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Derivatives > Mock 4 > Flashcards

Mock 4 Flashcards

1
Q

Which of the following is not likely to increase the price transparency of derivative contracts in an electronic screen trading facility?

A

Details of open interest

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2
Q

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:

A

Narrow

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3
Q

accreting swap

A

A swap based on a notional principal which will increase over the life of the contrac

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4
Q

Which of the following best describes the net liquidation value used by a clearing house?

A

It is used for the calculation of margin

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5
Q

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?

A

If, by the close that day the range had been 18.36 to 18.49 the order would be cancelled automatically

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6
Q

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?

A

Sell 85 contracts

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7
Q

short hedge

A

(long cash, short future)

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8
Q

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?

A

Nikkei 225

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9
Q

Where do coal futures trade?

A

ICE

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10
Q

In an open outcry trade, if all of the following participants are involved in the trade, who initiates the process?

A

Client

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11
Q

barrier option

A

An option that is activated or deactivated when the underlying hits a certain barrier price

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12
Q

short straddle

A

sell a call and a put, same strike and same month

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13
Q

Which of the clearing houses is used by the London Metal Exchange?

A

LME Clear

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14
Q

An increase in basis would indicate:

A

The cash price is rising relative to the future’s price

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15
Q

A report of supply problems for North Sea gas would result in which of the following for gas futures?

A

Prices would increase

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16
Q

Profit / loss

A

Profit / loss = Ticks moved x Tick value x No. of contracts

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17
Q

Which of the following is published by the exchange on completion of a basis trade?

A

Volume
Price
Contract details

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18
Q

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?

A

The resources of the clearing house can be used to close-out the position

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19
Q

Which of the following statements best describes open interest?

A

The total of short positions open for delivery for a particular delivery month

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20
Q

Which of the following is the most frequent use of synthetics?

A

Arbitrage

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21
Q

Under the Commodities Futures Modernisation Act 2000, who has the responsibility to regulate single stock futures?

A

SEC and CFTC

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22
Q

Which of the following would not be disclosed to a retail client in relation to potential margin payments?

A

The form of investments the clearing house accepts as margin

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23
Q

In a back market, if a trader expects the spread to widen he should:

A

Buy the nearby contract and sell the deferred contract

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24
Q

Which of the following best describes the purpose of the Transparency Directive?

A

It imposes minimum disclosure requirements on companies and their shareholders

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25
Q

Which of the following is TRUE concerning an Asian option?

A

The strike is compared to an average price

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26
Q

The strike is compared to an average price

A

The strike is compared to an average price

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27
Q

Which of the following is most likely to drive oil prices up?

A

War in the Middle East

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28
Q

Who pays the invoice amount?

A

The long pays it to the clearing house

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29
Q

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?

A

Basis will narrow, buy the basis

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30
Q

Which one of the following is the best description of a client’s executing member who does not have access to clearing facilities?

A

A full non-clearing broker member

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31
Q

Which of these would finalise the trade, usually for a commission?

A

Executing Broker

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32
Q

synthetic long call

A

long future + long put

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33
Q

An investor sells a euribor call option. Which of the following would a UK Clearing house accept as collateral to meet margin requirements?

A

US T-bonds

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34
Q

What is the main reason for an exchange declaring in the contract specifications the mechanism through which it will calculate EDSP?

A

To ensure that price manipulation is avoided

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35
Q

What is a credit line?

A

Credit that is granted by member firms to their clients.

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36
Q

Why would a market participant buy a ‘payer swaption’? It is because she believes:

A

Interest rates will rise

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37
Q

The maximum risk from a short futures position is:

A

Unlimited

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38
Q

A writer of a put option is at risk of incurring a loss if which of the following occurs?

A

A decrease in the price of the asset

39
Q

In relation to final settlement of cash settled index futures contracts which of the following best describes the obligations of longs and shorts?

A

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

40
Q

Which is the best definition of wide basis?

A

Unusually high demand on the cash/underlying asset

41
Q

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?

A

Pay the net of the premium and the margin by the next business day

42
Q

Which of the following statements regarding basis and basis risk is false?

A

Basis is said to weaken when it becomes more positive or less negative

43
Q

Which of the following is a usage of the gilt repo market?

A

It provides short term liquidity to investors whose money is tied up in bonds

44
Q

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?

A

Buy the three month eurodollar future and sell US T-bond futures

45
Q

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

A change in basis from June to November

46
Q

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?

A

Make floating rate interest payments and payments to the swap dealer for the decrease in the value of the index

47
Q

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?

A

Call intra day margin

48
Q

Which of the following is true in relation to segregation of assets?

A

UK rules require segregation of retail client assets from those of the firm and US rules require segregation of all client assets

49
Q

Limit order

A

must be filled at their limit price or better.

50
Q

A convertible bond:-

A

Converts into equity in the issuer

51
Q

Long straddle

A

volatility increasing

52
Q

If an investor believes that markets will stagnate they would MOST LIKELY use which one of the following strategies?

A

Covered Short Put

53
Q

If a portfolio has a low cumulative gamma a fund manager will need to adjust her portfolio only slightly to remain:

A

Delta neutral

54
Q

What happens to an ATM option if the volatility of the underlying increases?

A

Premiums for call and put options increase

55
Q

If interest rates exceed dividend receipts, one would expect FTSE 100 futures prices to be:

A

Higher than the current FTSE 100 index

56
Q

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?

A

To ensure counterparties know who to pay for settlement purposes

57
Q

Which of the following is true in relation to client margin requirements?

A

Margin requirements from clients may sometimes be netted-off against offsetting positions with the firm’s own margin requirements

58
Q

A trader simultaneously buys the June long gilt future and sells the September long gilt future. This is an example of:

A

Intramarket spread

59
Q

Which of the following would be best described as an arbitrage trade?

A

Buying an equity 240 call option at a premium of 25 ticks and selling an equity 240 put option at 30 ticks

60
Q

Which of the below defines the purpose of swapclear?

A

Provides clearing function

61
Q

Which of the following actions would a clearing house be unable to take if a counterparty to a trade defaulted on their obligations?

A

Close out and settle open contracts belonging to the defaulting member and their original counterparty

62
Q

The best description of gearing in the context of derivatives is:

A

The cost of the derivative as a percentage of the return on the investment

63
Q

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?

A

Sell stop

64
Q

In which of the following situations might it be possible for an arbitrager to make money?

A

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

65
Q

Which of the following exchange-traded metals is traded at the LME?

A

Copper

66
Q

Which of the following reasons BEST explains why a manager would monitor the delta of his portfolio?

A

To maintain a delta neutral position

67
Q

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:

A

Bear put spread

68
Q

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)?

A

Greater liquidity = lower transaction costs, lower elasticity

69
Q

Which of the following would provide a hedge against sterling interest rate exposure?

A

Interest rate caps
Forward rate agreements
Interest rate floors
Short sterling interest rate futures

70
Q

Which of the following options is likely to have the highest gamma?

A

A one month at-the-money call

71
Q

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?

A

Able to execute trades for the firm and clients but needs an arrangement with another firm for clearing

72
Q

Which of the following statements is the best description of the EU Transparency Directive?

A

It establishes minimum requirements on the disclosure of major shareholdings for issuers whose securities are admitted to trading on a regulated market

73
Q

Who issue an assignment notice before expiry?

A

ICE Clear Europe - at its discretion

74
Q

Which of the following are consequences of the Commodities Futures Modernization Act 2000 (CFMA 2000)?

A

The permitting of trading of single stock futures

The rendering of most OTC derivative contracts legally binding

75
Q

Which of the following would be true in relation to time decay over the life of an option?

A

At expiry, time decay will be zero

76
Q

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

A can close against any counterparty via the central counterparty with no default risk

77
Q

Which of the following may a firm call as collateral from a client with their permission?

A

Equity
Warrants
Debentures
Cash

78
Q

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

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

79
Q

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:

A

Collateralised debt obligations

80
Q

Which ONE of the following best describes spot month margining?

A

It is used to ensure that clients have adequate funds to make delivery

81
Q

The markets for US Treasury bill futures is regulated by which body?

A

The Commodities Futures Trading Commission (CFTC)

82
Q

If a client defaults on a clearing broker before a trade has been novated, what is the risk to the broker?

A

The clearing broker assumes the risk less any client margin held

83
Q

Which of the following is an advantage of the automatic exercise system?

A

Reduce paperwork on expiry

84
Q

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?

A

The clearing house

85
Q

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?

A

The seller cannot specify the delivery day

86
Q

An account

A

Suitable Land

87
Q

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:

A

An account

88
Q

delta

A

A measure of the change in an option’s premium for a change in the price of the underlying

89
Q

Which of the following is a difference between FLEX options and OTC options?

A

FLEX contracts have lower credit risk

90
Q

When trading an option on an exchange, which of the following is true?

A

The writer of a put has an obligation to buy an underlying asset

91
Q

Which of the following best describes the advantages of gearing?

A

The possibility to generate a large return on a small investment

92
Q

synthetic long

A

Long call + short put = synthetic long

93
Q

A synthetic short-put is created by:

A

Long-asset, short-call

94
Q

What is the impact of an increase in interest rates on call option premiums?

A

Increase

Derivatives (15 decks)

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