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Derivatives > Mock 5 > Flashcards

Mock 5 Flashcards

1
Q

If an investor holds a cash settled contract, how would this differ from holding a deliverable contract?

A

Deliverable contracts settle through the physical exchange of the asset whereas cash settled do not

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2
Q

Who has the right to buy back undated government bonds?

A

HM Government

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3
Q

The first notice days and last notice day

A

can be the same day

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4
Q

Which of the following BEST represents how trading is conducted on the London Metals Exchange (LME)?

A

Open outcry and electronic trading are both available

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5
Q

When the underlying falls in value

A

call premiums fall and put premiums rise

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6
Q

In a swap, what is the significance of the effective date?

A

It is the start date for accrual purposes

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7
Q

In relation to SPAN:

A

Positions are allowed to be offset within a portfolio

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8
Q

Which benchmark interest rate is quoted in more than one currency?

A

LIBOR

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9
Q

Which of the following would an investor choose if they expect a sharp rise in the market?

A

Out-of-the-money call

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10
Q

How would a hedger attempt to eliminate basis risk?

A

Hold the derivative investment to expiry

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11
Q

If an investor wishes to hedge against small price movements they should ensure their position has:

A

Delta = 0

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12
Q

In respect of Asian options which is the best description of an average strike option?

A

The strike price is set at the expiration date to be the average rate of the underlying over the life of the option

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13
Q

Which of the following describes arbitrage relating to the principal of put-call parity?

A
  • A combination of an underlying asset and positions in options
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14
Q

Which ONE of the following applies to a writer of an option on a future?

A

Receives full premium on expiry

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15
Q

Who benefits most from the passing of time?

A

Option writers

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16
Q

What actions is a non-clearing dealer member of an exchange permitted to do?

A

Trade for themselves only

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17
Q

Based on the Black and Scholes model for pricing options, we can assume that an increase in volatility will result in:

A

An increase in the premium value

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18
Q

A retail investor buys one future on ICE Futures Europe and clears through ICE Clear Europe. Which of the following is true of her margin payments?

A

They will be at least equal to those called on her broker

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19
Q

basis swap

A

It is where both legs are floating

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20
Q

Which ONE of the following is TRUE of FCA authorised funds?

A

They are freely marketable to the UK retail market

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21
Q

For what reason would you exercise a receiver option?

A

Because interest rates have dropped so the option is in-the-money

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22
Q

If a member of a clearing house has elected for automatic exercise, how would they prevent the exercise of a particular option?

A

Suppression order

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23
Q

Options with the longest remaining life (in this question, the Octobers) have the greatest time value.

A

the option which is closest to being at the money will have greatest time value.

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24
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

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25
Q

How are principles-based regulation best defined?

A

Use of high-level objectives that are binding on the firm

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26
Q

Which of the following measures the sensitivity of delta to a change in the value of the underlying?

A

Gamma

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27
Q

Broker X and Broker Y trade a futures contract between themselves. They are both non-clearing members of the exchange. The contract is registered with ICE Clear. A few days later broker X defaults on his margin payments. Who is responsible for any losses?

A

The clearing member that cleared the trade

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28
Q

Other than following the initial trade, when else can novation occur?

A

When a clearing member takes on the open position of another member

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29
Q

A general clearing member suffers default by an executing broker who gave up the trade. What protection will be offered to the member to cover the defaulting position?

A

Margin provided by the broker

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30
Q

liquidity

A

The facility with which a product can be traded

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31
Q

If metal prices fall,

A

supply will in turn fall, bringing prices to a new equilibrium though, causing them to rise.

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32
Q

equity traded options

A

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

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33
Q

Time value is greatest for which of the following options if the underlying asset is prices at 115 in April 2005?

A

November 2005 160 call

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34
Q

Which of the following best describes what happens on settlement day?

A

The seller, after giving appropriate notice, makes delivery of the underlying

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35
Q

Spot month margin is:

A

Additional margin to minimise any volatility near expiry date

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36
Q

Phil’s current portfolio is short 20 calls with a delta of 0.3. The portfolio can be made delta neutral by:

A

Buying 6 futures

37
Q

credit derivative

A

It protects an investor against a bond receiving a credit downgrade

38
Q

How is the payment calculated on a non-deliverable forward?

A

The forward rate agreed for the contract is compared to the spot rate at the end of the contract

39
Q

If an investor expected the spread in a backwardation market between futures traded on the same underlying asset to narrow, what action would they likely take?

A

Sell the spread

40
Q

synthetic short position.

A

Short call, long put = synthetic short position.

41
Q

An option writer has no ability to exercise an option

A

so could not instigate the issuance of an assignment notice.

42
Q

In which of the following instances would a trading member of an exchange give-up a trade to its clearing member?

A

If the member was a non-clearing member of the clearing house

43
Q

The Commodity Futures Modernisation Act lifted the ban on which of the following?

A

Single stock futures

44
Q

What are the daily movements paid on a futures position on an exchange called?

A

Variation margin

45
Q

Which of the following will cause an increase in price of emission rights?

A

Pollution targets are reduced based on regulations

46
Q

An investor buys a put and simultaneously sells a put with a higher strike price. What strategy has he entered into?

A

Bull put spread

47
Q

Which of the following are taken into account before deciding to carry out a cash and carry arbitrage trade?

A

Time to expiry
The price of the future
Interest rates
The spot price

48
Q

The announcement of which of the following would NOT affect the spot price of crude oil?

A

A tax change

49
Q

synthetic short call position?

A

Short future, short put

50
Q

If a client has used up their credit-line with a broker, they can trade in which of the following circumstances?

A

If they supply more collateral to the broker23

51
Q

An equity index future with a distant delivery date will have a higher fair value than that of a
near-dated one if:

A

The dividend yield is lower than present interest rates

52
Q

Margin is demanded by the clearing houses in the US and UK based on:

A

Net positions in the UK and gross positions in the US

53
Q

A producer who is long a commodity and is concerned that it will fall in value should undertake which of the following?

A

Buy a commodity floor

54
Q

Which of the following need not be disclosed to a retail client before executing a trade in a contingent liability transaction in relation to margin payments?

A

A statement that initial margin is a requirement from the relevant clearing house

55
Q

premium

A

is determined by the market.

56
Q

The role of counterparty to the buyer of an exchange futures contract is taken over from the seller by:

A

ICE Clear Europe

57
Q

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

A

The effective date

The termination date

58
Q

Fair value

A

= Cash price of the contract + Interest + Storage costs Interest

59
Q

Which of the following increase cost-of-carry?

A

Interest rates increase and the underlying increases in price

60
Q

An investor who sells the expensive contract and takes an offsetting position in the cash market is undertaking which of the following trades?

A

Cash/Futures arbitrage

61
Q

benefits of exchange traded derivatives.

A

Liquidity Reduced default risk Speed up trading

62
Q

Which ONE of the following represents a reason for the introduction of the over-the-counter derivatives market?

A

Confidentiality

63
Q

The relationship of the clearing house to a clearing member would be described as:

A

Always principal to principal

64
Q

If interest rates rise, what is the likely effect on equity option premiums?

A

Call prices rise and put prices fall

65
Q

Which of the following documents would need to be provided to a US investor in the event that a UK firm carries out a derivative transaction on their behalf?

A

Risk warning to be acknowledged by the investor

66
Q

basis swap

A

particular type of interest rate swap where a floating rate is swapped for a different floating rate.

67
Q

Which of the following is the BEST definition of a futures contract?
To enter into an agreement to deliver or take delivery of:

A

A specified quality and quantity of a specified asset on a fixed future date at a price agreed today

68
Q

A GBP inflation swap would be based upon which inflation index

A

RPI

69
Q

A derivative portfolio has a low gamma, this indicates:

A

The asset manager will less likely be required to actively manage their dynamic hedges to remain delta neutral

70
Q

An investor buys a 100 strike put with a January expiry and sells a 120 strike put with an April expiry. This is an example of which type of trade?

A

A diagonal spread

71
Q

crude basis

A

It is non-linear

72
Q

Why would an investor buy a receiver swaption?

A

To hedge against a fall in interest rates

To make a quick profit if interest rates fall

73
Q

Which of the following is true regarding margining positions for equity options?

A

A vertical bear put spread is unlikely to be margined

74
Q

Which of the following is a positive feature of over-the-counter products over exchange-traded products?

A

Flexibility allows for more accurate hedging

75
Q

American style payer swaption

A

The buyer has the right to enter into a swap from the commencement date to the expiry date and pay a fixed rate of interest

76
Q

A country introduces a 5% export tariff on cocoa in order to ensure domestic supply. The likely impact would be:

A

Global cash prices and global futures prices would both rise

77
Q

Which of the following is associated with Net Liquidation Value (NLV)?

A

London Span margin

78
Q

Since 1984 the CME has had a close relationship with which of the following?

A

SGX

79
Q

If an investor holds an underlying position in an asset and an opposing futures position, they are exposed to which of the following?

A

Basis risk

80
Q

Put the following in the order of resources the ICE Clear Europe will use in the event of a clearing member defaulting:

A

Margin
Clearing member’s contribution into the Members’ Default Fund
Other members’ contributions into the default fund
£200m Lloyds insurance

81
Q

Kate wishes to carry out a basis trade on the gilt future she has just sold. She therefore must:

A

Buy gilts on the LSE

82
Q

commodity swap

A

A swap where one party pays fixed interest in exchange for an amount that reflects the price of the agreed commodity

83
Q

Understanding layering is important in relation to:

A

Financial crime

84
Q

Gamma is:

A

Positive for calls and puts

85
Q

Which of the following is a feature of Euronext Derivatives’ Universal Trading Platform?

A

Order-driven

86
Q

What is the main objective of FPML?

A

To create a single readable file format for all OTC trades

87
Q

A warrant on LME:

A

Gives right of possession to a specific lot of deliverable metal

88
Q

purpose of price limits

A

Prevent prices moving too far or too fast during a trading session

89
Q

An order to buy 25 long gilt contracts at £103.00, or lower, if the market was currently at £103.10 would be called:

A

A limit order

Derivatives (15 decks)

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