Questions Flashcards
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
Non-US brokers to trade on non-US exchanges on behalf of US client
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
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.
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
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.
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
The US
Which of the following exchanges using the electronic order book system called Select?
ALondon Stock Exchange BLondon Metal Exchange CEurex DChicago Board Options Exchange
London Metal Exchange
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
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.
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
$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.
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
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.
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
AIII, IV, II, I ,
The holder informs their broker that they wish to deliver, which begins the whole process of exercising an option.
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
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.
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
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.
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
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.
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
I and IV ,
Metals are traded on COMEX. Financial derivatives are traded on MEFF.
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
Helping firms manage operational risk,
Regulators introduce processes that allow firms to manage operational risk.
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
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.
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
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.
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
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.
On which exchange are traded average price options (TAPOs) available?
ACOMEX BICE CLME DCSCE
CLME ,
Note: TAPOs are options where the price is calculated using the average price for the underlying over a period of time.
Which of the following futures contracts is not physically delivered?
ACopper BBrent crude CCocoa DWheat
Brent crude,
All non-financial futures are physically delivered except Brent (either cash settled or delivered through an EFP).
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
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.
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
Intra day,
Sudden increases in volatility are dealt with by the clearing house using intra day margin calls.
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
Flexibility
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
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.
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
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.