Study Topics Flashcards
When is collateral for OTC traded options most likely to be called?
If the option moves in-the-money
Who is responsible for publishing the ‘list of deliverables’ for a bond futures contract?
The exchange
What exchanges are energy derivatives traded?
COMEX and ICE
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?
Intra-day
The average of the bid and offer spot quotes is 150.00 for a foreign currency. What are the bid and offer quotes, if they both deviate from the average by 50 pips?
149.50-150.50
What in relation to margin would not have to be disclosed to a retail client before conducting a transaction?
The amount of margin payable by the client
Which of the following would be considered one of the main purposes of a regulator?
Helping firms manage operational risk
An investor who considers short-dated call options to be trading at excessive implied volatilities would consider a?
Horizontal spread
What is the purpose of price limits?
Prevent the market moving too far too fast during a trading session
A client receives a margin call after an adverse movement in the position of 10%. The initial margin was set at 5%. What will be the obligation of the client?
To deliver excess collateral to the value of 10%
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?
Less margin will be called from the house account only
An investor goes long on a September 330 call option on ACME shares for 30p. At expiry, she exercises the option, when the underlying share is selling at 335p. What is her return/loss?
-25p
Hedgers are MOST affected by?
Changes in basis
Who is responsible for financing a clearing house’s default fund?
Clearing members
Where are traded average price options (TAPOs) available?
LME
What is the motivation for conducting a horizontal spread with call options?
To profit from time decay
Look at the spread tables !!!!
Where a broker is extending a credit line, after how many days must the broker have a formal written agreement in place to be able to continue to offer it?
5
What option is the most geared? Why?
Deeply OTM options as they are the cheapest to buy.
If a member does not want the automatic exercise of in-the-money options on expiry, who needs to be notified?
No one. Automatic exercise is an ‘opt-in’ facility
An investor performs an arbitrage trade to profit from a price discrepancy between a Brent crude oil future and a refined oil future. What type of arbitrage trade is this?
Value-chain
A short hedger of crude oil futures is all of the following except
Long of the future and short cash crude oil
Which of the following is the best definition of an exchange delivery settlement price?
The price established on the last trading day on which a final variation margin will be paid
If the Bank of England lowers its base rate and the market rallies, which of the following portfolios will benefit most?
Positive Delta, negative Rho
Which of the following positions creates a synthetic short call option?
Short short short
Short the underlying and short a put option
A fund manager wants to hedge a £10m holding of equities using FTSE 100 option contracts with a strike of 5,450. If spot is currently 5,400 and the contract value is £10 per point, how many contracts would be required?
183
The CFTC Part 30 exemption allows
Non-US brokers to trade on non-US exchanges on behalf of US client
Which of the following actions would a broker take if a client misses a variation margin call?
Cover the amount using the house account
A key reason why trade documentation should be agreed directly between the
operations areas of the two parties is in order to reduce the risk of?
Unauthorised dealing.
The price of which of the following instruments will be MOST closely correlated to asset swap prices?
Credit default swap.
An investor owns 10 futures contracts. He then buys 10 put options. According to PUT/CALL PARITY, which of the following strategies (at the same option strike price) should he implement to minimise his market risk?
Sell 10 calls
What is a Binary Option?
An option that pays a fixed amount or nothing at all.
Where is a Gamma greatest?
Gamma is greatest for an at-the-money put option close to expiry.
What creates a synthtic short futures position?
Holding a put and writing a call.
When doing interest rate parity, what does the indicies look like?
e.g. 0.25 for a 3 month forward.
Which of the following would cause a reduction in supply?
If the price of a commodity falls to below the marginal cost of mining it
If an option position is assigned who is responsible for selecting a writer?
The clearing house.
Which ONE of the following is not a major exchange traded metal derivative in the UK?
Platinum
A client provides initial margin to their broker of £10,000 and the customer agreement has a margin call level of £8,000. Variation margin payments reduce the balance down to £7,750. What is required from the client?
The client will be required to make a payment of £2,250
An investor wishing to undertake a long-strangle would do which of the following trades?
Buy a put and a call with different strikes, but the same expiry month
What would create a synthetic equity fund in combination with a holding of a cash deposit?
Long future
What ways do the rules between the UK and the US differ in relation to client asset/money accounts?
UK rules on client money allows segregation or non-segregation whereas all US client’s money must be held in a segregated account
How to create a synthetic long call position?
Long the underlying and long a put.
Which option pricing model uses the ‘volatility smile’ as its pricing basis?
SABR
What does a warrant traded on the LME confer?
Confers legal ownership of the asset
For what reason would you exercise a receiver swaption?
Because interest rates have dropped so the option is in-the-money.
What factors leads to the spread on forward foreign exchange quotes being wider than on spot quotes?
Very simple
Time
If forward rates are due to flatten the yield curves would become more?
Horizontal
Which of the following is necessary in order for a UK broker to arrange a deal in derivatives for a US client on a US exchange?
Register with the CFTC.
What best describes the purpose of the FCA’s push towards Treating Customers Fairly (TCF)?
An agenda that helps consumers achieve a fair deal in the retail market
What is the purpose of position limits?
To prevent the investor from becoming over exposed to the underlying cash asset
If the interest rate is less than the dividend yield on a FTSE 100 index future?
The futures price will be less than the cash price
How would you describe the risk associated with buying a futures contract?
Limited to the futures price
Which of the following describes spread margin?
A reduced rate of margin for offsetting position
What is Intra-market spread?
Intra is closer
An intra-market spread is where an investor has a position in two different months, but in the same contract.
When is an option premium paid?
An option on a future has the premium paid on exercise or expiry, whichever is sooner.
The EDSP is calculated on which day?
The last trading day
A company has issued a fixed coupon bond and now expects interest rates to fall. Which of the following swaps is the most suitable?
Enter a receiver swap
A steepening yield curve means that?
Long term rates are rising faster than short term rates
Under the Commodities Futures Modernisation Act 2000, who has the responsibility to regulate single stock futures?
SEC and CFTC
A special purpose entity (SPE) acquires a portfolio of underlying assets and then issues a debt security based on these assets. What is this called?
A CDO
What is the most frequent use of synthetics?
Arbitragers
In an open outcry trade, if all of the following participants are involved in the trade, who initiates the process?
The client
What is a difference between FLEX options and OTC options?
FLEX contracts have lower credit risk
Which is the best definition of wide basis?
Unusually high demand on the cash/underlying asset
What 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?
Sell stop
Which broker usually finalises a trade?
Executing broker
What is the ISDA standardised initial margin schedule?
The adopted method of calculating initial margin under the uncleared margin rules
The maximum risk from a short futures position is?…….
Unlimited
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?
A synthetic long future at 97.10
An investor sells an option on ICE Futures and clears through ICE Clear Europe. What margin would be called on the investor by the clearing house?
Pay the net of the premium and the margin by the next business day
A and B agree the terms of a trade over the counter and then ask the central counterparty to novate the contract. What is the position if A subsequently wants to close the position before delivery?
A may not close the position without agreement from B but bears no default risk
Why would a market participant buy a ‘payer swaption’? It is because she believes
Get PAID!!!!
Interest rates will rise
What describes open interest?
The total of short positions open for delivery for a particular delivery month
Why do exchanges require member firms to fulfil their obligations regarding transaction reports, for instance, the requirement of the members of ICE Futures Europe to report trades into the UCP?
To ensure counterparties know who to pay for settlement processes.
Calculate the fair value of a 182 day S&P 500 future if the cash index is trading at 7,900, the dividend yield is 2.75% and the risk free rate is 2%
7,870
Fair value = 7,900 + (7,900 x 0.02 x 182/360) - (7,900 x 0.0275 x 182/360) = 7,870
If a client defaults on a clearing broker before a trade has been novated, what is the risk to the broker?
The clearing broker assumes the risk less any client margin held
An increase in basis would indicate? (Strenthening when converges)
The cash price is rising relative to the future’s price
What is a Eurobond?
Not always euro
A bond issued offshore in a currenct, other than the home currency.
