Mock 4 Flashcards
Which of the following is not likely to increase the price transparency of derivative contracts in an electronic screen trading facility?
Details of open interest
Interest rates stand at 6% and the dividend yield on the FTSE 100 Index is 2.5%. The March FTSE future is trading at 6,200 and the June FTSE future is trading at 6,250. You expect interest rates to fall, therefore the June/September spread will:
Narrow
accreting swap
A swap based on a notional principal which will increase over the life of the contrac
Which of the following best describes the net liquidation value used by a clearing house?
It is used for the calculation of margin
A broker enters an order to sell three futures at a price of 18.50 MIT GTC on Euronext’s Universal Trading Platform before the market opens. Which of the following would not happen to that order?
If, by the close that day the range had been 18.36 to 18.49 the order would be cancelled automatically
A fund manager has a holding of £10,000,000 of the cheapest to deliver gilt. How many contracts does she need to hedge a rise in interest rates if the price factor is 0.85?
Sell 85 contracts
short hedge
(long cash, short future)
For which of the following contracts is there a link between CME and SGX to allow common settlement prices and investors to transfer open positions between exchanges?
Nikkei 225
Where do coal futures trade?
ICE
In an open outcry trade, if all of the following participants are involved in the trade, who initiates the process?
Client
barrier option
An option that is activated or deactivated when the underlying hits a certain barrier price
short straddle
sell a call and a put, same strike and same month
Which of the clearing houses is used by the London Metal Exchange?
LME Clear
An increase in basis would indicate:
The cash price is rising relative to the future’s price
A report of supply problems for North Sea gas would result in which of the following for gas futures?
Prices would increase
Profit / loss
Profit / loss = Ticks moved x Tick value x No. of contracts
Which of the following is published by the exchange on completion of a basis trade?
Volume
Price
Contract details
In the event of a default by an exchange member, which of the following is the best description of what will happen if the clearing house offers an independent guarantee?
The resources of the clearing house can be used to close-out the position
Which of the following statements best describes open interest?
The total of short positions open for delivery for a particular delivery month
Which of the following is the most frequent use of synthetics?
Arbitrage
Under the Commodities Futures Modernisation Act 2000, who has the responsibility to regulate single stock futures?
SEC and CFTC
Which of the following would not be disclosed to a retail client in relation to potential margin payments?
The form of investments the clearing house accepts as margin
In a back market, if a trader expects the spread to widen he should:
Buy the nearby contract and sell the deferred contract
Which of the following best describes the purpose of the Transparency Directive?
It imposes minimum disclosure requirements on companies and their shareholders
Which of the following is TRUE concerning an Asian option?
The strike is compared to an average price
The strike is compared to an average price
The strike is compared to an average price
Which of the following is most likely to drive oil prices up?
War in the Middle East
Who pays the invoice amount?
The long pays it to the clearing house
A trader has a view in the market that the basis will be strengthening in a contango market. Which of the below best describes the basis movement and the action the trader should perform?
Basis will narrow, buy the basis
Which one of the following is the best description of a client’s executing member who does not have access to clearing facilities?
A full non-clearing broker member
Which of these would finalise the trade, usually for a commission?
Executing Broker
synthetic long call
long future + long put
An investor sells a euribor call option. Which of the following would a UK Clearing house accept as collateral to meet margin requirements?
US T-bonds
What is the main reason for an exchange declaring in the contract specifications the mechanism through which it will calculate EDSP?
To ensure that price manipulation is avoided
What is a credit line?
Credit that is granted by member firms to their clients.
Why would a market participant buy a ‘payer swaption’? It is because she believes:
Interest rates will rise
The maximum risk from a short futures position is:
Unlimited
A writer of a put option is at risk of incurring a loss if which of the following occurs?
A decrease in the price of the asset
In relation to final settlement of cash settled index futures contracts which of the following best describes the obligations of longs and shorts?
The long and the short are responsible for funding the final variation margin flow being the difference between the EDSP and the previous mark-to-market price
Which is the best definition of wide basis?
Unusually high demand on the cash/underlying asset
n investor sells an option on ICE Futures and clears through ICE Clear Europe. What margin would be called on the investor by the clearing house?
Pay the net of the premium and the margin by the next business day
Which of the following statements regarding basis and basis risk is false?
Basis is said to weaken when it becomes more positive or less negative
Which of the following is a usage of the gilt repo market?
It provides short term liquidity to investors whose money is tied up in bonds
The US yield curve is currently inverted. An investor anticipates the yield curve rotating anti-clockwise and flattening. Which of the following strategies is most appropriate?
Buy the three month eurodollar future and sell US T-bond futures
In June, a farmer is concerned about falling wheat prices and takes out a hedge trade by selling a December wheat contract. His wheat is ready for sale in November and he lifts the hedge by selling the wheat in the cash market and closing out his futures contract.
The farmer is at risk of the following:
A change in basis from June to November
A fund manager believes the FTSE 100 will increase in value and enters into a receiver total return swap, where equity returns are swapped for a floating rate. During this period of time the index falls in value.
Which of the following will the fund manager have to do?
Make floating rate interest payments and payments to the swap dealer for the decrease in the value of the index
What would ICE Clear Europe do if the short term volatility were to increase on an underlying asset of a future held by a member?
Call intra day margin
Which of the following is true in relation to segregation of assets?
UK rules require segregation of retail client assets from those of the firm and US rules require segregation of all client assets
Limit order
must be filled at their limit price or better.
A convertible bond:-
Converts into equity in the issuer
Long straddle
volatility increasing
If an investor believes that markets will stagnate they would MOST LIKELY use which one of the following strategies?
Covered Short Put
If a portfolio has a low cumulative gamma a fund manager will need to adjust her portfolio only slightly to remain:
Delta neutral
What happens to an ATM option if the volatility of the underlying increases?
Premiums for call and put options increase
If interest rates exceed dividend receipts, one would expect FTSE 100 futures prices to be:
Higher than the current FTSE 100 index
Why do exchanges require member firms to fulfil their obligations regarding transaction reports, for instance, the requirement of the members of ICE Futures Europe to report trades into the UCP?
To ensure counterparties know who to pay for settlement purposes
Which of the following is true in relation to client margin requirements?
Margin requirements from clients may sometimes be netted-off against offsetting positions with the firm’s own margin requirements
A trader simultaneously buys the June long gilt future and sells the September long gilt future. This is an example of:
Intramarket spread
Which of the following would be best described as an arbitrage trade?
Buying an equity 240 call option at a premium of 25 ticks and selling an equity 240 put option at 30 ticks
Which of the below defines the purpose of swapclear?
Provides clearing function
Which of the following actions would a clearing house be unable to take if a counterparty to a trade defaulted on their obligations?
Close out and settle open contracts belonging to the defaulting member and their original counterparty
The best description of gearing in the context of derivatives is:
The cost of the derivative as a percentage of the return on the investment
Which of the following allows a trader to close out a loss making long position by selling contracts but with the possibility that some are sold below the stated price?
Sell stop
In which of the following situations might it be possible for an arbitrager to make money?
A long call and a short put with the same expiry, same strike and on the same asset are trading more cheaply than the future
The price of a spread is below that of its constituent parts
A three-month index future is trading above that of the cost of the equity that makes it up and of holding it for the three-months
Which of the following exchange-traded metals is traded at the LME?
Copper
Which of the following reasons BEST explains why a manager would monitor the delta of his portfolio?
To maintain a delta neutral position
A trader buys a June 94 strike T-bond put and simultaneously sells a June 90 strike T-bond put. This is known as a:
Bear put spread
Which two of the following are true of the impact of liquidity on transaction costs (i.e. the spread between bid and offer prices) and elasticity of prices (in comparison to volume)?
Greater liquidity = lower transaction costs, lower elasticity
Which of the following would provide a hedge against sterling interest rate exposure?
Interest rate caps
Forward rate agreements
Interest rate floors
Short sterling interest rate futures
Which of the following options is likely to have the highest gamma?
A one month at-the-money call
Which of the following best describes the position of a firm that is an exchange member but a non-clearing member of a clearing house?
Able to execute trades for the firm and clients but needs an arrangement with another firm for clearing
Which of the following statements is the best description of the EU Transparency Directive?
It establishes minimum requirements on the disclosure of major shareholdings for issuers whose securities are admitted to trading on a regulated market
Who issue an assignment notice before expiry?
ICE Clear Europe - at its discretion
Which of the following are consequences of the Commodities Futures Modernization Act 2000 (CFMA 2000)?
The permitting of trading of single stock futures
The rendering of most OTC derivative contracts legally binding
Which of the following would be true in relation to time decay over the life of an option?
At expiry, time decay will be zero
A and B agree the terms of a trade over the counter and then ask the central counterparty to novate the contract. What is the position if A subsequently wants to close the position before delivery?
A can close against any counterparty via the central counterparty with no default risk
Which of the following may a firm call as collateral from a client with their permission?
Equity
Warrants
Debentures
Cash
ICE Clear Europe offers a mutual guarantee that includes default protection through the use of a default fund. How are each member’s contributions to this default fund calculated for their exchange traded contracts?
A proportion of the notional value of the default fund based on the average daily volume and value of trades conducted over a three month period
A special purpose entity (SPE) acquires a portfolio of underlying assets and then issues a debt security based on these assets. This would be called which of the following:
Collateralised debt obligations
Which ONE of the following best describes spot month margining?
It is used to ensure that clients have adequate funds to make delivery
The markets for US Treasury bill futures is regulated by which body?
The Commodities Futures Trading Commission (CFTC)
If a client defaults on a clearing broker before a trade has been novated, what is the risk to the broker?
The clearing broker assumes the risk less any client margin held
Which of the following is an advantage of the automatic exercise system?
Reduce paperwork on expiry
A trader sells futures on XYZ plc shares. If he is unable to meet his commitments, which body will be responsible for making payments to compensate the counterparties?
The clearing house
Which of the following is the best description of the difference between the last notice day and other days in the delivery month for the long gilt future?
The seller cannot specify the delivery day
An account
Suitable Land
Where a client gets a brokerage to manage their derivative positions specifically to their needs, but retains liability for all losses, this would be called:
An account
delta
A measure of the change in an option’s premium for a change in the price of the underlying
Which of the following is a difference between FLEX options and OTC options?
FLEX contracts have lower credit risk
When trading an option on an exchange, which of the following is true?
The writer of a put has an obligation to buy an underlying asset
Which of the following best describes the advantages of gearing?
The possibility to generate a large return on a small investment
synthetic long
Long call + short put = synthetic long
A synthetic short-put is created by:
Long-asset, short-call
What is the impact of an increase in interest rates on call option premiums?
Increase
