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CISI Capital Markets Programme: Derivatives > Study Topics > Flashcards

Study Topics Flashcards

1
Q

When is collateral for OTC traded options most likely to be called?

A

If the option moves in-the-money

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2
Q

Who is responsible for publishing the ‘list of deliverables’ for a bond futures contract?

A

The exchange

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3
Q

What exchanges are energy derivatives traded?

A

COMEX and ICE

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4
Q

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?

A

Intra-day

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5
Q

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?

A

149.50-150.50

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6
Q

What in relation to margin would not have to be disclosed to a retail client before conducting a transaction?

A

The amount of margin payable by the client

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7
Q

Which of the following would be considered one of the main purposes of a regulator?

A

Helping firms manage operational risk

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8
Q

An investor who considers short-dated call options to be trading at excessive implied volatilities would consider a?

A

Horizontal spread

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9
Q

What is the purpose of price limits?

A

Prevent the market moving too far too fast during a trading session

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10
Q

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?

A

To deliver excess collateral to the value of 10%

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11
Q

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?

A

Less margin will be called from the house account only

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12
Q

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?

A

-25p

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13
Q

Hedgers are MOST affected by?

A

Changes in basis

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14
Q

Who is responsible for financing a clearing house’s default fund?

A

Clearing members

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15
Q

Where are traded average price options (TAPOs) available?

A

LME

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16
Q

What is the motivation for conducting a horizontal spread with call options?

A

To profit from time decay

Look at the spread tables !!!!

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17
Q

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?

A

5

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18
Q

What option is the most geared? Why?

A

Deeply OTM options as they are the cheapest to buy.

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19
Q

If a member does not want the automatic exercise of in-the-money options on expiry, who needs to be notified?

A

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

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20
Q

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?

A

Value-chain

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21
Q

A short hedger of crude oil futures is all of the following except

A

Long of the future and short cash crude oil

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22
Q

Which of the following is the best definition of an exchange delivery settlement price?

A

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

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23
Q

If the Bank of England lowers its base rate and the market rallies, which of the following portfolios will benefit most?

A

Positive Delta, negative Rho

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24
Q

Which of the following positions creates a synthetic short call option?

Short short short

A

Short the underlying and short a put option

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25
Q

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?

A

183

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26
Q

The CFTC Part 30 exemption allows

A

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

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27
Q

Which of the following actions would a broker take if a client misses a variation margin call?

A

Cover the amount using the house account

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28
Q

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?

A

Unauthorised dealing.

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29
Q

The price of which of the following instruments will be MOST closely correlated to asset swap prices?

A

Credit default swap.

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30
Q

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?

A

Sell 10 calls

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31
Q

What is a Binary Option?

A

An option that pays a fixed amount or nothing at all.

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32
Q

Where is a Gamma greatest?

A

Gamma is greatest for an at-the-money put option close to expiry.

33
Q

What creates a synthtic short futures position?

A

Holding a put and writing a call.

34
Q

When doing interest rate parity, what does the indicies look like?

A

e.g. 0.25 for a 3 month forward.

35
Q

Which of the following would cause a reduction in supply?

A

If the price of a commodity falls to below the marginal cost of mining it

36
Q

If an option position is assigned who is responsible for selecting a writer?

A

The clearing house.

37
Q

Which ONE of the following is not a major exchange traded metal derivative in the UK?

A

Platinum

38
Q

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?

A

The client will be required to make a payment of £2,250

39
Q

An investor wishing to undertake a long-strangle would do which of the following trades?

A

Buy a put and a call with different strikes, but the same expiry month

40
Q

What would create a synthetic equity fund in combination with a holding of a cash deposit?

A

Long future

41
Q

What ways do the rules between the UK and the US differ in relation to client asset/money accounts?

A

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

42
Q

How to create a synthetic long call position?

A

Long the underlying and long a put.

43
Q

Which option pricing model uses the ‘volatility smile’ as its pricing basis?

A

SABR

44
Q

What does a warrant traded on the LME confer?

A

Confers legal ownership of the asset

45
Q

For what reason would you exercise a receiver swaption?

A

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

46
Q

What factors leads to the spread on forward foreign exchange quotes being wider than on spot quotes?

Very simple

A

Time

47
Q

If forward rates are due to flatten the yield curves would become more?

A

Horizontal

48
Q

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?

A

Register with the CFTC.

49
Q

What best describes the purpose of the FCA’s push towards Treating Customers Fairly (TCF)?

A

An agenda that helps consumers achieve a fair deal in the retail market

50
Q

What is the purpose of position limits?

A

To prevent the investor from becoming over exposed to the underlying cash asset

51
Q

If the interest rate is less than the dividend yield on a FTSE 100 index future?

A

The futures price will be less than the cash price

52
Q

How would you describe the risk associated with buying a futures contract?

A

Limited to the futures price

53
Q

Which of the following describes spread margin?

A

A reduced rate of margin for offsetting position

54
Q

What is Intra-market spread?

Intra is closer

A

An intra-market spread is where an investor has a position in two different months, but in the same contract.

55
Q

When is an option premium paid?

A

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

56
Q

The EDSP is calculated on which day?

A

The last trading day

57
Q

A company has issued a fixed coupon bond and now expects interest rates to fall. Which of the following swaps is the most suitable?

A

Enter a receiver swap

58
Q

A steepening yield curve means that?

A

Long term rates are rising faster than short term rates

59
Q

Under the Commodities Futures Modernisation Act 2000, who has the responsibility to regulate single stock futures?

A

SEC and CFTC

60
Q

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

A CDO

61
Q

What is the most frequent use of synthetics?

A

Arbitragers

62
Q

In an open outcry trade, if all of the following participants are involved in the trade, who initiates the process?

A

The client

63
Q

What is a difference between FLEX options and OTC options?

A

FLEX contracts have lower credit risk

64
Q

Which is the best definition of wide basis?

A

Unusually high demand on the cash/underlying asset

65
Q

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?

A

Sell stop

66
Q

Which broker usually finalises a trade?

A

Executing broker

67
Q

What is the ISDA standardised initial margin schedule?

A

The adopted method of calculating initial margin under the uncleared margin rules

68
Q

The maximum risk from a short futures position is?…….

A

Unlimited

69
Q

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

A synthetic long future at 97.10

70
Q

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?

A

Pay the net of the premium and the margin by the next business day

71
Q

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

A may not close the position without agreement from B but bears no default risk

72
Q

Why would a market participant buy a ‘payer swaption’? It is because she believes

Get PAID!!!!

A

Interest rates will rise

73
Q

What describes open interest?

A

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

74
Q

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?

A

To ensure counterparties know who to pay for settlement processes.

75
Q

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%

A

7,870

Fair value = 7,900 + (7,900 x 0.02 x 182/360) - (7,900 x 0.0275 x 182/360) = 7,870

76
Q

If a client defaults on a clearing broker before a trade has been novated, what is the risk to the broker?

A

The clearing broker assumes the risk less any client margin held

77
Q

An increase in basis would indicate? (Strenthening when converges)

A

The cash price is rising relative to the future’s price

78
Q

What is a Eurobond?

Not always euro

A

A bond issued offshore in a currenct, other than the home currency.

CISI Capital Markets Programme: Derivatives (11 decks)

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