Mock 5 Flashcards
If an investor holds a cash settled contract, how would this differ from holding a deliverable contract?
Deliverable contracts settle through the physical exchange of the asset whereas cash settled do not
Who has the right to buy back undated government bonds?
HM Government
The first notice days and last notice day
can be the same day
Which of the following BEST represents how trading is conducted on the London Metals Exchange (LME)?
Open outcry and electronic trading are both available
When the underlying falls in value
call premiums fall and put premiums rise
In a swap, what is the significance of the effective date?
It is the start date for accrual purposes
In relation to SPAN:
Positions are allowed to be offset within a portfolio
Which benchmark interest rate is quoted in more than one currency?
LIBOR
Which of the following would an investor choose if they expect a sharp rise in the market?
Out-of-the-money call
How would a hedger attempt to eliminate basis risk?
Hold the derivative investment to expiry
If an investor wishes to hedge against small price movements they should ensure their position has:
Delta = 0
In respect of Asian options which is the best description of an average strike option?
The strike price is set at the expiration date to be the average rate of the underlying over the life of the option
Which of the following describes arbitrage relating to the principal of put-call parity?
- A combination of an underlying asset and positions in options
Which ONE of the following applies to a writer of an option on a future?
Receives full premium on expiry
Who benefits most from the passing of time?
Option writers
What actions is a non-clearing dealer member of an exchange permitted to do?
Trade for themselves only
Based on the Black and Scholes model for pricing options, we can assume that an increase in volatility will result in:
An increase in the premium value
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?
They will be at least equal to those called on her broker
basis swap
It is where both legs are floating
Which ONE of the following is TRUE of FCA authorised funds?
They are freely marketable to the UK retail market
For what reason would you exercise a receiver option?
Because interest rates have dropped so the option is in-the-money
If a member of a clearing house has elected for automatic exercise, how would they prevent the exercise of a particular option?
Suppression order
Options with the longest remaining life (in this question, the Octobers) have the greatest time value.
the option which is closest to being at the money will have greatest time value.
An investor buys a bond with a BBB- credit rating. Why would they take out a credit default swap on the bond?
To protect the investor from a credit event
How are principles-based regulation best defined?
Use of high-level objectives that are binding on the firm
Which of the following measures the sensitivity of delta to a change in the value of the underlying?
Gamma
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?
The clearing member that cleared the trade
Other than following the initial trade, when else can novation occur?
When a clearing member takes on the open position of another member
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?
Margin provided by the broker
liquidity
The facility with which a product can be traded
If metal prices fall,
supply will in turn fall, bringing prices to a new equilibrium though, causing them to rise.
equity traded options
A call option’s exercise price can be above the share price
Time value is greatest for which of the following options if the underlying asset is prices at 115 in April 2005?
November 2005 160 call
Which of the following best describes what happens on settlement day?
The seller, after giving appropriate notice, makes delivery of the underlying
Spot month margin is:
Additional margin to minimise any volatility near expiry date
Phil’s current portfolio is short 20 calls with a delta of 0.3. The portfolio can be made delta neutral by:
Buying 6 futures
credit derivative
It protects an investor against a bond receiving a credit downgrade
How is the payment calculated on a non-deliverable forward?
The forward rate agreed for the contract is compared to the spot rate at the end of the contract
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?
Sell the spread
synthetic short position.
Short call, long put = synthetic short position.
An option writer has no ability to exercise an option
so could not instigate the issuance of an assignment notice.
In which of the following instances would a trading member of an exchange give-up a trade to its clearing member?
If the member was a non-clearing member of the clearing house
The Commodity Futures Modernisation Act lifted the ban on which of the following?
Single stock futures
What are the daily movements paid on a futures position on an exchange called?
Variation margin
Which of the following will cause an increase in price of emission rights?
Pollution targets are reduced based on regulations
An investor buys a put and simultaneously sells a put with a higher strike price. What strategy has he entered into?
Bull put spread
Which of the following are taken into account before deciding to carry out a cash and carry arbitrage trade?
Time to expiry
The price of the future
Interest rates
The spot price
The announcement of which of the following would NOT affect the spot price of crude oil?
A tax change
synthetic short call position?
Short future, short put
If a client has used up their credit-line with a broker, they can trade in which of the following circumstances?
If they supply more collateral to the broker23
An equity index future with a distant delivery date will have a higher fair value than that of a
near-dated one if:
The dividend yield is lower than present interest rates
Margin is demanded by the clearing houses in the US and UK based on:
Net positions in the UK and gross positions in the US
A producer who is long a commodity and is concerned that it will fall in value should undertake which of the following?
Buy a commodity floor
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 statement that initial margin is a requirement from the relevant clearing house
premium
is determined by the market.
The role of counterparty to the buyer of an exchange futures contract is taken over from the seller by:
ICE Clear Europe
Which TWO of the following dates defines the period of an interest rate swap?
The effective date
The termination date
Fair value
= Cash price of the contract + Interest + Storage costs Interest
Which of the following increase cost-of-carry?
Interest rates increase and the underlying increases in price
An investor who sells the expensive contract and takes an offsetting position in the cash market is undertaking which of the following trades?
Cash/Futures arbitrage
benefits of exchange traded derivatives.
Liquidity Reduced default risk Speed up trading
Which ONE of the following represents a reason for the introduction of the over-the-counter derivatives market?
Confidentiality
The relationship of the clearing house to a clearing member would be described as:
Always principal to principal
If interest rates rise, what is the likely effect on equity option premiums?
Call prices rise and put prices fall
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?
Risk warning to be acknowledged by the investor
basis swap
particular type of interest rate swap where a floating rate is swapped for a different floating rate.
Which of the following is the BEST definition of a futures contract?
To enter into an agreement to deliver or take delivery of:
A specified quality and quantity of a specified asset on a fixed future date at a price agreed today
A GBP inflation swap would be based upon which inflation index
RPI
A derivative portfolio has a low gamma, this indicates:
The asset manager will less likely be required to actively manage their dynamic hedges to remain delta neutral
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 diagonal spread
crude basis
It is non-linear
Why would an investor buy a receiver swaption?
To hedge against a fall in interest rates
To make a quick profit if interest rates fall
Which of the following is true regarding margining positions for equity options?
A vertical bear put spread is unlikely to be margined
Which of the following is a positive feature of over-the-counter products over exchange-traded products?
Flexibility allows for more accurate hedging
American style payer swaption
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
A country introduces a 5% export tariff on cocoa in order to ensure domestic supply. The likely impact would be:
Global cash prices and global futures prices would both rise
Which of the following is associated with Net Liquidation Value (NLV)?
London Span margin
Since 1984 the CME has had a close relationship with which of the following?
SGX
If an investor holds an underlying position in an asset and an opposing futures position, they are exposed to which of the following?
Basis risk
Put the following in the order of resources the ICE Clear Europe will use in the event of a clearing member defaulting:
Margin
Clearing member’s contribution into the Members’ Default Fund
Other members’ contributions into the default fund
£200m Lloyds insurance
Kate wishes to carry out a basis trade on the gilt future she has just sold. She therefore must:
Buy gilts on the LSE
commodity swap
A swap where one party pays fixed interest in exchange for an amount that reflects the price of the agreed commodity
Understanding layering is important in relation to:
Financial crime
Gamma is:
Positive for calls and puts
Which of the following is a feature of Euronext Derivatives’ Universal Trading Platform?
Order-driven
What is the main objective of FPML?
To create a single readable file format for all OTC trades
A warrant on LME:
Gives right of possession to a specific lot of deliverable metal
purpose of price limits
Prevent prices moving too far or too fast during a trading session
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 limit order
