Track & Error Flashcards
John buys a Eurodollar futures contract at 95.00 and sells it the same day at 95.04.
What’s the profit made by John?
(95.04 - 95) * $2,500 = $100 (for 4 basis points)
Basis Point (BP) Value of a Eurodollar futures contract is $25. This’s because a 1% annual (360) interest rate move leads to a 0.25% impact on the actual dollar value of the Eurodollar futures contract as the underlying security is a $1,000,000, 90-day LIBOR deposit.
Based on the cotnract value of $1 million, a 1% change in interest rate will lead to 0.25% * $1 million = $2,500 change.
So the change per basis point (0.01%) = $2500/100 = $25
John buys S&P 500 Index at 3,500 points (Day 1). The initial margin is 10% and the maintenance margin is 9%. The value per point is $250.
John deposited the initial margin at the time of taking the position. He also deposited $10,000 and $12,000 on day 2 and day 3, respectively.
The index moved to 3,450 on Day 2, 3,390 on Day 3, and 3,400 on Day 4.
What’s the margin balance at the end of Day 4? Presume that margin calls were issued, if required, and John stopped up the margin balance, if required.
$84,500
Jane has a forex trading account. When should the bank give a warning regarding her initial margin balance?
The warning should be given when the margin balance falls below the initial margin (NOT maintenance margin).
In the US Treasury Futures, the invoice price =
Settlement Price x Conversion Factor (CF) + Accrued Interest
The price quote for 2-year T-note Futures is in terms of ____
percent of par to 1/4 to 1/32nd of 1% of par (US$15.625 rounded up to nearest cent)
The Stop Order trigger condition can be defined by ____
Stop Series
Stop Price
Stop Price Reference Type
Stock Price Condition
SGX-DC provides clearing for which of the following trades?
A. OTC commodity trades registered via the SGX OTC Trade Registration Platform
B. Products listed on SGX-DT
C. OTC financial derivatives trades registered via industry-used trade registration system.
D. All of the above
D
John is worried that the fuel prices may rise significantly once the economy picks up.
Currently, he buys crude oil at $70 per barrel (the spot price) and has contracted to sell to his customers at $73 per barrel over the next 6 months.
The 6-month crude oil futures contracts are trading at $69 per barrel.
If John buys crude oil futures at $69, and the spot and futures prices after 6 months are $67 and $68, he will make _____ per barrel net.
If he buys the contract at $69 and the futures price falls to $68, he will lose $1 per barrel in the futures trade.
However, his profit in the cash market will increase to $73 - $67 = $6 per barrel.
Therefore, he will make $5 per barrel on a net basis.
The GBP/SGD spot rate is 1.865. The 1-year interest rates for SGD and GBP are 3% and 1% respectively.
What’s the 1-year (360 days) outright GBP/SGD rate?
1-year outright GBP/SGD = 1.865 (Spot Rate) * (1+3%)/(1+1%) = 1.9019
Countery Currency: SGD
Base Currency: GBP
Jane thinks that S$ is going to appreciate against the USD over the next 6 months. She should ____
A. Selling bonds she owned
B. Short-selling bond calls
C. Overweight on interest-sensitive stocks
Go overweight on interest-sensitive stocks
If S$ is expected to appreciate, domestic interest rates are likely to fall, bond prices rise. Therefore, selling bonds or short-selling bond calls is not an appropriate strategy.
Compared to a market weighted index, an equally-weighted index comprising of the same stocks will always have a ____ exposure to smaller market cap stocks and ___ exposure to large-cap stocks
Greater
Lesser
There’s ____ uptick rule for short-selling Equity Index Futures.
NO
Borrowing shares is ____ allowed in the case of short-selling Equity Index Futures.
NOT allowed
The S&P/Case-Shiller Home Price Index is a series of indices representing _____ different metropolitan statistical areas.
10
What are the SGX-DT products eligible for mutual offset with CME?
Nikkei 225 Index Futures (NK)
USD Nikkei 225 Index Futures (NU)
SGX FTSE Emerging Market Index Futures (FEM)
SGX FTSE China H50 Index Futures (FCH)
If the contract interest rate for a 3-month Eurodollar futures contract is 2.5% per annum, what is the contract IMM Index?
100 - 2.5 = 97.5
John takes a clendar spread position by selling 1,000 June 2020/September 2020 Eurodollar spread.
The June 2020 contract was quoted at 98.5 and the September 2020 was quoted at 98.2 at the time of taking the position.
At the time of closing the position after 2 weeks, the quotes were 98.8 and 97.9.
What’s the payoff for John?
John selling 1,000 June 2020 at 98.5 and close by buy it at 98.8 (a loss of 30 basis points)
The loss = (98.9-98.5) * 100* 1,000 * $25 = $750,000
John bought September 2020 at 98.2 and sell at 97.9
The loss = (98.2-97.7) * 100 * 1,000 * 25 = $750,000
Tottal loss = $750,000 + $750,000 = $1.5 million.
The spread widened from 30 basis points (98.5-98.2) to 90 basis points (98.8-97.7).
The steepening of the curve resulted in a loss in the short calendar spread position.
Calculate the number of contracts required for a delta-neutral hedge of the interest rate on a 270-day loan for US$10 million using Eurodollar futures.
The interest payment is due in 270 days. The prevailing interest rate is equal to 5%.
Assume that the interest rate on the loan is correlated one to one with the Eurodollar rate.
Basis point value (BPV) of the $10 million, 270 day loan = ($10 million x (270/360)) * 0.01% = $750
Discounted value of the BPV = $750 / (1+5%*270/360) = $722.9
BPV of a Eurodollar futures contract = $25
Therefore the number of contracts required = $722.9 / $25 = 28.92 or 29 contracts
ABC Limited expects to borrow $10 million for 2 years at 3-month LIBOR fixed premium in March 2020.
The premium is reset quarterly. ABC wants to use Eurodollar futures for hedging.
For hedging purpose, the loan is broken into 8 quarterly strips with 1st 90-days locked in.
How can ABC hedge against interest rate increases over 8 quarterly loan reset dates if it expects the yield curve to steepen?
of contracts to hedge = BPV of loan (7 quarters * 90 = 630 days) / contract size = $1,750 / 25 = 70
BPV of loan = $10,000,000 * (630 days / 360) x 0.01% = $1,750
So ABC should sell 70 contracts.
If ABC expects the yield curve to STEEPEN, it should stack the short hedge in the DISTANT futures (December 2021 contract) because short-term yields are expected to decline relative to long-term yields.
Eurodollars futures price will move in the opposite direction.
If ABC will be borrowing money, it must _____ Eurodollar futures to hedge against any ___ in interest rates.
Sell
increase
Jane hedges her equity portoflio for 3 months by short-selling S&P500 futures at 3,300 (value of each point being $250).
The spot prices at the time of hedging and after 3 months are 3,310 and 3,360 respectively.
The futures price after 3 months is 3,355. The value of the stock portfolio at the time of initiating the hedge was USD 10 million.
The beta of stock portfolio is 2.00.
Ignoring dividend payout on the S&P 500 index and transaction costs, what is the overall value of Jane’s portfolio net of the loss in the futures contract hedge?
of Contracts required for the hedge = ($10 million / (3,300 * 250)) * 2 = 24 contracts
The loss in the short position = 24* $250 * (3,355 - 3,300) = $330,000
The gain in the portfolio = ((3,360-3,310)/3,310)100)2 = 3.021%
Therefore, the value of the portoflio at the end of 3 months = (1+3.021%) * $10 million = $10,302,100
Net of the heding loss, the portoflio value = $10,302,100 - $330,000 = $9,972,100
A trader buys a calendar spread of futures contracts and the long-term interest rates rise more than the short-term interest rates.
He will ____ on the nearer leg and _____ on the further leg
If the long-term interest rates rise more than the short-term interest rate, the price of long-term contract dropped more than the short-term contract
Calendar spread is composed by buy short-term contract + short long-term contract
Suffer a loss on the nearer leg and make a profit on the further leg
The TED spread is used as an indicator of _____ because U.S. T-bills are considered risk free, while the rate associated with the Eurodollar futures reflects _____
Credit risk
the credit ratings of corporate borrowers
In the 130/30 long-short strategy used by hedge fund mangers ______
Outperformers in the portfolio are 130% of the AUM (Long)
Underperformers in the portfolio are 30% of the AUM (Short)
If a consumer has taken housing loan from a bank at floating rate and he expects the rates to go up. What alternatives does he have to cover the risk?
To hedge against the risk of increase in interest rates, the consumer can ______ (2 ways)
Sell interest rate futures as the interest rates increase, the interest rate futures will fall, giving a profit in the short hedge.
Alternatively, he can buy interest rate call options to profit from the rise in the value of the option if interest rate rises.
The profits will partly offset the higher borrowing costs.
Immunization is ____ (form) of hedge and is done for ____
What’s the objective of immunization hedge?
Strong-form cash hedge; done for a currently held cash position
To minimize the variance in the expected total returns of a portfolio
Inventory hedge is for _____
vs.
Strong-form hedge
Covering risks related to assets to be held for an indefinite period of time
Covering risks on assets to be held for a given investment period
PQR Limited has taken a loan of $1 million on a fixed interest rate of 5% per annum from X Bank.
LMN Limited has taken a $1 million loan on a floating rate of LIBOR+1% from Y bank.
PQR prefers a floating rate and LMN prefers a fixed interest rate. Therefore, they enter into an interest rate swap (IRS) where PQR agrees to pay LMN LIBOR+0.5% per annum and LMN agrees to pay PQR 4.5% per annum (both cash flows based on $1 million).
Analyze the cash flow
PRQ: Pay Fixed interest rate of 5% (X Bank) + LIBOR + 0.5% (LMN) - fixed rate of 4.5% fixed received from LMN = Pay 1% + LIBOR
PRQ’s liability increases or decreases with LIBOR, $10K for each percent movement
LMN: Pay LIBOR + 1% (To Y Bank) + Receive LIBOR + 0.5% from (PRQ) + Pay fixed rate of 4.5% to PRQ = Locked 5% per annum
The cash flows between PQR and LMN are netted. Therefore, if LIBOR is 3%, PQR pays 3.5% or $35k to LMN and LMN (always) pays $45K to PQR.
What factors must be considered for evaluating the sutiability (viability) of an arbitrage opportunity? (3)
Brokerage
Initial margin
Basis risks
John has shorted 100 shares of ABC Limited at $15.00 per share. To hedge his short position, he buys ABC’s call option with a strike price of $16 at $1.5 per share.
What’s the maximum gain per share possible in this position?
For maximum gain, ABC’s share price goes to zero.
Then John makes $15 on his short position. However, he has paid $1.5 or the call option which expires worthless if ABC’s share goes to zero.
Therefore, the maximum gain per share = $15 - $1.5 = $13.5
What’s a bear put debit spread involves?
Long ITM put and a short OTM put
What’s a bull call spread?
Long ITM call + Short OTM call
What’s long straddle? vs. Long Strangle?
- Long Straddle: Buy the call and the put for same strike price/underlying/time to expiry
- Long Strangle: Buy OTM call and PUT
What’s the appropriate strategy to hedge a long position with great volatility with expectation of declining price?
Buy ATM put option
Selling call or put options (significant loss potential) may turn out to be risky because of the security’s expected volatility.
Jane buys 1,000 shares of PQR Limited at $50. PQR is a volatile stock and it is known to fall significantly post its earnings release. The next earning release is due in a 5 weeks.
The current market price of PQR shares is $51 and the premium for its $50 call and put options is $3 per share (lot size 100 shares, expiry in 2 months).
If Jane wants to hedge her long stock position, what should she do?
A. Sell the 1,000 shares and book $1,000 profit.
B. Sell 10 lots of call options with a strike price of $50.
C. Sell 10 lots of put options with a strike price of $50.
D. Buy 10 lots of put options with a strike price of $50.
D
PQR is a volatile stock with large movements post major events (i.e. earnings release). Therefore, it makes sense to hedge the position with an ATM put option.
In the event of a significant fall, the profit in the long put position will offset the loss in the long stock position.
Selling the shares is not a way to HEDGE a stock portfolio.
Selling call or put options (significant loss potential) may turn out to be risky because of the security’s expected volatility.
John buys 1000 shares of PQR Limited at $100. John believes that the stock price of PQR will rise over the long-term.
A few days after the purchase, a brokerage report forecasts a 3% correction in the stock after the quarterly results (due in 7 days) are announced.
John believes that the correction will be temporary and the stock will rebound within a few weeks.
He wants to take advantage of the temporary fall. The current market price of PQR shares is $99 and the premium for its $100 call and put options is $2 per share (lot size 100 shares, expiry in 14 days). What should John do?
A. Sell the 1,000 shares and book $1,000 loss
B. Sell 10 lots of call options with a strike price of $100.
C. Sell 10 lots of put options with a strike price of $100.
D. Buy 10 lots of put options with a strike price of $100.
B
Uncovered call is ___strategy
Bearish
Straddles can be purchased in case of a ____ outlook
Neutral
Covered call writing is a ____ strategy
Neutral
What’s a bear CALL spread? What’s the market view of a bear CALL spread?
Buy OTM call and Sell ITM Call
Expect a moderate decline in the underlying
What’s a bear put spread? What’s the market view of a bear PUT spread?
Buy ITM Put and Sell OTM Put
Expect a decline in the underlying
What’s a debit bull spread? It’s called “debit bull spread” because ____
When is a debit bull spread used? (Market View)
A debit bull spread is a bull call spread.
It includes buy a ITM call (lower strike price, higher premium) and sell a OTM call (higher strike price, lower premium).
Bull call spreads involve taking a debit (net outflow, paying a premium for the spread)
Market Outlook: Price to moderately go up
Bull call spread vs. Bear call spread
Bull call spread: BUY ITM Call + Sell OTM Call
Bear Call spread: BUY OTM Call + Sell ITM Call
Bull put spreads is also called ____ because ____
It involves _____
Bull put spread is also called (credit bull spread). It involves taking credit (net inflow = premium)
BUY OTM put (lower premium) + Sell ITM put (higher premium)
Diagonal spreads are created using options of ____ (security) ____ (strike price) and _____ (expiration dates).
A diagonal spread is a combination of ____ and ____spreads.
Same
Different
Different
Vertical and calendar
What’s a ratio spreads? What’s the market view? (2:1 ratio spread)
What’s the downside and upside?
The investor sell 2 options for every 1 long option.
Calls in a call ratio spread and puts in a put ratio spread.
Ratio spreads are a market neutral strategy where the investor expects little movement in the underlying share price in the near term.
The upside is limited but there’s potentially unlimited risk on the downside (in the case of calls), due to the net short position when the ratio position is established.
If equity puts are used, the maximum theoretical loss is when the share price reaches zero.
Index options are settled in ___
Cash
Interest rate options are settled in ___
Cash
Currency options are structurally ____ as currency futures contracts
the SAME
Options on futures tend to enjoy _____ liquidity than the options that required actual delivery of a cash instrument.
Greater
Expiry date of bond options is ____ the maturity of the underlying bond.
before
Bond options are mostly traded ___.
OTC
The rights in a bond option can be exercised ____ the expiration date.
on or before
Interest rate options are ____ style options
European options
Interest rate options allow a borrower to _____
Interest rate options allow a lender to _____
- fix interest rate at a particular call strike price to avoid paying higher interest expense when they worry about rising interest rates.
- fix interest rate at a particular put strike level to protect earnings at a particular level when interest rates are falling.
An interest rate option gives the option buyer the right but not the obligation to ____
make (call) or receive (put) known interest rate payment.
What does it mean for an investor buys an interest rate PUT option on SIBOR with an exercise price of 2.0%?
This means that at expiration, if the prevailing SIBOR rate is lower than 2.0%.
The investor will exercise his option and will receive 2.0% in lieu of the prevailing SIBOR rate.
John believes that S$ will appreciate against the USD. John should:
A. Sell USD and buy S$
B. Buy USD and sell S$
C. Buy call options that give him the right to buy USD
D. Sell call options on S$.
A
Payment of dividend _____ the price of the call option as _____
Decrease
The underlying share price falls when the share becomes ex-dividend
Higher strike price mean ____ option price
Lower
Market price - strike price = Intrinsic Value (option price)
Fall in risk-free interest rates makes the call option more ____
valuable
Jane believes that the stock price of PQR will rise significantly over the next few weeks.
The current market price is $100 per share and Jane wants to buy 10,000 shares.
However, she only has $100,000 and cannot purchase the desired quantity.
The lot size for call and put options on PQR’s stock is 100 shares. The premium for the call and the put options for $100 strike price is $3 per share.
If Jane is an aggressive investor, she should:
A. Sell 100 lots of put options on PRQ’s shares with a strike price of $100.
B. Sell 100 lots of call options on PRQ’s shares with a strike price of $100.
C. Buy 100 lots of call options on PRQ’s shares with a strike price of $100.
D. Buy 100 lots of put options on PRQ’s shares with a strike price of $100.
C
What is the best situation for payoff of short position in put options is ____
Zero
Payoff = - (Strike - market price)
Payoff of short positions in put options cannot be negative
A call holder can ____ the option to reduce his loss due to ___
exercise
cost of the option
What is the intrinsic value of the put buyer?
Strike price minus market price, or zero (whichever is greater)
Characteristics of the payoff graph of a put option at expiry include:
A. Upward slope of a long put before the exercise price
B. A horizontal line after the exercise price for a short put
C. A horizontal line before the exercise price for a long put
D. None of the above
C
Synthetic Long position on an asset can be created by _____ because _____
According to the put-call parity
C + PV (X) = P + S
S = C + PV (X) - P
Buying the call, short-selling the put and LENDING the present value of the exercise price
Price of an option is a value equal to or greater than _____ based on whether ______
equal to or greater than its intrinsic value based on whether the time value is greather than 0
If the thoeretical value of an option changes by minus 5 cents per day, its theta is ____
-0.05
Theta is usually displayed as a _____ measure (time period)
1-day or 7-day measure
In the case of a Credit Default Swap, the holders provide _____ and the bank ____
Provide guarantee on credit default by companies
Bank pays the premium for the guarantee
Holders of CDS stand to _____ in the case of any reference entity defaults.
lose a significant amount
Structured notes are usually a combination of ______
Two or more underlying financial instruments
The coupons received from a bond in a structured note can be used for purchasing ______
Options contract
Issuers should AVOID using _____ in PHS (The Product Highlights Sheet)
Technical terms and disclaimers
If a structured note is issued by a special purpose vehicle, it’s ____
A. illegal
B. off-balance sheet from the bank’s perspective
C. the investors still have recourse to the bank in the event of a default
D. All of the above
B
A 1-year structured deposit linked to MSCI Singapore index has a participation rate of 30% above the strike price of 500. If the MSCI is at 495 and Jane invests $500,000 in this structured deposit (1 month remaining to maturity), what will she receive upon maturity if the index is fixed at 520 on the maturity date?
Jane’s gain 520 - 500 = 20. With a participation rate of 30%, the gain is 20*30% = 6.
The amount received = (1+6/500) * $500,000 = $506,000
The offer for a debenture structured note is exempted from prospectus requirements if _____ (3)
The offer is made only to institutional investors, accredited investors and made for a minimum consideration
Under the SFA, an accredited investor includes ___
- An individual whose ____
- A corporation _____
- Trustee _____
- An individual whose net personal assets exceed in value $2 million or income in the preceding 12 months is not less than $300,000
- A corporation with NET assets exceeding $10 million in value
- Trustee of such trust as the authority may prescribe, when acting in that capacity
Structured deposits must meet _____ as define under the _____
the definition of deposit as define under the Banking Act
Structured deposits are similar to structured notes as they _____
a debt obligation of the bank
Unlike structured notes, structured deposits are a type of ____ and are NOT _____
deposit
debentures
A Bermudan swaption is ____ option, where the ____ is obligated to enter into an underlying swap on _____ exercise dates during the life of the swaption.
Unlike an American swaption which _______, a Bermudan swaption _____
an interest rate option
Seller
various
can be exercised anytime during the life of swaption
can ONLY be exercised on the rate fixing dates
A Variable Maturity - Multi - Callable RAN is a RAN ______.
The note holder will _____ as he’ll be ______
The note issuer will have the right to ____
embedded with callable features at each interest fixing date.
Receive a higher yield as he’ll be SELLING a Bermudan Swaption on top of buying a RAN.
Terminate the structure on the various rate fixing dates if the implied forward rate proves to be higher than the strike fixed rate, which then exposes the holder to reinvestment risk.
Callable Range Accrual Notes (RANs) are likely to have ___ yields as compared to non-callable RANs because ____ .
Higher
because the call feature makes them riskier
An inverse floater note is a structured note that ______
The initial coupon is _____ than a bank deposit rate.
If interest rates go up, the coupon is ____ by the ____
Pays coupons which are inversely linked to a floating interest rate index.
Higher
Reduced by the leveraged increase of the interest rate, which is determined by a leverage factor.
Product description: Structured note linked to XYZ Ltd stock price, Reference underlying asset: XYZ Ltd shares, Notional Investment: USD 1,000,000, Purchase price of ELN: USD 850,000, Maturity: 100% notional sum if XYZ share price is at or above the strike price on the fixing date, OR XYZ shares if XYZ share price is below the strike price on the fixing date, Tenure: 1 year, Current XYZ share price: USD 9.00, Strike Price: USD 8.50. Based on the above data, which of the following statements is/are FALSE?
The yield of the ELN in the best-case scenario is 15%
If the price of XYZ on fixing date is USD 8.5, the investor will lose USD 50,000
If the price of XYZ on fixing date is USD 8.00, the investor will get 125,000 shares of XYZ
If the price of XYZ on fixing date is USD 12.00, the investor will make USD 350,000
ALL 4 are FALSE.
If the price is at or above the strike price, the investor will get US$1,000,000 on maturity.
Therefore, he’ll make a maximum profit of US$150,000 on US$850,000 = 17.65%
If the price of XYZ on fixing date is below the strike price, the investor will get shares based on notional amount and the strike price, which is equal to US$1,000,000 / US$8.5 = 117,647 shares.
The investor will be able to sell these shares at US$D in the market to get US$941,176 = US$8 * 117,647
The notional amount in an equity-linked note is $100,000, the ELN price is $0.99, the strike price is $5, and current price of the underlying is $5.35. What is the breakeven price?
If the price drops below the strike price, the investor will get $100,000 / 5 = 20,000 shares
The breakeven price = $99,000 / 20,000 = $4.95
The fixing date of an equity-linked note is usually ____
2 business days from the maturity date
A worst of ELN pays a ___ yield and / or has ____ strike level as compared to a normal ELN because _____
higher
lower
it is much more risky, with exposure to a decline of not just a single stock or index
An accumulator involves a ____ and a ____ on the underlying asset.
Long Call
Short Put
The unfunded structure replication method of an structured exchange-traded fund is a type of _____ method
Swap-based
Exchange-traded commodities (ETC) are ____ (types) issued by ___ to _____.
ETCs are special type of ____ which are backed by _______
Debt Securities issued banks to track the performance of commodities
ETN which are backed by securities or physical assets such as gold
Risks of trading in options include ____ risks (4 types)
Counterparty risks (in OTC options)
interest rate risk
market risk
liquidity risk
Jane wants to invest in bonds that have very low interest rate sensitivity. Jane should invest in bonds that are:
short-term with high coupons
____ (short/long-term) bonds with ____ (low/high) coupons and ____ initial yields are _____ to interest rate
Short-term bonds with high coupons and high initial yields are less sensitive to interest rate
In which scenarios will a swaption seller also be required to pay the floating interest leg of the swaption?
if interest rate becomes negative
In the case of Receive-Fixed Interest Rate Call Swaption if the investor is the swaption seller exercise of the option implies _____
Exercise of the option implies selling protection against decrease in interest rates.
Reinvestment risk is greatest for bonds with _____ (4 characteristics)
large coupons, higher coupon payment frequency, long maturities, selling at a premium.
If the interest rate volatility increases significantly, the value of a callable bond _____ because ______
Declines as investors required higher yield and thus lower bond value.
The value of call option increases when interest rate volatility increases, which will reduce the value of the callable bond because the bond holders will have sold a call option component to the issuer
They main types of risks involved in trading futures include _____ (3)
credit risks, market risks and settlement risks
Counterparty risks of Futures are ____ because _____
negligible because futures are exchange-traded
An Equity-Linked Structured Note comprises of a zero-coupon bond and a long position in a call option on an index with 100% participation rate. The zero-coupon bond is issued at a 7% discount to face value, and is redeemed at par on maturity after one year. The value of the call option doubles till maturity. What is the total return to the investor during the year?
The PV of Zero-Coupon bond = $100/(1+7%) = $93.46
The amount invested in the call option = 100 - 93.46 = 6.54
The call option doubles in value to $13.08. Thus, profit from the call is $6.54
Therefore, the return on investment = $6.54/$100 = 6.54%
Regarding the factors impacting the participation rate in a classic equtiy-linked note (Zero-coupon bond + a long position in a call option), which of the following statments is FALSE?
A. Higher maturity reduces the participation rate
B. Use of up & out barrier increases the participation rate
C. Higher discount rate will increase the participation rate
D. None of the above
A.
All else being equal, a higher maturity period will increase the discounting factor and hence increase the discount, which lowers the issue price.
Therefore, more money will be available for investing in the return coponent (call option), which means that the participation rate will be higher.
Similarly, higher discount rate will increase the participation rate.
The use of up & out barrier will increase the participation rate because the cost of a shorter maturity knock-out call option is cheaper than that of a conventional call option.
From the investor’s perspective, the best time ot invest in Equity-Linked Structured Notes with zero-coupon bond and long position in a call option is when ______
The interest rates are high and the volatility of the underlying asset is low.
This’s because higher interest rates will lower the PV of the zero-coupon bond and provide more funds for the purchase of the call option.
Also, lower volatility will make the cost of equity options cheaper for the investment product (thereby increasing the participation rate).
The face value of a Zero-coupon bond is $50 and the discount rate is 8% with 2 years to maturity. If the call premium on a 2 year KO Barrier contract for an underlying index is $10, what is the participation rate?
The issue price of the bond = 50/(1+8%)^2 = 42.87
Therefore, the discount (the amount available for investing in the $ call) is 50 - 42.87 = 7.133
Hence, the participation rate = 7.133/10 = 71.33%
Mark-to-market valuation of auto-callable structured products is _____
avoided
In the case of an Equity-Linked Exchange-Traded Fund (ETF), the likely minimum investment amount is ____
1 board lot
The back-end redemption and switching fees in an Equity-Linked Structured Fund ranges between ____
2% - 3%
The key variables impacting the outcome of investment in Equity-Linked Structured Notes include _______ (2)
interest rates and the volatility of the underlying asset
The likely minimum investment amount in a Equity-Linked Structured note is ____.
SGD50,000 or higher
The upfront brokerage in an Equity-Linked Exchange-Traded Fund is _____
<1%
The slope of the pay-off diagram of a Reverse Convertible with a zero-coupon bond and a short put is _______
Flat at and above the strike price of the option, and upward sloping below the strike price of the option
The payoff diagram of the discount certificate is similar to ____, which is _____
Reverse Convertible with zero-coupon bond and short put option
Below strike price: upward sloping
At and above the strike price: Flat
What’s the upside/downside of a Reverse Convertibles comprises a zero-coupon bond and a short put option?
The positive upside pay-out is capped.
The full extent of the investment amount is exposed to downside risk.
For a call barrier option, the barrier level is _____ the strike price.
For a put barrier option, the barrier level is _____ the strike price.
Higher than or equal
Lower than or equal
A Single Barrier Call/Put Option will expire worthless (get knocked out) if ____
Call: Spot price is above the knock-out price
Put: Spot price is below the konck-out price
For Double barrier options, the expectations are that _____
The profit potential is ____
Underlying will remain in a RANGE.
Capped
____ a major risk in barrier option as they’re _____
Counterparty riks
OTC products
For barrier option, there’s a high risk of _____if ______
loss premium if barrier conditions are breached (i.e. knock-OUT event occurs or if there’s NO knock-in event).
Knock-Out puts express the view that ____
Knock-Out call express the view that_____
Underlying is likely to fall
Underlying is likely to Increase
A simple barrier capital preservation certificate (shark’s fin) which does not involve a straddle contains ______
an up-and-out barrier knock-out call
Capital reservation in a Barrier Capital Preservation Certificate (without straddle), capital reservation refers to ____ amount
the NOMINAL (not the purchase price)
What are the investment views in the case of Barrier Capital Preservation Certificate?
Rising underlying
Sharply falling underlying possible
Underlying does not touch the barrier during its lifetime
A Barrier Capital Preservation Certificate (Straddle) contains _____
2 knock-out options: Barrier Call and Barrier Put
The investor of a Barrier Capital Preservation Certificate (Straddle)’s investor will receive _____ if knock-out event occurs.
There’re ____ possible knock-out events, one for ____, and if it occurs, the investor receives ____
a return at maturity, which is capped.
Two
each of the options
the agreed capital amount
What’s the investment view in the case of Barrier Capital Preservation Certificate (straddle)?
What’s the direction of underlying?
What’s the expect realised volatility?
Strategy is ____ relative to likely pay-out
Investors ____expect ____ volume
There’s no firm view on the direction of underlying
No large price swings (underlying remains within a range)
Expect realised volatility to be higher than current implied volatility (i.e. strategy is Cheap relatively to likely pay-out)
Investors do not expect high volume.
A Callable R-Bear contract has a strike price of $20, call price of $18, conversion ratio of 5, financial cost of 12% per annum, time to maturity is 6 months and the initial spot price is $16. What is the profit/loss if contract is sold after 3 months when the spot price is $14?
Theoretical price of a Bear CBBC = (Strike Price - Underlying Asset Price + Financial Cost) / Conversion Ratio
Initial Price = (20 -16+12% x 20 x 6/12) / 5 = 1.04
Price after 3 months = (20-14+12% x 20 x 3/12)/5 = 1.32
Therefore, the profit = (1.32-1.04)/1.04 = 26.92%
Which of the following statements about Mandatory Call Event (MCE) of Callable Bull/Bear Contracts (CBBCs) is/are TRUE?
A. On the occurrence of the MCE, the trading in the CBBC terminates immediately.
B. MCE is triggered for a for a Bull contract if the spot price touches or moves above the Call Price.
C. MCE is triggered for a for a Bear contract if the spot price touches or moves below the Call Price.
D. All of the above
A
For cateogy R-CBBC, the call price is ____ the strike price.
For the BEAR contract, call price is ____ the strike price.
For the BULL R-CBCC, call price is ___ the strike price.
different from
less than
more than
The MCE occurs in the case of R-CBBC BEAR/BULL contract ___
in the case of N-CBBC BEAR/BULL contract ____
R-CBBC Bear Contract: when the asset price rises and hits the call price
R-CBBC Bull Contract: when the asset price falls and hits the call price
N-CBBC Bear Contract: when the asset price moves up and hits the call price
N-CBBC Bull Contract: when the asset price declines and hits the call price.
The financial costs of Callable Bull/Bear contracts (CBBCs) includes _____ (3)
ISSUER’s cost of borrowing, adjustments for dividends and the issuer’s profit margin.
The financial cost of a CBBC is ___ for ____ maturity contracts and it _____ over time as the CBBC moves closer to the ____
Higher
Decline
expiration date
The MCE Settlement Price for a Bull contract is _____
The MCE Settlement Price for a Bear contract is ____
NOT LOWER than the minimum trading price of underlying asset between the period of MCE up to the next trading session.
NOT LOWER than the maximum trading price of underlying asset between the period of MCE up to the next trading session.
Price of the CBBC is _____ by implied volatility
not significantly impacted
Financial costs are ____ in case of CBBCs
deducted daily
Implied volatility ___ warrant price.
impacts
CFDs are ____ settled.
Investors are entitled to _____ and can participate in ___.
Investors are not entitled to ___.
Cash
cash dividends
stock splits
Vote
CFDs have ___ expirty date
NO
Jane goes long on a CFD contract (1,000 shares) on Company ABC. The price of the share on the opening day is $8.50 (the purchase price). After 30 days, the share price rises to $10 and Jane closes her position. The margin requirement for the share is 15%, Commission is 0.50%, GST (Commission): 10% and Financing charges are 10% per annum What is the return on investment?
Value of purchase = 8.5*1000 = 8500
Commission = 8500 * 0.5% = 42.5
GST on Commission = 42.5*10% = 4.25
Total transaction cost (buying) = 42.5+4.25 = 46.75
Value of sale = 10*1000 = 10000
Commission = 10000 * 0.5% = 50
Gast on Commission = 50*10% = 5
Total transaction cost (selling) = 50 + 5 = 55.
Financing interest (30 days) = 8500 * 10% * 30/360 = 70.83
Total expenses = 55 + 46.76 + 70. 83 = 172.58
Net profit = 10000 - 8500 - 172.58 = 1327.42
Initial investment (on 15% margin) = 15% 8500 = 1275
Therefore, ROI = 1327.42 / 1275 = 104.11%
The statistical arbitrage trading strategy for CFD pairs trading is based on ____ analysis, where the investors identifies____ that have a ______ correlation but _____.
If the investor believes there will be _____ and the price patterns will ____, he can execute a pair’s trade with the two equity CFDs.
Quantitative
two companies that have a STRONG historical price correlation but recent short-term market movement indicate a deviation from the trend.
MEAN REVERSION and price patterns will return to the historical norm
In a market-maker model, liquidity and efficient pricing will depend on _____.
CFD provider’s ability make a market
In a market-maker model, liquidity and efficient pricing will depend on CFD provider’s ability to make a market by ensuring ______ and to keep a ____ so that CFD investors can trade in a cost efficient manner.
ensuring adequate supply to meet investor demand and to keep a tight bid-ask spread so that CFD investors can trade in a cost efficient manner.
In a market-maker model, discretion on the bid-ask spread lies with ______ and is ____ to investors.
CFD Provider
not transparent
Investor A buys 1 lot (1,000) of ABC Extended Settlement (ES) contract at $10.00. The maintenance margin (MM) is 10% and the initial margin (IM) is 1.2 times the MM. If the valuation price on the next day is $10.20, what is the excess margin?
IM deposited at the time of taking the position = 1000 * $10 * 10% * 1.2 = $1200
IM at $10.2 = 1000 * $10.2 * 10% * 1.2 = $1224
Variation margin (VM) = ($10.2 - $10)*1000 = $200 (profit)
Therefore, IM + VM = 1224 - 200 = 1024
The excess margin = IM deposited - (IM+VM) = $1,200 - $1,024 = $176
An ES Contract is a _____
SINGLE stock future that is listed on SGX-ST.
At expiration, if the position of ES has not been offset, the contract is settled by ______ at ____ price.
physical delivery at the contracted price
The leverage allowed in contra trading is _____
infinite
There’s ____ financing cost in contra trading.
NO
ES contracts have ___ leverage.
Margin trading has ____ leverage.
Contra tading has ____ leverage.
5x to 20x
2x (shares) or 3x (cash)
infinite
The board lot size for Extended Settlement (ES) contracts in Singapore is ____
One standard board lot
The minimum tick size for an ES contract in Singapore is ____
as per the underlying market
The trading platform for trading ES contracts in Singapore is _____
SGX Trading Engine (Quest ST)
John has invested $100,000 in the shares of ABC Limited at $10 per share. He hedges his long position in the shares of ABC Limited by short-selling the relevant ES contracts on ABC at $9.50 per share.
What is the maximum loss that John can suffer because of adverse movement in the price of ABC’s shares?
John can lose a maximum of ($10-$9.5) * 10,000 = $5,000
John has invested $100,000 in the shares of ABC Limited at $10 per share. He hedges his long position in the shares of ABC Limited by short-selling the relevant ES contracts on ABC at $9.50 per share.
If the ABC share price is fixed at $11.00 for settlement of ABC’s ES contract, what is John’s overall profit or loss?
John’s gain on his long position in ABC shares = 10,000*($11-$10) = $10,000
His loss in the short position = ($11-$9.5)*10,000 = 15,000
The net loss = $15,000 - $10,000 = $5,000
Jane buys 1,000 ES contracts of ABC’s shares at $20. If the maintenance margin is 10% and valuation price is $18, what is the required margin based on outright margining?
Require margin = Maintenance margin + Additional margin
$18 * 1,000 * 10% + ($20 - $18) * 1,000 = $3,800
Jane buys 1,000 May ES contracts of ABC at $20 and Sells 1,000 June ES contracts of ABC at $21. If the maintenance margin is 10% and the valuation prices for the May and June contracts are $21 and $22.5 respectively, what is the required margin based on spread margining?
Required margin = Maintenance margin + Additional margin.
Long Position: Maintenance margin = $20 * 1,000 * 10% = $2,000
The additional margin = ($20-$21)*1,000 = -$1,000
The additional margin for short position = ($22.5-$21) * 1,000 = $1,500.
Therefore, the required margin = $2,000 - $1,000+$1,500 = $2,500
John buys 1 lot (1,000 shares) of ABC Ltd.’s ES contract at $20. The Maintenance Margin (MM) is 10% and the Initial Margin (IM) is 1.15 times the MM. John deposits the required IM at the time of taking the position.
If the valuation price of the contract is $18,
The initial margin will be ____
The required margin will be ____
A margin call for ____ will be sent to John.
The additional margin will be _____
The MM for initial position = $201,00010% = $2,000.
The IM = $2,000 * 1.15 = $2,300. John deposits $2,300 at the time of taking the position.
If the valuation price reaches $18, the MM = $181,00010% = $1,800. The IM will be $1,800 * 1.15 = $2,070
The additional margin (AM) = ($20-$18) * 1,000 = $2,000.
The required margin = MM + AM = $1,800+$2,000 = $3,800.
Margin call = IM+AM - Existing margin deposit = $2,070 + $2,000 - $2,300 = $1,770
If a customer has been issued a margin call for an Extended Settlement Contract, risk reducing trades are allowed _____
in all the circumstances whether margings are expected or not
Which of the following products is suitable for a conservative investor who wants to protect his capital?
A. CLN
B. RAN
C. DCI
D. Accumulator
B
A RAN is _____
a structured note where the investor receives a target level of return if a reference index falls within an agreed range, failing which the client receives less / no interest, but his/her principal will not be affected
Jane invests $1 million in a first-to-default CLN linked to 5 companies (maturity: 1 year from date of investment). The terms of the CLN state that the issuer of the CLN must pay the note holders 3% per annum (360 days) as long as there is no credit event. The 5 companies in the basket are totally uncorrelated with each other and the probability of default of each company is 10%.
How much money will Jane definitely receive if one of the 5 companies defaults 90 days after Jane’s investment?
If there is a defualt in 1 of the 5 companies, Jane may lose the entire invested capital.
This’s because the note holders are selling credit protection to the SPV (the issuer) and must cover for the event of default
Tom places a $1m margin for an unfunded 1-mth (22 business days) accumulator on ABC shares, with daily observation. The Accumulator allows Tom to accumulate 10,000 shares of ABC at a strike price of $5 per share, with a KO barrier at $6.50. What is the maximum loss possible?
Maximum loss is when the ABC share price remains below the KO barrier for the entire 22 days and falls to zero at the end of the 22-day period.
In this case, Tom will have accumulated 22*10,000 = 220,000 shares at $5.
Therefore, the loss will be = $5 * 220,000 = $1.1 million
Jane invests $1 million in a first-to-default CLN linked to 5 companies (maturity: 1 year from date of investment). The terms of the CLN state that the issuer of the CLN must pay the note holders 3% per annum (360 days) as long as there is no credit event. The 5 companies in the basket are totally uncorrelated with each other and the probability of default of each company is 10%.
What is the total probability of the credit event (default)?
Since the companies are uncorrelated, the probability of default in the CLN is 10%*5=50%.
John wants to accumulate PQR’s shares and invests in a 6-month (125 business days tenor) accumulator with 1x2 gearing for PQR shares (the reference share).
The spot reference price is $11, the strike price is $10.50 and the KO barrier is $12. The number of shares per observation is 1,000 and the settlement is done monthly.
If the share price of PQR remains between $11 and $11.50 during the first 21 business days and John sells the accumulated shares in market at $11.50, what is his gain?
Since the share price remains below the KO barrier, the number of shares accumulated at $10.5 (strike price) is 21*1,000 = 21,000.
The profit per share is $11.5-$10.5 = $1.
Therefore, the total profit = $1*21,000 = $21,000
John wants to accumulate PQR’s shares and invests in a 6-month (125 business days tenor) accumulator with 1x2 gearing for PQR shares (the reference share). The spot reference price is $11, the strike price is $10.50 and the KO barrier is $12. The number of shares per observation is 1,000 and the settlement is done monthly.
If the share price of PQR remains between $10.60 and $11.10 during the first 10 business days of the second settlement cycle and below $10.50 for the balance 11 business days of the cycle, how many shares will John accumulate?
For the share price remains below the strike price period (11 business days), the number of shares accumulated at $10.5 (strike price) is 1121,000 = 22,000
For the balance 10 days of the settlement cycle, John will accumulate 10*1,000 = 10,000 shares.
So the total number of shares accumulated = 22,000+10,000=32,000
Early redemption of Range Accural Notes (RANs) is subject to ____
bid of the dealer
If the correlation amongst the basket of companies in a First-to-Default Credit Linked Note is zero, the yield should be _____
Sum of yields of the respective companies
In a first-to-default CLN, the note holders are effectively _____
Selling credit protection to the SPV issuer and will receive an enhanced yield in return.
In the event a company from the basket in a First-to-Default Credit Linked Note defaults, the note holders ____
recover the par value minus the losses after the issuer makes the payment in respect of the defaulted loan
CLN holders will purchase the first-to-default CLNs issued by a _____.
The issuer will use the proceeds to ______
SPV
Purchase typically higher rated securities, for example, government bonds
The advantgaes of First-to-Defualt Credit Linked Note include ______
Disadvantages are _____
High yields (based on the risk assumed)
Transparency about the creditworthiness of the basket of companies
The counterparty risk remains high and the liquidity is limited
Under the first-to-default notes structure, the SPV ____to ___ by ______.
The SPV issuer will receive ____ from ____, which will be used to ____
Sells credit protection to the bank by entering into a first to default credit swap (the bank pays the issuer SPV).
Protection payment from the bank, which will be used to subsidized the enhanced yield to the note holders.
Under the notes structure, the bank pays the ____. The bank will then use ____ for _____.
SPV issuer
the credit protection for their loans to that particular basket of companies.
Under the first-to-default notes structure, if one of the companies in the basket defualts, then _____
SPV issuer _____
Banks ____
Notes holders _____
The SPV issuer, being the protection seller to the bank, has to liquidate the AAA-rated securities and pay the bank
The bank receive a payment
The notes holders will only be able to recover the remaining sum (par value minus losses)
The four indices forming the basis of a 4 years and 11 months Auto-Redeemable Structured fund close 105%, 108%, 110% and 132% of the initial level. Each index has a weight of 25% and the knockout event did not occur. The outperformance payout is the arithmetic weighted average return of the 4 Underlying Indices, subject to the threshold, and adjusted for the participation rate. The threshold is 110% and the participation rate is 25%. What is the outperformance payout to the investor in percentage terms?
Weighted average return=(105%+108%+110%+132%)/4 = 455%/4 = 113.75%
Returns in excess of threshold = 113.75%-110%=3.75%
Based on the participation rate of 25%, Outperformance payout = 25%*3.75%=0.9375%
Advantages of the 4 years and 11 months Auto-Redeemble Structured fund include _____ (2)
However, ____ is offset by lower pay-out outperformance at maturity, as _____
Downside protection (capital is preserved) and transparency for the investors (underlying indices are well-known and easily trackable).
fixed first coupon
Participation Rate is only 25%
The 3-year Auto-Redeemable Structured Fund with underlying indices Nikkei 225 and S&P500 is not suitable for investors who _____ because _____
require regular income payments because there’re NO interim coupon pay-outs
What is the percentage daily price limit for MSCI Singapore Index Futures?
15% in either direction from the previous day’s settlement price
If the MSCI Singapore Index Futures moves by daily price limit on any day, a cooling off period of 10 minutes is allowed. What is the price limit for the day after this cooling period?
There’s no price limit for the day
For MSCI Singapore Index Futures, whenever the price moves by ____ in either direction from the previous day’s settlement price, trading at or within a price limit of ____ is allowed for the next ___ minutes.
After this cooling off period has elapsed, there shall be ____ limits for the remainder of the trading day.
There shall be no price limits on ____. (day)
15%
15%
10
NO
The last trading day of the expiring contract month
In Nikkei 225 Index Futures, if the price moves by ____ in either direction from the previous day’s settlement price, trading at or within a price limit of ____ is allowed for the next ___ minutes.
Thereafter, trading is allowed within an expanded price limit of ____ in either direction from the previous day’s settlement price throughout the trading day.
7.5%
7.5%
15
12.5%
The contract months for MSCI Singapore Index Futures are _______
2 nearest serial months & March, June, September, December months on a 1-year cycle
The contract months for the 3-month Singapore Dollar Interest Rate Futures are ____.
2 nearest serial months & March, June, September, December months on a 2-year cycle
The contract months for the 5-year Singapore Government Bond Futures are ____.
2 nearest quarter (March, June, September and December) months
The contract months for the Eurodollar futures contracts are ____.
4 nearest serial months & March, June, September, December months on a 10-year cycle
The contract months for the Euroyen TIBOR Futures are ____.
March, June, September, December months on a 5-year cycle.
The contract months for the Full-sized 10-year Japanese Government Bond Futures are ____.
March, June, September, December months
The contract months for the MSCI Taiwan Index Futures are ____.
2 nearest serial months & March, June, September, December months on a 1-year cycle.
What are the contract months for the Nikkei 225 Index Futures?
6 nearest serial months & 20 nearest quarterly months
The contract months for the Straits Times Index Futures are ____.
2 nearest serial months and March, June, September, December months on a 1-year cycle
The contract size for Straits Times Index Futures is ____.
SGD 10X the Index Futures Price
The contract size for the MSCI Singapore Index Futures is ____.
SGD 200X the Index Futures Price
The contract size for the MSCI Taiwan Index Futures is ____.
USD 100 multiplied by the index futures price.
The contract size of the 3-month Singapore Dollar Interest Rate Futures is ____.
SGD 1 million
The contract size of the 5-year Singapore Government Bond Futures is ____.
SGD 100,000
The contract size of the Euroyen TIBOR Futures is ____.
JPY 100,000,000
The cooling off period for the Straits Times Index Futures after the daily price limit is touched on any day is ____.
10 minutes
The final settlement price of the MSCI Taiwan Index futures is ____.
The official closing price rounded to 2 decimal places.
The last trading day for the Eurodollar Futures contract is ____.
2 London business days preceding the 3rd Wednesday of the expiring contract month
What is the last trading day for Nikkei 225 Index Futures?
The day before the second Friday of the contract month.
The last trading day for the 5-year Singapore Government Bond Futures is ____.
The last Singapore business day of the expiring contract month.
What is the last trading day for the Euroyen TIBOR Futures?
2nd TFX business day immediately preceding the 3rd Wednesday of the expiring contract month.
The last trading day for the MSCI Singapore Index Futures is ____.
The second-last business day of the expiring contract month
The last trading day of the MSCI Taiwan Index Futures is ____.
The 2nd last business day of the expiring contract month.
The last trading day of the Straits Times Index Futures is ____.
The 2nd last business day of the expiring contract month
What is the minimum price fluctuation allowed in Nikkei 225 Index Futures for strategy trades?
1 index point
The minimum price fluctuations allowed in the MSCI Taiwan Index Futures is ____.
0.1 index point.
The minimum price fluctuations for 5-year Singapore Government Bond Futures is ____.
SGD 0.01 per SGD 100 face value.
The minimum price fluctuations for the spot month in Eurodollar Futures contract is ____.
0.0025 point (USD 6.25).
The minimum price fluctuations in the Euroyen TIBOR Futures is ____.
JPY 1,250
The minimum price fluctuations in the Full-sized 10-year Japanese Government Bond Futures is ____.
JPY 0.01 per JPY 100 notional value.
The minimum price fluctuations on the MSCI Singapore Index Futures is ____.
0.1 index point
The minimum price fluctuations on Straits Times Index Futures is ____.
1 index point
The size of the contract for Nikkei 225 Index Futures is ____.
JPY 500 multiplied by the index futures price.
In MSCI Taiwan Index Futures, what is the price limit on the last trading day of the expiring contract month?
There is no price limit.
In case of a Constant Proportion Portfolio Insurance (CPPI), the ‘reserve cushion’ is ____.
The difference between the initial amount and the absolute floor
If V is the current value of the portfolio, F is the current Futures quote, T is the value per tick and β is the beta of the portfolio, what is the number of contracts required for Hedging Equity Risk?
{V ÷ (F X T)} X β
theories posits that futures prices are basically the expected spot prices of the underlying asset in the future?
Expectancy Model
Changes in the TED spread can provide an indication for which of the following risks?
Credit risk
The TED spread is _____
Difference between the price of the 3-month US Treasuries futures contracts and 3-month Eurodollars futures contract which have the same expiration month.
The TED spread is used as an indicator of credit risk because ______
U.S. T-bills are considered risk free, while the rate associated with the Eurodollar futures reflects the credit ratings of corporate borrowers.
Calculate the break even price for a put holder based on the following information. Spot price of the share is $100. Price of the put option purchased for strike price of $100 is $5. The stock price rises to $110 on the expiry date.
$100 - $5 = $95
The put holder pays $5 for the put (his cost). He’ll recover this cost when the intrinsic value of the option is $5.
This will happen when the price of the underlying = $100 - $5 = $95
Intrinsic Value of Put Option = Strike Price - Underlying Price
Company warrants are ____ style.
American
A company warrant is usually a ____ option with ____ maturity, compared to structured warrants, which usually expire in ___ years.
Long-dated Call Option with 3-5 years maturity
Less than 1 year
Warrant holders _____ dividends or cash distributions.
DO NOT receive
Warrant holders are not entitled to _____
dividends or cash distributions
Calculate the conversion price of a call warrant based on the following information. Market price of the underlying=$100, exercise price=$105, warrant price=$2, and conversion ratio=3.
The conversion price of a CALL warrant = X + nWP = 105 + (3*2) = $111
= Strike Price + Conversion ratio x Warrant Price
Which of the following structured products DOES NOT have an embedded short put option written by the holder?
A. Accumulators
B. Bond-linked notes
C. First-to-default credit-linked notes
D. Zero coupon plus option note
D
If an investor invests most of his money in exchange-traded blue chip equities, the BIGGEST risk faced by him is the ____.
A. Concentration risk
B. Correlation risk
C. Market risk
D. Liquidity risk
Concentration Risk
Which of the following products has the HIGHEST reinvestment risk for an investor?
A. A plain vanilla bond with lower coupon payment frequency
B. A Zero-coupon bond
C. A putable bond
D. A callable bond
D
Reinvestment risk refers to _____
The risk that investors have to reinvest their bond proceeds - coupons and/or principal - at an interest rate below their YTM.
Reinvestment risk is greatest for bonds with _____
Large coupons, higher coupon payment frequency, long maturities, and those selling at a premium.
___ bonds have no reinvestment risk, while _____ bonds have high reinvestment risk.
Zero coupon
Callable
Calculate the price of a bond based on the following information. Modified duration=4, market price of bond=$970, and the bond yield declines by 50 basis points
If the bond yield declines, the bond prices go up.
If the modified duration is 4 and the bond yield declines, the bond prices will go up by 50*4 = 200 basis points.
Therefore, the bond price will be $970 * 1.02 = $989.4
There’s ____ margin requirement for knock-out products.
NO
There’s ____ margin requirement for structured warrants.
NO
What does knock-out products and structured warrants share in common?
Both don’t have margin requirement
Which type of CFDs DOES NOT have any counterparty risk?
Exchange-traded business model CFDs.
This’s uncommon CFDs.
Purchasing an extended Settlement contract is different from purchasing share options mainly because of ____.
the required margins on purchase
If the accumulator is an unfunded one, which would be an additional risk?
Leverage risk
The price discovery of futures contracts is through ______ process, unlike forwards.
an auction-like process
The cost of carry model assumes that ______ (4 assumptions)
- The contract is held till maturity so that a fair price can be arrived at
- There’re no transaction costs or margin requirements
- There’re no restrictions on short selling
- Investors can borrow and lend at the same interest rate
A company is planning to take a 6-month USD 50 million loan from an foreign bank in September (i.e. 5 months from now). The 6-month USD lending rate is presently 1.65% and the September and December Eurodollar futures are at 98.25 and 98.10 respectively. In September, the 6-month USD lending rate increases to 2.15%. The September and December Eurodollar futures decline to 97.85 and 97.45 respectively. If the company wants to fully hedge its interest rate exposure using the September futures contract, what is the number of contracts required?
The basis point value of a 6-month USD50,000,000 loan = USD50,000,0000.0001180/360=USD2,500. The basis point value of a Eurodollar futures contract = USD25. Therefore, the number of contracts required = USD2,500/USD25=100 contracts.
Calculate the gearing ratio if the call warrant price is $0.50, the exercise price is $5, the conversion ratio is 1, and the share price is $4.
Gearing ratio = Share price / (Warrant price x Conversion Ratio)
= $4 / ($0.5*1) = $8
Put Warrant IV:
Put Warrant IV = Max (0, (X-S)/n)
X: Strike Price
S: Underlying Security Price
N: Conversion ratio
Which of the following funds adopting the Constant Proportion Portfolio Insurance (CPPI) strategy will have the lowest allocation to the risky assets?
Crash Size Cushion Value
Fund A 40% 25%
Fund B 25% 20%
Fund C 50% 35%
Fund D 35% 30%
A
The allocation to risky assets = Multiplier * Cushion level = 1/Crash Size * Cushion Level
Under direct issuance, structured notes are issued by ____
Structured notes are considered as the debt of ___
Banks. There’s no SPV involved.
The debt iwll be reflected on its balance sheet as liability.
The debt is a direct obligation of the bank to its creditors and the investors bears the credit risk of the bank.
Under direct issuance, the investors of structured notes bear the ___ risk of ____
Credit risk of the bank
Suppose the note holders invest a total principal amount of SGD 10 million in a First-to-Default CLN issued by the Special Purpose Vehicle (SPV) set up by PQR Bank. Through the First-to-Default CLN, credit protection of SGD 10 million is provided for the first-to-default among 5 different companies. If one of the companies defaults, up to SGD 10 million would have to be paid out by the note holders.
If a company in the basket defaults:
The note holder will have to pay off the company.
In which of the following situations a Structured ETF can trade away from its NAV?
A. When there are direct investment restrictions in relevant markets.
B. When there’s arbitrage trading
C. When there are differences in trading times of the ETF and the underlying assets.
D. When the underlying securities are extremely volatile.
A / C/ D
What’s the risk resulting from the time difference between a financial instrument’s issue date and settlement date?
Transactional Risk
Which of the following factors will NOT help to mitigate systemic risk in investments?
A. Extent of leverage allowed
B. Level of interest rates
C. Stability of economic growth rate of a country
D. Regulatory environment
A
If DV01 is $1 and the bond price increases by $10, the yield will ____
Fall by 10 bps
DV01 (dollar value per basis point) is also known as
Dollar duration
PV01 (present value of a 01)
PVBP (price value of a basis point)
A Bond is currently priced at $900 and its PVBP = $2. If the yield of the bond increases by 10bps, bond price will ____
Will decline by $2 x 10 = $20
$900 - $20 = $880
A bond is currently priced at $1,000.What will be the price of the bond if its modified duration is 5, and the yield decreases by 100 bps?
Will increase by 5*100 bps = 5%
Therefore, the price of the bond will be $1,000 * 1.05 = $1,050
The participation rate of an Equity-Linked Structured Notes =
Discount Sum / Call Premium
Barrier options are traded at ____
OTC
Barrier options are ____ and require a ____ premium compared to standard options.
Cheaper
Lower
Stop-loss orders ___ get executed depending upon ____
may or may not get executed whether the trigger price is touched or not
After the trigger, the stop loss order may ____ filled if ____
not get filled if the limit price cannot be achieved.
This can happen in volatile market conditions where there may be price jumps and there is no transaction taking place at the set order price.
Stop-loss orders cannot get filled ______ (under what circumstance)
Above the set limit price
Dividend Stripping is relevant to ____
CFDs
What’s dividend stripping?
An astute CFD trader can exploit market anomalies and make a tidy profit by capturing the share dividend.
He buys the CFD before the ex-dividend date and closes out his position shortly thereafter, before the share price has fully adjusted to the theoretical ex-dividend price.
Such an investor will look out for companies that have good dividend payouts, monitor them and select the right share offering opportunities for a dividend stripping trade.
In terms of a daily range accrual note on HSI:
If the HSI moves above the KO barrier, ____
If the spot HSI value falls below the accrual level, ____
1) The coupon will stop accumulating and the investor will get back his principal plus the coupon accrued only on maturity.
2) The accumulation of accrual coupons will stop, BUT will resume when the HSI subsequently trades within the range.
Correlation between the companies is ____ to the number of risk factors of the First-to-Default CLN.
With lower correlation, there’re _____ And ____ is required
Inversely proportional
more risk factors and a higher yield is required
Assuming the correlation amongst the basket of companies is zero, the First-to-Default CLN’s yield should be ____
Equal to the sum of the yields of the respective companies
Which of the following is/are advantages of the First-to-Defualt CLN?
A. attractive yields
B. Diversification
C. Easy to understand
D. Protection of the principal amount
A.
Yields of First-to-default CLNs can be high depending on the risks that the note holders are willing to assume.
What is the additional risk that an investor takes if he invests in the accumulator on an unfunded basis instead of on a fully funded basis?
Leverage risk
If the structured fund assets are linked to major equity indices only, the investor is exposed to _____
High level of concentration risk with regard to the class of assets
If the fixed coupon of a fund declines, the participation rate should _____
increase
What are the inherent risks in auto-redeemable structuted fund?
Counterparty risk
Market risk
Liquidity risk
For a product with the yield return component for the entire period is paid at maturity, either in full or is zero, its ____ type
binary payout type
If the futures price of an Equity Index Futures is $100, the spot price is $95, and the interest is $7, what is the dividend?
Future Price = Spot price + Interest - Dividend
Dividend = Spot price + Interest - Future Price = $2
If the annualized interest rate for a 180 day Treasury bill is 4.25%, the price of the futures contract is ____
This’s to find the short-term interest rate future price
P = 100 * (1-R) = 100 * (1-0.0425)
If a trader buys a calendar spread of USD/GBP futures contracts and the price of leg 1 falls by 1 tick and that of the further leg falls by 2 ticks, what is the profit or loss?
Assume that each tick is US$50 and the contract size is 100.
(2-1) * 50 * 100 = $5,000 (profit)
If the spread in the opening position of a long butterfly spread of futures contracts is 14 ticks and the spread in the closing position is 20 ticks, what is the net position?
Since the spread icnrease (closing spread > opening spread), there is a gain on a net basis
The gain = 20 - 14 = 6 ticks
What is the modified portfolio value of a two-stock portoflio with different weight and beta?
MPV = Value of the actual portoflio * weighted beta of the stock portoflio
Calculate the loan value in a delta-neutral hedge if the hedge ratio is 4, number of contracts required for hedging is 100, and the contract size is $2 million.
Number of contracts = Hedge ratio x (Loan Value / Contract Size)
100 = 4 x (Loan Value / $2 million)
If the change in security price is double the change in futures price, bank loan value is 10 times the contract size, what is the number of contracts required for a complete hedge?
Hedge ratio = Change in Security Price / Change in Futures Price = 2
Loan value / Contract size = 10
Therefore, # of contracts for hege = Hedge ratio x (Loan Value / Contract Size)
Premium payback period of a convertible bond =
Market Conversion Premium / Income differential per share
Convertible Bond Value = (Bond value / Option)
Straight bond value + value of call option on stock
Conversion value of a convertible bond =
Conversion ratio * Market price of share
The market price of a convertible bond is $20 and the conversion ratio is 5. What is the market conversion premium per share if the share price is $3?
Market conversion premium = Market conversion price - Share Price
Market conversion price = Market price of convertible bond / Conversion ratio
A $100 face value convertible bond has a coupon of 8%. The conversion ratio is 5 and the dividend per share is $1. If the market conversion premium is $2, what is the premium payback period?
Premium payback period = Market conversion premium / Income differential per share = 2/0.6 = 3.33 years
Income differential per share = (Coupon - (Conversion ratio * Dividend per share)) / Conversion ratio = ($1008% - (51))/5 = 0.6
If the market price of a convertible bond exceeds its straight value by 5%, the downside risk is _____
The Downside risk of a convertible bond can be estimated as: Premium over straight value = (Market price of convertible bond / Straight value) - 1
What’s the Gearing Ratio of a warrant?
Gearing Ratio = Share price / (Warrant Price x Conversion ratio)
The delta of a warrant is 0.8, and a $1 change in the share price leads to a $0.4 change in the price of the warrant. The conversion ratio of the warrant is ____.
Delta = n (conversion ratio) * change in WP / change in Share Price
0.8 = n * 0.4/1
Call warrant for XYZ is trading at $0.45, its exercise price is $0.65 while the share price is $0.80.
What is the time value if the conversion ratio is 1?
Time Value = Warrent price - Intrinsic value = 0.45 - 0.15 = 0.3
Intrinsic value for call warrant = (Underlying share price - Strike price) / Conversion ratio = (0.8 - 0.65) / 1 = 0.15
What’s Put Warrant Conversion Price
Put Warrant Conversion Price = Strike Price - Conversion ratio * Warrant Price = X - nWP
The premium of a call warrant is 10%, conversion ratio is 4, warrant price is $0.50, and the strike price is $100.
What is the market price of the underlying?
Call Premium (%) = [(nWP + X - S)/S] * 100
0.1 = [(4*$0.5 +$100 - S) / S] * 100
The exercise price of a put warrant is $25 and the market price is $27. If the conversion price is $22
What is the premium in dollar terms?
Unlike options, the premium for warrants is the difference between the price and intrinsic value.
Since you pay $22 to sell at $27, the premium has to be $5.
Conversion Price of Put Warrant = Strike Price - Conversion Ratio * Warrant Price
Premium of Put Warrant = Conversion Ratio * Warrant Price - (Strike Price - Underlying Share Price) = nWP - X + S = nWP - (X-S)
X-S = Strike Price - Underlying Share Price = Intrinsic value of Put Warrant
Warrant Premium (%) =
= (Warrant Premium - Underlying Share Price) / Share Price
Adjustment factor for dividend
Adjustment factor = (Last cum-date closing price of the underlying-special dividend per share - normal dividend per share) / (Last cum-date closing price - normal dividend per share)
In a classic equity-linked structured note, a zero-coupon bond has a face value of $1,000 and the present value is $950.
If the premium of the call option is $40, what is the participation rate?
Partiticpation rate = Discount Sum / Call option premium = (Face value - Present value) / Call option premium
125% = (1000 - 950) / 40
Given the price of the call option is 25% and the fund has only 20% to invest, what will be the share of participation in the index?
Share of participation = % of fund to invest / % of call option
= 20/25 = 80%
If the settlement price of a bear Callable Bull/Bear Contracts (CBBC) is $10, the conversion ratio is 3, the maturity value is $6, what is strike price?
Maturity value of a Bear Contract = (Strike Price - Settlement Price) / Conversion Ratio = $10 + (3*$6)
Gearing ratio of CBBC =
Gearing Ratio = Underlying Asset Price / (Price of CBBC x Conversion Ratio)
Formula is same as Warrant Contract
Residual value of a bull R-CBBC =
Reisidual value of a bear R-CBBC =
(Settlement Price - Strike Price) / Conversion Ratio
(Strike Price - Settlement Price) / Conversion Ratio
