

Time value

A

Time value = premium - intrinsic value.

90
Q

Intrinsic value for a put

A

Intrinsic value for a put = strike - underlying asset value

91
Q

Gamma

A

greatest for an at-the-money put option close to expiry

92
Q

In a standardised option contract which of the following is not fixed in advance?

A

Premium

93
Q

When a special purpose entity (SPE) issues a security backed by cash flows from a basket of loans that have been purchased, it would be called a:

A

Collateralised loan obligation

94
Q

A clearing house guarantees the trades of:

A

All clearing members

95
Q

All of the following may be used as collateral for margin purposes except:

A

Gilts denominated in euro

Derivatives (15 decks)

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