Questions

Question 1

The CFTC Part 30 exemption allows:
ANon-US brokers to trade on US derivative exchanges BUS brokers to trade on non-US derivative exchanges CNon-US brokers to trade on non-US exchanges on behalf of US client DUS brokers to trade on non-US exchanges on behalf of US clients

Answer 1

Non-US brokers to trade on non-US exchanges on behalf of US client

Question 2

If the Bank of England lowers its base rate and the market rallies, which of the following portfolios will benefit most?
APositive Delta, positive Rho BPositive Delta, negative Rho CNegative Delta, positive Rho DNegative Delta, negative Rho

Answer 2

Positive Delta, negative Rho,

Delta measures the sensitivity of the premium to changes in the underlying asset. Delta is positive for bullish positions.
Rho measures the change in option premium with a 1% change in interest rates. If your position Rho is positive, you want interest rates to increase, resulting in increased position value. If position Rho is negative, you want interest rates to decrease, resulting in increased position value.

Question 3

Which of the following is true of aternative delivery procedures (ADP) offered on some physically delivered contracts?
AThe clearing house will have no obligations to guarantee the performance of the contract under ADP BThe asset is delivered away from the clearing house procedures; the buyer pays through the clearing house account CDelivery will still be bound by the exchange’s rules and regulations under ADP DIt allows an over-the-counter position for forward delivery to be exchanged for a exchange-traded position

Answer 3

The clearing house will have no obligations to guarantee the performance of the contract under ADP ,

In the event that the seller and buyer (once the two have been allocated by the clearing house) agree to make delivery other than as specified in the exchange’s rules and regulations for that contract, both parties must advise the clearing house of their agreement. The clearing house will then liquidate the contracts at the agreed settlement price, in fulfilment of all its obligations under the delivery contract.

This agreement is known as an alternative delivery procedure (ADP).

An ADP may take place at any time during the delivery period, once the long and short futures positions have been matched for the purpose of delivery. ADPs are almost exclusive to commodity contracts, and are accepted by a wide range of major exchanges, such as ICE, CME and Euronext.

Question 4

The most likely place to find exchanges where trading firms can purchase seats and exercise voting rights is in which of the following countries
AThe US BEurope CJapan DChina

Answer 4

The US

Question 5

Which of the following exchanges using the electronic order book system called Select?
ALondon Stock Exchange BLondon Metal Exchange CEurex DChicago Board Options Exchange

Answer 5

London Metal Exchange

Question 6

If a member does not want the automatic exercise of in-the-money options on expiry, who needs to be notified?
AAny NCM BThe exchange CThe clearing house DNo one. Automatic exercise is an ‘opt-in’ facility

Answer 6

No one. Automatic exercise is an ‘opt-in’ facility,

Automatic exercise of ITM options is ‘opt-in’. If the broker does not want automatic exercise afterwards, a ‘suppression notice’ has to be filed.

Question 7

The cash price of one lot of Aluminium is currently at $1,200/tonne. The cost of three month’s storage is $15/tonne. Interest rates are currently 12% p.a. What contango for the three month over the cash is required to make it beneficial for a member to enter a contract to buy cash and sell forward three months?
A$27/tonne B$36/tonne C$51/tonne D$50/tonne

Answer 7

$51/tonne,

($1,200 x 12% x 3/12) + $15 = $51. To make a profit the actual futures price needs to be in excess of $51 above the cash price.

Question 8

The June/December calendar spread on ICE’s STIR future contract is trading at +30 ticks. If an investor BUYS the spread, which of the following is/are true?
IThe investor buys the June leg and sells the December leg
IIThe investor buys the December leg and sells the June leg
IIIThe investor expects the yield curve to flatten
IVThe investor expects the yield curve to steepen

Answer 8

I & IV,

The spread takes its name from what the investor does with the NEAR month. Buying the spread means that he/she is buying the June leg and selling the December leg - Option I is therefore correct. Because the calendar spread is positive, this means that the price of the June leg is greater than the price of the December leg, or in other words, the implied interest rate is lower for the June leg and higher for the December leg (remember, STIRs are priced 100 - implied rate). As the investor is buying the June leg, he/she must expect prices to go up (and interest rates to go down) in the near month. The investor is also selling the December leg, which means he/she must expect prices to go down (and rates to go up) in the far month. The investor therefore expects the yield curve to STEEPEN - Option IV is correct.

Question 9

Put the following actions in order from first to last relating to a holder deciding to exercise an option:
IThe writer receives an assignment notice from the clearing house and must then honour their obligations
IIThe broker receives an assignment notice from the clearing house and allocates it to a client who holds a position as a writer
IIIThe broker completes an exercise notice and forwards it to the clearing house
IVUpon receipt of the exercise notice the clearing house assigns it to a member firm
AIII, IV, II, I BII, III, IV, I CI, II, III, IV DIV, I, III, II

Answer 9

AIII, IV, II, I ,

The holder informs their broker that they wish to deliver, which begins the whole process of exercising an option.

Question 10

Which of the following options would be described as being the most geared?
AIn-the-money options BAt-the-money options COptions with the highest delta DDeeply out-of-the money options

Answer 10

Deeply out-of-the money options,

OTM options will be the cheapest to buy and hence the most geared since a very small initial outlay (the premium) allows the investor to control a much greater value asset.

Question 11

When is collateral for OTC traded options most likely to be called?
AIf the option moves out-of-the money BIf the option moves in-the-money CIf interest rates rise DIf volatility falls

Answer 11

If the option moves in-the-money ,

We do not know what type of option is being referred to, so interest rates cannot be used as they affect calls and puts differently. If an option moves in-the-money, it exposes the holder to increased default risk of the writer. This would be covered by collateral. As option premiums are typically paid up front, the option moving out-of-the-money exposes the writer to no more risk than that already covered by the premium.

Question 12

When does the premium of an option on an equity index need to be settled?
AUpon the closing of the position BUpon the expiry of the option CAt the choice of the holder DBy the next business day

Answer 12

By the next business day,

Options that are on the underlying asset or an index will need premiums to be settled T+1. However, options on futures can be settled upon exercise or expiry.

Question 13

On which of the following exchanges are energy derivatives traded?
INYMEX
IICOMEX
IIIMEFF
IVICE
AI and II BII and III CI and IV DIII and IV

Answer 13

I and IV ,

Metals are traded on COMEX. Financial derivatives are traded on MEFF.

Question 14

Which of the following would be considered one of the main purposes of a regulator?
AHelping firms manage price risk BHelping firms manage default risk CHelping firms manage inflation risk DHelping firms manage operational risk

Answer 14

Helping firms manage operational risk,

Regulators introduce processes that allow firms to manage operational risk.

Question 15

Which of the following is the best definition of an exchange delivery settlement price?
AThe marked-to-market price for the day on which variation margin is based BThe settlement price paid on a cash-settled future CThe guaranteed price at which open positions can close out their positions DThe price established on the last trading day on which a final variation margin will be paid

Answer 15

The price established on the last trading day on which a final variation margin will be paid,

EDSP is the market’s term for the official closing price of the contract on the last trading day. It is set by the exchange in order to prevent any possible manipulation of the actual closing price.
For physically delivered futures, it represents the amount of money paid by the long on delivery based on one unit of trading (for example, per tonne). For cash settled contracts, it represents the price on which a final variation margin will be paid.

Question 16

Which of the following statements are true in respect of maintenance margin?
IIt is another name for variation margin
IIIt is a system of margining operated by a number of derivative exchanges, particularly in the US
IIIWhen an account falls to the maintenance margin level, it must be replenished by the client up to the original initial margin level
IVMaintenance margin arrangements can be operated in the UK between brokers and their clients
AII, III and IV BII and IV CII and III DI, II and IV

Answer 16

AII, III and IV ,

Maintenance margin is often used on US exchanges, it is not used by LCH.Clearnet or ICE Clear Europe but may be used by a firm against its client.

Question 17

The client asset rules insist that a firm reconcile a client’s assets on a regular basis. For what reason is this reconciliation required?
ATo keep clients informed as to the value of their assets BTo ensure that the firm can meet any calls on these assets CTo provide the competent authority with records of the assets DTo facilitate in the valuation of the firm’s assets

Answer 17

To facilitate in the valuation of the firm’s assets,

A firm must regularly reconcile the assets in order to ensure they have the correct assets should the client call for their return, or ask the firm to use them in any way.
The assets would not need to be the exact assets deposited by the client, but would need to be equivalent.

Question 18

On which exchange are traded average price options (TAPOs) available?
ACOMEX BICE CLME DCSCE

Answer 18

CLME ,

Note: TAPOs are options where the price is calculated using the average price for the underlying over a period of time.

Question 19

Which of the following futures contracts is not physically delivered?
ACopper BBrent crude CCocoa DWheat

Answer 19

Brent crude,

All non-financial futures are physically delivered except Brent (either cash settled or delivered through an EFP).

Question 20

When a clearing house calculates a net margin call after marking to market, which of the following best describes the effect on the clearing members?
ALess margin will be called from both the client and the house accounts BTrades from the same exchange are cancelled out CLess margin will be called from the house account only DHouse margin is netted off against client margin

Answer 20

Less margin will be called from the house account only ,

Clearning houses offer a principal to principal guarantee. That is, they recognise the clearing member only, not the clearing member’s clients. If two clients’ margin payments net off, it is possible for the house (clearing member) to hold onto this margin and not pay it over to the clearing house.

Question 21

The market suddenly becomes more volatile causing the price of futures contracts to drop sharply. Which of the following types of margin will be required from a member with a large long futures position?
AVariation BSpot month CIntra day DIncreased initial

Answer 21

Intra day,

Sudden increases in volatility are dealt with by the clearing house using intra day margin calls.

Question 22

Many proponents of the principles-based approach feel that the key advantage over rules-based regulation is:
ACost effectiveness BInternational acceptance CFlexibility DStandardisation of procedures

Answer 22

Flexibility

Question 23

What is tick value?
IThe product of multiplying tick size by contract size
IIThe profit or loss caused by a one tick movement in price on one futures contract
IIIThe smallest permitted price movement in a futures contract
IVA value used to calculate profit or loss on option trades which is dependant on the strike price of the option
AI only BI and II CIII only DI, II and IV

Answer 23

BI and II,

The tick size represents the minimum movement of a contract but we also need to consider the contract size to understand the overall profit or loss on the contract per a tick movement. So this can also be described as tick size x contract size.

Question 24

Which of the following in relation to margin would not have to be disclosed to a retail client before conducting a transaction?
AWhen the margin is to be paid BThe form in which the margin may be paid CWhat the firm may do if the client defaults on their margin payment DThe amount of margin payable by the client

Answer 24

The amount of margin payable by the client,

The firm would also need to disclose the other circumstances (apart from not paying margin) when it would close out the client’s position without prior reference to them.

Question 25

What is the motivation for conducting a horizontal spread with call options?
ATo profit from time decay BExpect an increase in volatility CBelieve the market will rise DTo hedge against an existing position

Answer 25

To profit from time decay ,

Selling a near dated option and buying a far dated option and then subsequently reversing these trades should result in profit.

Question 26

What is the objective of client categorisation to ensure?
AAll clients are considered the same BClients are categorised based on the main instrument traded CClients are categorised based on their specific service requirements DCategorisation is based on the financial resources of the client

Answer 26

Clients are categorised based on their specific service requirements ,

This is the best available answer, since the level of service required and the client knowledge and experience will all be considered.

Question 27

When a metal producer enters into a fixed for floating commodity swap to protect themselves from uncertainty in prices (agreeing to receive a fixed price in return for paying a floating price), which of the following is NOT true?
AThe producer benefits from certainty in pricing BThe floating amount payable is equal to the price of the metal produced CThe amount payable by the producer is based on an agreed metal index DThe producer does not necessarily sell the metal to their counterparty in the swap

Answer 27

The floating amount payable is equal to the price of the metal produced,

The floating amount payable by the producer will be based on a pre-agreed metal index, which will not necessarily be the price of the metal on the market.

Question 28

If short-term interest rates were expected to fall, what effect would this have on the spread between two delivery months on a futures contract with an underlying asset in good supply?
AWiden BNarrow CRemain unchanged DIndeterminate

Answer 28

Narrow,

The cost of carry would fall due to the lower interest rate, thus the difference between the two fair values would be narrower.

Question 29

What would be the equivalent exposure to the UK stock market if an investor bought seven FTSE 100 futures? The contract is currently at 6,400 points and has a tick value of £5 per half point.
A£32,000 B£64,000 C£224,000 D£448,000

Answer 29

D£448,000,

Total exposure = 6,400 points x £10 per point x 7 contracts = £448,000.

Question 30

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?
AA bermudan option BA compound option CA chooser option DA binary option

Answer 30

A compound option,

A bermudan option is an option (call or put) where early exercise is restricted to certain dates during its life.
A chooser option allows the holder to decide whether the option is a call or a put at a pre-determined time during it’s life.
A binary option (also known as a digital option) pays a fixed amount, or nothing at all, depending
on the price of the underlying instrument at maturity.

Question 31

To secure exemption under CFTC Part 30, FCA members must do all of the following except:
AJoin the NFA arbitration scheme BPay 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 CProvide the CFTC via the FCA with any relevant client records DSend and receive back from clients the generic CFTC risk disclosures

Answer 31

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,

CFTC Part 30 is explained in full in Chapter 9: Matt’s notes

Question 32

Which of the following statements regarding warrants is false?
AThey are issued by a company to raise cash BThey are a long-dated call option on the company’s shares CThey are the right to subscribe for new shares at a fixed price on a future date DThey are only issued to existing shareholders

Answer 32

They are only issued to existing shareholders,

Warrants are normally issued alongside a bond issue.

Question 33

What is shown on electronic/screen based trading systems?

ACurrent bid/offer BBest bid/offer CDetails of the days trades DBest three bid/offer prices

Answer 33

Best bid/offer,

The assumption is that the question is referring to a Level I screen, which shows the best bid and offer currently available.

Question 34

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?
AA top-up to initial margin in the event of large intra-day movements in the price of the underlying BA one off deposit made by the clearing member as insurance that delivery obligations are fulfilled CIt is an additional rate of margin to cover the risk of default during the delivery process DIt is margin that may be called by the clearing organisation from its members in anticipation of major events

Answer 34

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

Spot month margin is taken to cover the clearing organisation between the last trading day of the contract and its ultimate delivery.

Question 35

Which of the following is the SEC not responsible for?

AStock options BStock index options CCurrency transactions on exchange DNYMEX

Answer 35

NYMEX,

NYMEX and CME are the responsibility of the CFTC.

Question 36

Which of the following BEST describes the motivation for gearing?
AHigher risk for higher return BLower risk for similar return CHigher risk for lower return DLower risk for higher return

Answer 36

Higher risk for higher return ,

Gearing or leverage is the ability to generate higher percentage returns based on initial outlay. This can work both ways and could also result in greater relative losses.

Question 37

How does ICE Futures adjust for exchange rate fluctuations, if the EDSP and contract price of a universal stock future are in different currencies?
ABy converting the EDSP to the contract currency at the spot exchange rate at close BThe SPAN system will convert, using a time-weighted average for the life of the futures contract CThe invoice amount will be payable in both currencies DThe EDSP and contract currency are never different

Answer 37

The EDSP and contract currency are never different,

The EDSP and contract currency are NEVER different for universal stock futures.

Question 38

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?
AIt will increase the value of calls and increase the value of puts BIt will increase the value of calls and decrease the value of puts CIt will decrease the value of calls and decrease the value of puts DIt will decrease the value of calls and increase the value of puts

Answer 38

It will increase the value of calls and decrease the value of puts,

An increase in interest rates will increase the value of calls and decrease the value of puts, while a drop in interest rates will have the opposite effect. The longer the time to expiration, the higher an option’s rho. At-the-money and in-the-money options have relatively higher rho.

Question 39

Which of the following is an advantage of pooled funds?

ADilution levy BNo charges CGeographical diversification DInvestor has direct control over their investment

Answer 39

Geographical diversification,

Pooled funds are small collective schemes. An advantage is that the small investor may achieve diversification reasonably cheaply. Dilution levy is charge to an investor when they redeem many units or shares.

Question 40

Which of these is true for London?
AThere is a central exchange for trading foreign currency. BDerivative trades are subject to the Dodd-Frank Act. CCleared derivative trades are subject to standard portfolio analysis of risk. DUS firms must get a CFTC 30 exemption to trade.

Answer 40

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

SPAN is used to calculate margin on cleared derivatives trades. There is no central exchange for FOREX in the UK. The Dodd-Frank Act and CFTC 30 both apply in relation to the US.

Question 41

An investor buys 300 BP 430p call options at 15p. What will be the premium paid assuming each contract represents 1,000 shares?
A£45 B£4,500 C£45,000 D£64,500

Answer 41

£45,000,

Total premium paid = Premium x contract size x No. of contracts
= 15p x 1,000 x 300 = £45,000

Question 42

Euronext’s UCP is used for all of the following functions EXCEPT:
AAccount reconciliation BTrade allocation CAccount assignment DTrade matching

Answer 42

Account reconciliation,

The Universal Clearing Platform operates behind Euronext’s Universal Trading Platform. Its primary facilities are trade allocation of trades to the appropriate clearing member, matching the detail of the trades and allocating it to a recognised account type.

Question 43

All of the following are used to determine the priority by which orders on Euronext Derivatives’ Universal Trading Platform are executed except:
APrice BOrder type CTime of order DUnderlying

Answer 43

Underlying,

The underlying product is not relevant for order priority purposes.

Question 44

What adjustment is made to the calculated SPAN scanning risk to adjust for offsetting futures positions?
ASpot month changes BVariation margin CInter-commodity spread margin DShort option minimum charge

Answer 44

inter-commodity spread margin,

When calculating scanning risk an adjustment is made to take account of inter-commodity spreads: e.g. long-gilt future, short-bund future. Because these two positions offset each others’ risk, at least to a certain extent, the adjustment is subtracted from scanning risk. Note that inter-commodity spread margin is also called inter-commodity credit.

Question 45

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?
AA buy MIT BA buy stop CA sell MIT DA sell stop

Answer 45

A buy MIT,

Stop orders are orders used to close an existing position. MIT (market if touched) orders are orders that can be used to enter the market. The speculator here is only interested in opening a position if the market retraces down from its current level, an order to buy below the current level is required; a buy MIT.

Question 46

All of the following may be used as collateral for margin purposes except:
AGerman bunds BSterling denominated gilts CGilts denominated in euro DUS Treasury bonds

Answer 46

Gilts denominated in euro,

Only gilts denominated in £s are acceptable to UK Clearing houses.

Question 47

Which of the following best describes a covered warrant?
AThe right to have shares delivered by a company at the warrant strike price BA company holding sufficient cash to cover an obligation under a warrant contract CThe right to buy or sell shares created by an investment bank in tradable form DA bank buying warrants whilst holding the underlying shares

Answer 47

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

Covered warrants are similar to traded options and create an obligation on a writer (typically an investment bank) to make or take delivery of shares.

Question 48

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

Answer 48

UTP,

Click is used by the OM London Exchange. SETS is an automated share dealing system used on the LSE.

Question 49

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?
AThe firm has achieved a CFTC Part 30 Exemption BThe client has started trading for investment purposes CThe client has been reclassified as a market professional DThe client has started trading US based derivatives

Answer 49

The client has started trading for investment purposes,

The assumption is that if the client has started trading derivatives for investment purposes, then previously the trading activities related to hedging activities.
Derivatives used for hedging purposes are outside the scope of MiFID, whereas derivatives used for investment purposes would be covered.

Question 50

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)?
ABuy futures BBuy calls CBuying puts DWrite calls

Answer 50

Buying puts,

As interest rates increase, the price of interest rate futures goes down. In other words there is an inverse relationship between the interest rates and the price of interest rate futures. It therefore follows that the value of put options (they are priced like the futures) on interest rates would go up as interest rates increase and this would act as a hedge in this example.

Question 51

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

Answer 51

Market

Question 52

Which of the following creates a synthetic short futures position?
AHolding a call option and writing a put option BHolding a put option and writing a call option CHolding the underlying and writing a call option DSelling the underlying and holding a put option

Answer 52

Holding a put option and writing a call option,

Assuming the two options have the same strike the asset will be delivered at the strike price whatever the market does. This is synthetically like being short a future.

Question 53

Under which of the following conditions might a broker pay margin money to a customer?
ADuring delivery BAs a consequence of calculating spreads CAs a result of marking-to-market DWhen processing an intra-day margin call

Answer 53

As a result of marking-to-market ,

Marking-to-market is the process by which the contract is revalued, normally on a daily basis. Variation margin is calculated following the marking-to-market process. This could result in a variation margin credit which would be paid to the broker, who in turn would pay their client.

Question 54

A bank asking a client for more collateral in respect of their open-positions is equivalent to:
AA margin call BPayment of variation margin CNet liquidation value DMaintenance margin

Answer 54

A margin call ,

This is equivalent to a firm making a margin call.

Question 55

Interbank deposit rates are used to determine which of the following?
ARepo rate BInterbank borrowing rates CFed funds rate DForward rates

Answer 55

Interbank borrowing rates ,

Deposit rates (e.g. LIBID) and lending rates (e.g. LIBOR) are always closely linked. The interest rate paid in repo agreements is an important benchmark in the money markets, and so is influential on interbank rates (NOT the reverse as suggested by A).

Question 56

Which of the following is the best description of a closing contract on the LME?
AClosing-out of a position to realise a profit on a contract on the settlement date BA contract which allows delivery before the settlement date CA contract which allows delivery after the settlement date DClosing-out of a position to realise a profit on a contract on the trade date

Answer 56

Closing-out of a position to realise a profit on a contract on the settlement date ,

A closing contract, as the name suggests, is a contract that closes-out a position. However, profits are not realised, on the LME, until the settlement date (prompt date).

Question 57

Which ONE of the following applies to a writer of an option on a future?
AReceives a residual credit based on the net liquidation value (NLV) of the option BReceives the full premium less any initial margin CReceives premium on day of trade DReceives full premium on the earlier of exercise or expiry

Answer 57

Receives full premium on the earlier of exercise or expiry,

An option on a future has the premium paid on exercise or expiry, whichever is sooner.

Question 58

Which option pricing model uses the ‘volatility smile’ as its pricing basis?
ABlack-Scholes BBinomial CSABR DBermudan

Answer 58

SABR,

Volatility smile states that the implied volatility is greater for options with strike prices that are well in the money and very much out of the money. This is the pricing basis for SABR model which in contract to Black-Scholes model that uses a fixed level of implied volatility.

Question 59

In which of the following ways do the rules between the UK and the US differ in relation to client asset/money accounts?
AUK rules on client money obliges segregation of all client money from the firm’s money whereas the US allows all client money to be held in a non-segregated account BUK rules on client money allows segregation or non-segregation whereas all US client’s money must be held in a segregated account CBoth the UK and US rules allow client’s money to be held in segregated or non-segregated accounts DNeither the UK and US rules allow client’s mo

Answer 59

UK rules on client money allows segregation or non-segregation whereas all US client’s money must be held in a segregated account,

In the US, client’s money MUST be segregated from the firm’s. In the UK, segregation is only OBLIGED to retail clients as professional clients may opt-out of the client money rules.

Question 60

What are the main differences between an interest rate swap and a currency swap?
IThe principal amounts of an interest rate swap are transferred between the counterparties but not transferred between counterparties of a currency swap
IIThe principal amounts of a currency swap are transferred between the counterparties but not transferred between counterparties of an interest rate swap
IIIThe periodic payments of an interest rate swap are made gross but in a currency swap are paid net
IVThe periodic payments of a currency swap are made gross but in an interest rate swap are paid net
AI and III BI and IV CII and III DII and IV

Answer 60

DII and IV,

The principal amount of an IRS is notional and not actually transferred between the counterparties to the swap. IRSs also make payments net, i.e. payments between the counterparties are netted out.

Question 61

An investor is long ten futures contracts and long ten put contracts. To offset market risk from this position, the investor should:
ABuy ten call options BSell ten call options CSell ten futures contracts DDo nothing as there is no market risk

Answer 61

Sell ten call options,

According to put-call parity, being long a future and long a put creates a synthetic long-call. Therefore, to offset this position, the investor should sell calls.

Question 62

Which of the following exchanges are most likely to have arbitrage trades occurring between the two?
AICE and LME BICE and LSE Derivatives CICE and NYMEX DOneChicago and NYMEX

Answer 62

ICE and NYMEX,

Both these exchanges have Brent crude oil contracts. However, note that the contracts are slightly different from each other.

Question 63

An investor writes 10 puts on a long gilt future with a strike price of 105.00 at a premium of 10p per contract. At the same time the investor also sells 10 long gilt futures at 105.25. On expiry of the options, the future is trading at 104.25. Assuming all options are exercised and all positions closed out, what profit or loss is made?
A15p loss per contract B25p loss per contract C35p profit per contract D90p profit per contract

Answer 63

35p profit per contract,

The investor has two positions: short puts on a long gilt future and short positions in the long gilt future.
As the writer of the put, the investor receives the premium of 10p per option. If the option is exercised, the investor will receive a long position in the long gilt future at 105.00. When this occurs it will close out the short positions originally opened at 105.25,
Long at 105.00 and short at 105.25 gives a 25p profit. Remember, the investor also gained 10p premium on the options, taking his profit to 35p.
NOTE: the contract is somewhat confusingly called the ‘long gilt future’ and you can be long the ‘long gilt future’ or short the ‘long gilt future’.

Question 64

You are a ring dealing member of the London Metals Exchange and have quoted one of your clients a price over the telephone. What response should you provide if the client requests a ‘second opinion’?
AInform the client he may contact Exchange officials to confirm quoted prices BInform the client that real-time prices from the floor are available from quote vendors CInform the client that he has the right to inspect FCA records of real-time prices DThere is no possibility of a second opinion

Answer 64

Inform the client that real-time prices from the floor are available from quote vendors ,

Quote vendors, such as Reuters and Bloomberg, provide real-time prices.

Question 65

In an open outcry market what is the market price?

ALast trade BCurrent bid/offer quotes CAverage of the last ten minutes of trading DNo market price is reported

Answer 65

Current bid/offer quotes,

Current bid/offer quotes represent prices at which trading is possible and are therefore the market price.

Question 66

Which of the following is NOT a possible consequence of inadequate monitoring of an open derivatives position?
ANew cash positions may be established BUnexpected cash calls to meet variation margin CUnexpected cash calls to meet initial margin DPosition closed-out by another counterparty

Answer 66

Position closed-out by another counterparty,

If a position is not monitored, the investor will not be aware if the positions are about to reach delivery. This could lead to a position in the cash market, or unexpected calls to meet margin.

Question 67

Which of the following factors leads to the spread on forward foreign exchange quotes being wider than on spot quotes?
ALarger exchanges BVolatility CTime DLiquidity

Answer 67

Time,

Forward bid-ask spreads are wider than spot bid-ask spreads because of the time factor.

Question 68

Which of the following is NOT used in calculating closing futures prices on ICE Futures?
AThe traded price during the last thirty seconds of the closing range BThe weighted average of the prices traded during the last thirty seconds of the closing range CThe weighted average of the prices traded during the last ten minutes of trading DThe mid-price at the time the settlement price is calculated

Answer 68

The weighted average of the prices traded during the last ten minutes of trading,

The closing range is also referred to by the exchange as the ‘settlement range’.

Question 69

The markets for US Treasury bill futures is regulated by which body?
AThe US Treasury BThe Federal Reserve CThe Securities and Exchange Commission (SEC) DThe Commodities Futures Trading Commission (CFTC)

Answer 69

The Commodities Futures Trading Commission (CFTC),

The CFTC controls commodity and financial derivatives markets, although the SEC does control equity derivative markets.

Question 70

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?
AAble to execute and clear trades for the firm and clients BAble to execute but not clear trades for the firm only CAble to execute and clear own trades but must give up client trades to a clearing member DAble to execute trades for the firm and clients but needs an arrangement with another firm for clearing

Answer 70

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

All trades executed will normally then be cleared by a General Clearing Member by agreement.

Question 71

Which of the following reasons BEST explains why a manager would monitor the delta of his portfolio?
ATo assess interest rate changes BTo track the price change in the underlying asset CTo predict the changes in implied volatility DTo maintain a delta neutral position

Answer 71

To maintain a delta neutral position,

Question 72

where do coal futures trade

Answer 72

ICE

Question 73

Which of the following statements regarding basis and basis risk is false?
ABasis risk is the uncertainty of basis values affecting the user of the future BBasis is said to weaken when it becomes more positive or less negative CBasis is calculated by deducting the futures price from the cash price DIf a future is trading at its fair value basis equals the cost of carry

Answer 73

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

Basis weakens when the cash prices weaken relative to futures. Because basis is calculated at Cash - Futures, the lower relative cash price results in basis becoming either less positive or more negative.

Question 74

Who pays the invoice amount?
AThe long pays it to the exchange BThe seller pays it to the clearing house CThe seller pays it to the long DThe long pays it to the clearing house

Answer 74

The long pays it to the clearing house,

The long pays the invoice amount to the clearing house who then passes it onto the short.

invoice amount is just the payment i think

Question 75

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:
AEquity linked note BSynthetic collateralised debt obligations CCollateralised debt obligations DCredit linked note

Answer 75

Collateralised debt obligations ,

Collateralised debt obligations (CDOs) are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets. A special purpose entity (SPE, more commonly referred to as a special purpose vehicle or SPV in European markets) acquires a portfolio of underlying assets.

Question 76

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?
AA must negotiate terms with B and will suffer if B defaults BA can close against any counterparty via the central counterparty with no default risk CA can close the position against any counterparty but still faces default risk DA may not close the position before delivery but bears no default risk

Answer 76

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

The swapclear and repoclear facilities offered by LCH allow either party to close a novated position at any time with effectively no default risk because of the central counterparty guarantee.

Question 77

Which of the following is true in relation to client margin requirements?
AA firm may net client and firm margin requirements at all times BA firm may never net client and firm margin requirements CMargin requirements from clients may sometimes be netted-off against offsetting positions with the firm’s own margin requirements DMargin requirements from clients are always netted-off against offsetting positions with the firm’s own margin requirements

Answer 77

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

If client accounts are held within a NON-SEGREGATED account, then netting off is permitted. Netting-off is not permitted is the firm operates a segregated account for the client.

Question 78

An investor is long an 97 BTP call at a 30 tick premium and short a put at the same exercise price at a 20 tick premium. What is the overall position?
AA synthetic long future at 97.10 BA synthetic long call at 97.10 CA synthetic short future at 97.10 DA synthetic long future at 96.90

Answer 78

A synthetic long future at 97.10,

Long call + short put = synthetic long. The breakeven price will be equal to the strike price plus the difference between the two premiums, i.e. 97 + (0.3 - 0.2) = 97.10. Note that the premiums are expressed as ticks. One tick is 0.01.

Question 79

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?
AWould be filled if the market opened at 18.61 BWould be filled if the market opened at 18.50 CCould possibly be filled at 18.40 DIf, by the close that day the range had been 18.36 to 18.49 the order would be cancelled automatically

Answer 79

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

The order is Market if Touched, Good Till Cancelled. Selling MIT orders are placed above the market and are executed at the next price after the trigger price (in this case 18.50) has been traded. The market opening at 18.61 would mean that 18.50 had assumed to be traded and would be filled. Likewise, if the market opens at 18.50 the order would become live. It is possible for the order to be filled at 18.40 if, after having traded 18.50 the next available price is at 18.40. Good till cancelled orders are cancelled on the clients say so, not automatically at the end of that day.

Question 80

Which of the following is not likely to increase the price transparency of derivative contracts in an electronic screen trading facility?
ADisplay of best bid and offer BUpdates of last traded price CDetails of the depth of price and volume DDetails of open interest

Answer 80

Details of open interest,

Open interest is an indicator of the likely liquidity of the contract rather than an indicator of price.

Question 81

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?
ABasis will narrow, sell the basis BBasis will narrow, buy the basis CBasis will widen, sell the basis DBasis will widen, buy the basis

Answer 81

Basis will narrow, buy the basis,

In a contango market, if the basis is strengthening then it will narrow as the price in the cash market will be getting stronger relative to the futures market. If the basis strengthens, the trader should buy the basis which means buy the cash asset and sell the future.

Question 82

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:
AA retail scheme BA pooled fund CAn investment DAn account

Answer 82

An account,

An account is where, usually, a wealthy investor holds a private account with a brokerage.

Question 83

Which of the following would not be disclosed to a retail client in relation to potential margin payments?
AWhen margin will be required and when it is due BThe form of investments the clearing house accepts as margin CThe steps the firm will take if the client fails to pay the required margin DAny other circumstances in which the firm may close out the client’s position

Answer 83

The form of investments the clearing house accepts as margin ,

A retail client must be notified BEFORE conducting a contingent liability transaction. They will be notified of what the broker accepts as margin, but not what the clearing house accepts.

Question 84

what do UK clearing houses accept as collateral

Answer 84

UK Clearing houses will only accept European, Canadian and US government debt as collateral.
denominated in home currency of course

Question 85

Which of the below defines the purpose of swapclear?
ASending secure messages and confirmation BHelps clients reduce capital, credit and operational costs CProduce electronic confirmation which are ISDA compliant DProvides clearing function

Answer 85

Provides clearing function,

Swapclear is owned by LCH.Clearnet and provided clearing for the OTC market. The answers define the role of Markitwire, NEX Trioptima and Swiftnet FPML.

Question 86

Which of the following statements best describes open interest?
AIt is the volume of lots on the bid and offer at the opening for a particular delivery month BThe sum of all long positions less all short positions currently open for delivery for a particular delivery month CThe sum of all segregated and in-house positions open for delivery for a particular delivery month DThe total of short positions open for delivery for a particular delivery month

Answer 86

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

The open interest for a given delivery month is the total of all long OR short positions open for delivery in that contract.

Question 87

Who issue an assignment notice before expiry?
AThe holder of an option BICE Clear Europe - at its discretion CThe exchange - at its discretion DThe writer of an option

Answer 87

ICE Clear Europe - at its discretion,

The clearing house will send out the assignment notice to a short position of its choice.

Question 88

Which of the following best describes an accreting swap?
AA swap based on a notional principal which will increase over the life of the contract BA swap based on a notional principal which is linked to a withholding tax liability and the purchase of a cash bond CA swap based on a notional principal which will increase or decrease in line with seasonal borrowing requirements DA swap based on a notional principal which will decrease over the life of the contract

Answer 88

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

Answer A is the best description of an accreting swap. Answer C is a rollercoaster swap and Answer D an amortising swap.

Question 89

Which of the following are consequences of the Commodities Futures Modernization Act 2000 (CFMA 2000)?
IThe prohibition of trading single stock futures
IIThe permitting of trading of single stock futures
IIIThe rendering of most OTC derivative contracts legally binding
IVThe rendering of most OTC derivative contracts legally unenforceable
AI and IV BI and III CII and IV DII and III

Answer 89

DII and III,

The CFMA 2000 was passed to prevent the US financial services industry losing business to other financial centres in instruments that existing federal legislation prohibited - such as single stock futures.

Question 90

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?
AThe last notice day is the last day the contract can be traded BThe seller cannot specify the delivery day CThe exchange will specify the grade of asset to be delivered DThere are no differences

Answer 90

The seller cannot specify the delivery day,

On any other delivery day a short can specify the delivery day. On the last notice day the delivery day is specified (T +1).

Question 91

Which of the below options is not an influencing factor on supply of Metals?
AAvailability BCost of extraction CGovernment subsidies and tariffs DSuitable Land

Answer 91

Suitable Land,

All play a part in supply of metals except suitable land. Land is a factor for agriculturals where we require suitability for growth.

Question 92

An investor will receive a semi-annual interest payment of how much in the following situation?
The investor purchases five 6% $1,000 par value bonds. They are selling at a discount and have a yield to maturity of 8%.
A$150 B$225 C$300 D$60

Answer 92

$150,

The investor will receive semi-annual payments of $150. The bond pays 6% interest based on $1,000 par value. There are 5 bonds= $5,000 par value. 6% of $5,000=$300/year in interest. Since the interest is paid semi-annually, the payment would = $150.

Question 93

Which of the following may a firm call as collateral from a client with their permission?
IEquity
IIWarrants
IIIDebentures
IVCash
AI, II, III BIII and IV CI, III, IV DI, II, III, IV

Answer 93

I, II, III, IV,

With the permission of the client a firm could call any of these. UK Clearing houses, however, would only accept debentures and cash.

Question 94

Which of the following is the most frequent use of synthetics?
ASpeculation BArbitrage CHedging DRegulatory purposes

Answer 94

Arbitrage ,

The reason for using synthetics might be to create positions that may not be available on the underlying asset. However, the main reason for the use of synthetics is arbitrage.

Question 95

Which of the following actions would a clearing house be unable to take if a counterparty to a trade defaulted on their obligations?
AClose out and settle open contracts belonging to the defaulting member and their original counterparty BTransfer open positions to another member CHedge the risk of the defaulting member’s open position by entering into new contracts on the exchange DHedge the risk of the defaulting member’s open position by entering into other off-exchange transactions

Answer 95

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

The clearing house would close out the positions of the defaulting member but not their counterparty. Remember, the clearing house is the counterparty to every cleared trade, so would close out the trades of the defaulting member and look to transfer or hedge their exposure.

Question 96

A trader holds a straddle with strike prices set at 740. The underlying is at 765. What is the intrinsic value?
A0 B25 C(25) D50

Answer 96

25,

There is no such thing as negative intrinsic value on a put option. The call option is in the money by 25p.

Question 97

Which of the following best describes the net liquidation value used by a clearing house?
AIt is used for the calculation of margin BIt eliminates the need to pay variation margin CIt eliminates the need to pay initial margin DIt is added to the initial margin to compensate for increased liquidity in the market

Answer 97

It is used for the calculation of margin.,

Net liquidation value is the marked to market value of an investor’s positions netted off in span. If the NLV falls, then more margin will be paid. If the NLV rises, then margin will be received.

Question 98

Which of the following would be true in relation to time decay over the life of an option?
AThe closer to expiry the rate of decay will decrease BAt expiry, time decay will be zero CTime decay accelerates at the start of the contract DIt is possible for the rate to become negative

Answer 98

At expiry, time decay will be zero ,

i put the answer about possible to become negative, read the FUCKING QUESTION

Question 99

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?
AMarket if touched BSell limit CSell stop DStop limit

Answer 99

Sell stop,

Sell stops specify a limit price for closing out purposes but the price is not guaranteed.

Question 100

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?
AEURIBOR BNikkei 225 CYen DS&P500

Answer 100

Nikkei 225,

The Nikkei 225 trades on both CME and SGX. The link to allow cross settlement between the two is called the mutual offset trading link.

Question 101

Which one of the following is the best description of a client’s executing member who does not have access to clearing facilities?
AA non-clearing proprietary member BAn individual clearing broker/dealing member CA full non-clearing broker member DA general clearing broker/dealing member

Answer 101

A full non-clearing broker member,

As the executing member is performing a trade for a client they must be at least a broker, as they do not have access to clearing facilities they must be a non clearing member making this the best answer.

Question 102

Which of these would finalise the trade, usually for a commission?
AIntroducing Broker BIDB CClearing Broker DExecuting Broker

Answer 102

Executing Broker,

An introducing broker effects transactions with its customers through a clearing broker and does not hold customer funds or securities. Inter-dealer brokers (IDB) acts as an intermediary between other market participants, such as brokers and/or market-makers. A clearing broker acts as clearing agent in connection with a transaction. An executing broker finalises or executes an order on behalf of a client

Question 103

In which of the following situations might it be possible for an arbitrager to make money?
IA long call and a short put with the same expiry, same strike and on the same asset are trading more cheaply than the future
IIThe price of a spread is below that of its constituent parts
IIIThe premium on an option is expected to rise in value due to an expected increase in volatility
IVA 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
AI and II BII and III CI, II, IV DI, III, IV

Answer 103

CI, II, IV ,

To perform an arbitrage trade there must be a discrepancy in the market to allow a risk free profit. Trade (III) is merely a speculative trade with all of the risks involved.

Question 104

A UK company is to receive £10m in two months’ time. It intends to place the funds on deposit for a three month period. The company treasurer is concerned that during the interim period interest rates will fall from their current level of 9.5% and wants to hedge against this eventuality.
She therefore buys 20 short term interest rate futures on ICE Futures at 89.55.
When the cash is received two months later, she sells 20 short sterling contracts at 90.10 when the bank deposit rates are 8.80%.
Calculate the net profit or loss on this overall position, assuming a tick value of £12.50 per basis point.
A£3,750 loss B£17,500 loss C£13,750 gain D£15,340 loss

Answer 104

£3,750 loss,

Step 1: Gain on futures position = 55 ticks x £12.5 x 20 contracts = £13,750.
Step 2: Interest lost on cash position = £10m x (9.5 - 8.8)/100 x 3/12 = £17,500.
Step 3: Net loss on overall position = £13,750 - £17,500 = £3,750

Question 105

A fund manager who has a £10m nominal position in the cheapest to deliver long UK Government bonds is concerned about market movements and wishes to hedge.
How many future contracts would be required if the nominal size of the contract is £100,000 and the cheapest to deliver bond has a price factor of 1.0896476?
ABuy 109 contracts BSell 109 contracts CBuy 1090 contracts DSell 1090 contracts

Answer 105

Sell 109 contracts ,

As the fund manager has a long position to hedge they would need to sell contracts.
(£10,000,000 / £100,000) x 1.0896476 = 108.96476 rounded to 109 contracts.

Question 106

An investor buys a put and simultaneously sells a put with a higher strike price. What strategy has he entered into?
ABull call spread BBear call spread CBull put spread DBear put spread

Answer 106

Bull put spread ,

Remember BULL BUY LOW strike call or put. Therefore the investor has entered into a BULL put spread.

Question 107

Which ONE of the following applies to a writer of an option on a future?
AReceives a residual credit based on the net liquidation value (NLV) of the option BReceives the full premium less any initial margin CReceives premium on day of trade DReceives full premium on expiry

Answer 107

Receives full premium on expiry,

An option on a future has the premium paid on expiry.

Question 108

Which ONE of the following is TRUE?
AThe last trading day comes before the first notice day BThe first notice days and last notice day can be the same day CThe last notice day and last trading day are always the same day DThe delivery day always follows the last notice day

Answer 108

The first notice days and last notice day can be the same day ,

The first and last notice day can be different days, it will be the same day when there is only one notice day for the contract.
For some contracts, like bonds futures, it is possible that delivery can occur on more than one day. Therefore the delivery day does not always have to follow the last notice day but could be any day in the delivery month.

Question 109

What actions is a non-clearing dealer member of an exchange permitted to do?
ATrade and clear for themselves and their clients BTrade and clear for themselves only CTrade for themselves and their clients DTrade for themselves only

Answer 109

Trade for themselves only,

A dealer is permitted to deal in principal only - brokers can act as agent for their clients.

Question 110

An investor buys a 270p put for a premium of 30p and sells a 300p put for a premium of 40p. What is the maximum loss in this position?
A10p B20p C30p D40p

Answer 110

B20p,

The investor has created a bull put spread which is a net initial credit trade. They pay 30 and receive 40p so the net credit is 10p which is the maximum profit.
The difference between the two strikes will equal maximum profit + maximum loss: 300 - 270 = 10p + maximum loss So maximum loss = 30p - 10p = 20p

Question 111

An investor buys a put at 320p and pays a premium of 18p on ABC Ltd. ABC Ltd was trading at 305p. Two days later, ABC Ltd enters administration and eventually liquidation. The shares ultimately settle at a nil value. What is the investors profit or loss?
ALoss of 18p BLoss of 302p CProfit of 18p DProfit of 302p

Answer 111

Profit of 302p,

As the investor bought a put they would have made a profit.
The profit on the put is the strike - premium as the share was worthless.
So 320 -18p = 302p

Question 112

The role of counterparty to the buyer of an exchange futures contract is taken over from the seller by:
AA consortium of member firms BThe clearing member through which the contract was sold CICE Clear Europe DEuronext Derivatives

Answer 112

ICE Clear Europe,

All ICE Futures Europe trades are settled via ICE Clear Europe acting as central counterparty. As central counterparty, ICE Clear Europe is the buyer against every short trade and the seller against every long trade.

Question 113

Which statement would be correct if current share price is 85?

Diagram of long call kink at 80, breakeven at 90

AA call would be in-the-money BA put would be in-the-money CA call would be out of-the-money DA put would be out-of-the-money

Answer 113

A call would be in-the-money,

IN THE MONEY EVEN IF BELOW BREAKEVEN

Question 114

What synthetic position is created if an investor sells a long gilt 97.00 call for a premium of 30 basis points and buys a long gilt 97.00 put for a premium of 20 basis points?
ASynthetic long future at 96.90 BSynthetic long future at 97.10 CSynthetic short future at 97.10 DSynthetic short future at 96.90

Answer 114

Synthetic short future at 97.10,

Short call, long put = synthetic short position.
For the price we can use put-call parity. Put call parity states:
C - P + K = S
0.30 - 0.20 + 97 = 97.10
Admittedly this is the short position. However, for the short position:
P - C - K = S
0.20 - 0.30 - 97.00 = -97.10 (or short at 97.10)

Question 115

The announcement of which of the following would NOT affect the spot price of crude oil?
AWorsening weather conditions across the US BThe announcement by OPEC that they will be reducing the daily quota of production CA shortage in the supply of tankers DA tax change

Answer 115

A tax change

Question 116

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?
AThe exchange BThe clearing house CBroker X’s bank DThe clearing member that cleared the trade

Answer 116

The clearing member that cleared the trade,

As Brokers X and Y are non-clearing members the trade would have to have been cleared by a clearing member. The clearing member would be responsible for any losses incurred in relation to margin.

Question 117

An order to buy 25 long gilt contracts at £103.00, or lower, if the market was currently at £103.10 would be called:
AA market-if-touched BA stop order CA limit order DA contingent order

Answer 117

A limit order,

The order is to buy below the current market level, at £103.00 or better, i.e. a limit order. This cannot be a stop order as it would have to be to buy ABOVE the current market level, i.e. to limit the loss on your current short position. Market-if-touched orders work on the principle that if a given level is reached, a market order (i.e. ‘at best’) is activated

Question 118

Which of the following is true with regard to crude basis?

AIt is always negative BIt is always positive CIt is linear DIt is non-linear

Answer 118

It is non-linear,

Basis, sometimes called ‘crude basis’ is the relationship between the cash price and the futures price. It is usually negative (contango) but may be positive (backwardation). Since the price of a future is not a direct function of price of the underlying, the relationship is non-linear.

Question 119

Aluminium is trading at $1,200. Interest rates are 12% pa and storage costs are $15 for three months.
What contango on cash price (for 91 days) is required for it to be worthwhile for an investor to buy cash and sell forward?
A$27 B$36 C$51 D$59

Answer 119

$59,

This is a strangely-worded question. The contango is the difference between cash and futures price where the futures price is higher than cash. The assumption has to be that the examiner is asking what is the cost of carry for a three month period and therefore if the contango is greater it would be profitable to buy cash and sell forward (cash and carry arbitrage).
Cash price = $1,200 Interest for 91 days = $1,200 x 12% x 91/360 = $36.4 Storage = £15
Cost of carry = $51.4
If the cost of carry were $51.4 and the contango $59, it would be worthwhile buying cash and selling forward.

Question 120

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?
ABuy a future BSell a future CBuy the spread DSell the spread

Answer 120

Sell the spread,

A narrowing spread in a backwardation market. An investor would be best suited to sell the spread.

Question 121

The fund manager of MegaFund has a holding of the cheapest-to-deliver gilt with a market value of £115m and nominal value of £120m. Which of the following is the most appropriate hedge if the price factor of the cheapest-to-deliver is 1.145625 and the face value of a long gilt future is £100,000?
ASell 1,375 long gilt futures BBuy 1,375 long gilt futures CSell 1,200 long gilt futures DBuy 1,200 long gilt futures

Answer 121

Sell 1,375 long gilt futures,

Number of contracts required = (NV of CTD/£100,000) x price factor.
Therefore, number of contracts required = (£120,000,000/£100,000) x 1.145625 = 1,375 contracts (rounded to the nearest contract).

Question 122

Which of the following would an investor choose if they expect a sharp rise in the market?
AIn-the-money call BOut-of-the-money call CIn-the-money put DAt-the-money put

Answer 122

Out-of-the-money call

Question 123

he shares of a company are currently at 400p. The date is January 2001. Which of the following call options has the highest time value?
AApril 2001 and strike 380p BOctober 2001 and strike 380p CApril 2001 and strike 360p DOctober 2001 and strike 360p

Answer 123

October 2001 and strike 380p ,

Options with the longest remaining life (in this question, the Octobers) have the greatest time value. Of these, the option which is closest to being at the money will have greatest time value.

Question 124

Who has the right to buy back undated government bonds?

AThey cannot be redeemed BInstitutional investors CHM Government DGilt-edged market makers

Answer 124

HM Government,

Undated bonds would be repurchased by the Debt Management Office (DMO), which is part of Her Majesty’s government.

Question 125

Margin is demanded by the clearing houses in the US and UK based on:
ANet positions in both countries BGross positions in both countries CNet positions in the UK and gross positions in the US DGross positions in the UK and net positions in the US

Answer 125

Net positions in the UK and gross positions in the US,

UK Clearing houses demands margins from each type of account in net positions. The US clearing houses demand margin on gross positions.

Question 126

All of the following could lead to an assignment notice being issued on an option, EXCEPT:
AAn option investor wishing to take a position in the underlying shares BAn option holder wishing to receive future dividends on the share CAn option investor wishing to deliver shares DAn option writer wishing to mitigate risk exposure

Answer 126

An option writer wishing to mitigate risk exposure,

An option writer has no ability to exercise an option, so could not instigate the issuance of an assignment notice.

Question 127

What effect does spot month margining have?
A Initiates a maintenance margin call
B Initiates an additional intra-day margin call
C Increases the initial margin
D Increases the variation margin

Answer 127

Increases the initial margin

Question 128

What key event normally occurs during the first 90 seconds of the settlement range
in connection with futures contracts?
A The spread levels are monitored
B The weighted average prices are determined
C The trading is temporarily suspended
D The prices are artificially lowered

Answer 128

The spread levels are monitored

Question 129

Which type of swaps would MOST likely be used by a less developed country to
reduce the size of its debt?
A Volatility
B Arrears
C Constant Maturity
D Environmental

Answer 129

Environmental

Question 130

In order to create a delta neutral portfolio, a long underlying position can be hedged by
a short:
A at-the-money call
B at-the-money put
C deep-in-the-money call
D deep-in-the-money put

Answer 130

deep-in-the-money call

Question 131

When a broker is NOT a direct member of an exchange which of the following
methods could be used to execute a client`s trade?
A An order routing service offered by an exchange member
B LIFFE CONNECT
C A broker who can allocate and claim exchange orders
D A broker who has access to a clearing account

Answer 131

An order routing service offered by an exchange member

Question 132

A mutual offset system is an agreement between two exchanges that allows trades
executed on one exchange to be booked and cleared through the other. Which of the
following exchanges allow offsets on their Japanese Government bond (JGB)
contracts?
A Singapore Exchange (SGX) & CME Group
B Osaka and CME Group
C Tokyo Stock Exchange (TSE) and CME Group
D NYSE Liffe and CME Group

Answer 132

Singapore Exchange (SGX) & CME Group

Question 133

An investor buys a 480 put in XYZ plc shares for 15p and sells a 520 put at 30p. What
is the investor`s net profit or loss per share if the price of these shares at expiry is
460p?
A Loss of 15p
B Loss of 25p
C Profit of 15p
D Profit of 25p

Answer 133

Loss of 25p

Question 134

What is the final opportunity that holders of long UK government bond future positions
have to close their positions and therefore avoid ultimate delivery?
A Last Notice Day
B The day prior to Assignment Day
C Last trading day
D 3 business days prior to the start of the delivery month

Answer 134

Last trading day

Question 135

The main financial markets regulator in India is the:
A Financial Conduct Authority
B Securities and Exchange Commission
C Securities and Exchange Board
D Monetary Authority

Answer 135

Securities and Exchange Board

Question 136

Under Commodity Futures Trading Commission Part 30, what types of derivative
transactions by US customers are allowed?
A Futures and options transactions on US exchanges only for all US customers
B Futures and options transactions on non-US exchanges for all US customers
C Futures and options transactions on all exchanges for all US customers
D Only futures and options transactions for commercial purposes

Answer 136

Futures and options transactions on non-US exchanges for all US customers