Warrants & Structured Products Flashcards
At-the-money warrants have a delta of around ___.
It means that ____
0.5
1 cent increase the underlying price will lead to 0.5 cent change in the warrant value
Call wrrants with highe strike prices result in ____, but are not suitable if _____
High strike price
A small change in price is anticipated
Call Wrrant IV =
Put Warrant IV =
Call = Max {0, (S-X)/n}
Put = Max {0, (X-S)/n}
IV (Intrinsic Value) is zero for _____ (type of warrants)
OTM and ATM warrants
CP (Conversion Price) for Call Warrant
CP (Conversion Price) for Put Warrant
Call CP = X + nWP
Put CP = X - nWP
The warrant premium is mainly its ____
time value
Premium of warrant is ____
Difference between the price of warrant and its intrinsic value.
Premium of Call Warrants
Premium of Put Warrants
Call Warrants Premium = nWP + X - S
Put Warrants Premium = nWP + S - X
If expressed in percentage, premium is _____
the percentage by which the underlying share price should move by maturity so that the investor breaks even
Premium (%) of Call Warrants
Premium (%) of Put Warrants
Premium (%) of Call Warrants = [(nWP+X-S)/S] * 100
Premium (%) of Put Warrants = [(nWP+S-X)/S] * 100
In both put and call warrants, exercise expenses are payable by _____ to the _____
warrant holder to the warrant agent
Cash settlement of a call warrant:
Cash settlement of a put warrant:
Calll = (S-X)/n per warrant
Put = (X-S)/n per warrant
New Exercise Price of Structured Warrants =
New Exercise Price = Old Exercise Price x Adjustment Factor
Adjustment Factor = (P-SD-ND)/(P-ND), where
P = the last cum-date closing price of hte underlying
SD = Special dividend per share
ND = Normal dividend per share
Adjustment for Share Buy Backs / Cancellations of the underlying stocks of structured warrants:
New Exercise Price =
New Exercise Price = Old Exercise Price * Adj. Factor 1 * Adj. Factor 2
Adj. Factor 1 = Existing Shares /Number of shares on an ex-basis
Ad. Factor 2 = (P-CD) / P, where
P = the last cum-date closing price of the underlying
CD = Cash distribution per share held immediately prior to the Capital Reduction/Buyback
New Conversion Ratio = Old Conversion Ratio * Adjustment Factor 1 * Adjustment Factor 2
Adjustment for Share Splits of the underlying stocks of structured warrants:
New Exercise Price = Old Exercise Price * Adjustment Factor, where Adjustment Factor = Existing Shares / Number of shares on an ex-basis
New Conversion Ratio = Old Conversion Ratio * Adjustment Factor
For each currency translated warrants, the settlement amount =
For instance, a structured warrant on the Hang Seng Inde is traded in Singapore, the underlying currency HKD is different from the settlement currency SGD
MAX {0, Underlying Currency 1 * [(Refrence Level - Exercise Level)/n] x Exchange Rate (Settlement Currency / Underlying Currency)}
MAX {0, HKD 1 * [(Refrence Level - Exercise Level)/n] x Exchange Rate (SGD/HKD)}
The Conversion value or parity value of a convertible bond is _____
Conversion value =
its value if it’s converted immediately
Conversion value = market price of share * conversion ratio
What’s the min. value of convertible bond?
Greater of its conversion value or its value without the conversion option, i.e. the straight value
Market conversion premium per share for a convertible bond =
Market conversion price - share price
What’s Premium of Convertible Bond over straight value?
= (market price of convertible bond / straight value) - 1
For warrants, the downside risk of the warrant is ____
the value of warrant
For convertible bonds, the downside risk is _____
the difference between the convertible price and the staight bond value
The payback period, without factoring the time value of money, for a convertible bond is calculated as ____
Premium payback period = market conversion premium / income differential per share
Income differential per share = [coupon - (conversion ratio * dividend per share)] / conversion ratio
What’s the participation rate of a structured products?
The percentage increase in the structured product’s return for every 1% increase in the performance of the reference asset
If warrants issued as an attachment to a bond, they help ____ the coupon paybale to the holders.
This’s because ____
Decrease
The bond issue is made more attractive by the option to buy shares
Warrants can be listed and traded ____
Seperately
A zero strike warrant is essentially a _____ has an exercise price of ___, which means that it’s always _____.
The cash settlement and warrant price are euqal to ____
Synthetic Stock
Zero
In-the-money
the underlying security’s closing price.
In Singapore, company warrants can be exercised _____ (at what time)
anytime before expiry
In the case of convertible bonds, the downside is _____.
The downside of a convertible bond is ______.
The market value conversion per share can be considered as ______
Not fixed.
The downside of a convertible bond is the difference between the convertible price and the straight bond, and the value of the straight bond is not a constant.
the value of the embedded call option
Parity value of a convertible bond is _____
Market price of the underlying share x conversion ratio
What’s the market conversion price or conversion parity price?
The effective price that an investor pays for SHARES, if the investor purchases the convertible bond and converts it into shares
The market conversion price can be seen as a ____ price as _____
Breakeven price
Once the actual share price increase above the market conversion price, any further increase would result in an increase in the convertible bond’s price.
Gearing ratio of a warrant =
Share price / (Warrant price * Conversion ratio)
Investors expecting a small move in the underlying asset price should buy warrants which are _____ (type), while investors expecting a large move can buy _____.
ATM or Slightly ITM
OTM (as they’re cheaper)
In the name of a structured warrant, strike price shown ____
after the name of the underlying instrument if it’s an index
In the case of warrants, the premium is usually expressed as a percentage of _____
UNDERLYING share price
In case of a call warrant, the premium is = (2 ways)
- Warrant price - Intrinsic Value
- Conversion price - market price of the underlying
Call warrant premium = nWP + X - S and nWP + X = Call Warrant Conversion Price
All structured warrants listed on SGX-ST have the ____ style of expiry settelemnt (_____ contracts).
Asian
path-dependent contracts
Jane purchased an Asian call option (strike price $102) on the shares of PQR Limited when the spot price was $100 per share. The premium paid was $1 per share. The settlement price is determined based on the arithmetic average of the month end closing prices for the 3 months. PQR stock prices at the end of the 1st, 2nd and 3rd month are $109, $104, and $96.
The net profit/loss of Jane is ____
What if it’s a plain vanilla call option?
Net profit = Intrinsic value - premium paid = (103-102) -1 = 0
Jane breaks even.
Had it been a plain vanilla call option, the option would have been out of the money on the expiry date (spot price of $96 is less than the strike price).
In A discount certificate, exercise price is ____ the issue price.
At maturity, if the underlying asset’s closing price on expiration or valuation date(s) is at or above the exercise price, the holder will receive _____
If the closing price is below the exercise price, then the holder will receive ____
Above
A cash settlement equal to the exercise price
A cash settlement equal to the Value of the Underlying on the expiration or valuation date(s).
Under the Financial Advisors Act, one of the criteria to determine whether an individual is an HNWI or not includes that total net personal assets of the person should exceed _____ in value or the equivalent in foreign currencies.
S$2 million
Structured products that have a conversion feature to another currency or type of asset, are _____
NOT principal protected
Jane wants to hedge against a rise in GBP by investing in a Dual Currency Investment (DCI). What is the possible problem with this hedging strategy?
The GBP may rise significantly and she may not be able to buy GBP at a good rate when she subsequently needs the GBP
Jane’s daughter is studying in the United States. She wants to buy USD/SGD at 1.35 for her son’s education expenses. A one-year (365 days) dual currency investment (DCI) is available at 5% per annum with a strike price of USD/SGD 1.35. She invests SGD100,000 in the DCI when the USD/SGD spot rate is 1.37.
What is the USD/SGD breakeven point for Jane if she invests in the DCI?
If USD/SGD spot rate is 1.360 upon expiry of the DCI, what amount will Jane get back at maturity?
If USD/SGD is below the strike price on maturity, Jane will get USD77,778 = 100,000 * (1+5%) / 1.35
For breaking even (getting back the initial SGD 100,000), the USD/SGD rate should be = 100,000/77,778 = 1.2857
If USD/SGD spot rate is 1.360 upon expiry of the DCI, what amount will Jane get back at maturity?
Since the USD/SGD spot is above the strike price, Jane will get the 5% yield = 100,000 * (1+5%) = SGD105,000
Based on the following data for a Dual Currency Investment, which of the following statements is/are TRUE? Investment sum: SGD 200,000, Base currency: SGD, Alternate currency: USD, Tenor: 1 year, Interest rate: 8%, Strike price: USD/SGD 1.3500 (current rate: USD/SGD 1.3900). USD sum to be received if spot rate goes below the strike price: USD 160,000
- The breakeven USD/SGD exchange rate for the investor is ____
- The investor will receive ____ if the put is not exercised
- If USD/SGD is 1.15 at maturity, the investor will receive ____
- As long as the USD/SGD remains at ____, the investor will not lose money.
- USD160,000/SGD200,000 = USD/SGD 1.25
- SGD 200,000 * (1+8%) = SGD$216,000
- At USD/SGD 1.15, this will transalte into SGD 1.15 * 160K = SGD184K
- remains at or above the breakeven point of 1.25 (which is below the strike price)
In a Constant Proportion Portfolio Insurance (CPPI) product, Cusion Value =
Cusion Value = Total portfolio - Floor Value
In a Constant Proportion Portfolio Insurance (CPPI) product, Allocation to Risky Asset =
Allocation to risky asset = Multiplier * Cushion Value
In a Constant Proportion Portfolio Insurance (CPPI) product, Multiplier =
Multiplier = Allocation to Risky Asset / Cushion Value
In a CPPI product, as the investment moves towards maturity, the floor value approaches ____
100% of the principal sum
In a CPPI product, Crash Size =
Crash Size = 1/Multiplier
The CPPI strategy involves a ____ allocation between risk-free and risky assets. It provides protection to _____
Dynamic
protection to the capital initially invested
DPPI is similar to CPPI. Unlike CPPI, however, _____
The MULTIPLIER of DPPI is a variable instead of being a constant.
Under CPPI, ____ is calculated at regular intervals.
a floor value of the total portfolio
Structured products with principal preservation features can still be considered _____ depending on_____
High risk depending on the investment grade of the underlying fixed income securities
Brokers sometimes provide ____ financing against structured products
Short-term
Structured products are _____ and need to ____ to avoid losses
illiquid and need to be held till maturity to avoid losses
____ makes a payment to the bank in case of default of the reference entity in a Credit Default Swap.
Issuer
A structured note is in the form of _____ or ______
A debenture or a structured deposit
All debentures are _____ debts
Senior, unsecured and unsubordinated
In Singapore, the principal sum of the structured deposits, with or without interest, must be ____
repaid in full at maturity
If financial advice is given for sale of a structured deposit ______ (regulation) need to be followed unless the investor is an _____ (4)
FAA
Accredited investor
High net worth individual
Overseas investor who is not a Singaporean or a Singapore permanent resident
Institutional investor
Constant Proportion Portfolio Insurance (CPPI) is a _____ that aims to ______.
It involves ________
Trading Strategy that aims to ensure a fixed minimum return at all times or on a specified future date.
It involves continuous non-discretionary rebalancing of portfolio allocation between risky and safe assets based on a formula or mathematical algorithm.
Sharpe Ratio is ____
Sharpe Ratio =
a risk-adjusted measure of performance
The ratio = (Return of the portfolio - risk-free rate) / Standard deviation of the portfolio returns
What are excluded from TER (Total Expense Ratio)?
trading fees
interest expense
brokerage fees
TER (Total Expense Ratio) =
Total cost of the fund / Total assets
SICAV is _____ fund (type)
open-ended CIS / Umbrella fund
VaR is measured in three variables which are ____
amount of potential loss
probability of that loss
time frame
___ and ____ is used to measure volatility
Standard deviation or variance between returns of the asset or fund
Depending on the financial techniques involved in creation, structured funds can be classified into two categories, namely, _____
those which are based on derivatives
and those which are based on techniques derived from portfolio insurance
Fund Trustee should ensure that proper accounts are maintained and ____ is audited.
The unit holders should get the semi-annual report within ____ from the end of the relevant period and also receive the annual report within ____ from the end of relevant period.
CIS
2 months
3 months
Any breaches should be intimated to the MAS within _____ days after the breach comes to notice of Trustee
3 business days
Schemes that are only offered to institutional investors are _____ schemes.
In an offer to institutional investors, ____ and ____ is not required.
NOT restricted schemes
prospectus and information memorandum
Restricted schemes are those ____ (3 types of investors)
offered only to accredited investors, other relevant persons, and those who subscribe with SGD 200,000 or more per transaction
Alternative Assets ETFs focus on alternative assets, mainly _____
These ETFs provide a ____for _____
listed hedge funds
secondary market for hedge funds that are less liquid
ETNs are ____ issued by ____ and are not subject to _____
debt securities
banks
diversification requirement
ETC are _____ issued by ____.
ETC is a type of ____ backed by _____
debt securities issued by banks
ETN backed by securities or physical assets, i.e. gold
The bid-offer spread is impacted, among other things, by _____
the cost of hedging
The _____ framework can be used to evaluate country risk.
PESTLE
___ risk accentuates the transactional risk
Currency Risk
Issuer risk is a part of ______ risk
counterparty
Structured warrant holders re exposed to ____ risks
issuer risk and the credit rating risk of the issuing bank
What are three main types of risks involved in trading?
Market risks
Credit risks
Settlement risks
What’s DV01?
Dollar value per basis point is the dollar change in price with respect to the yield of a fixed-income security or a swap.
Modified duration measures ____
Modified duration increases with ______
the sensitivity of the bond price to changes in interest rate
increase in time to maturity
fall in coupon rates
fall in bond yields
A VaR statistic has three components, namely ____
- relatively high level of confidence, usually 95% or 99%
- a time period
- an estimate of investment loss in dollars or in percentage
In the case of a classic structured product: Equity-Linked Structured Note
The discount sum =
$100 - PV
PV = $100/(1+r)*T
PV = Present Value
r = rate of interest
T = number of periods
____ options can be used to reduce the maturity term and holding period in order to mitigate investment risks.
Exotic options such as “up-and-out” barrier call option
The negative effects of mark-to-market valuation are _____ for auto-callable structured products if _____
avoided
if the product is redeemed due to the call event
Reverse Convertibles consist of ____
The upside is _____
The downside is _____
A low-risk and a high-risk component and is suitable for those investors who are looking for higher yield
A zero-coupon bond and a short put option is used.
The upside is capped at the premium from the option and the discount sum from the zero-coupon bond.
However, the downside risk is significant as far as the short-put option is concerned.
The discount certificate is made up of ____
A long position zero-strike call option and a short call position on a given stock that is either ATM or OTM
The discount certificate’s structure is governed by ______ model based on the _____ principal.
options pricing model based on the put-call parity principal
The put-call parity principal of a discounted certificate can be represented as ____
Put-call parity: C + PV (X) = S + P
Bond (Note) + Short Put (Reverse convertible) = Long Call (Zero Strike) + Short Call (Discount Certificate)
There’s ____ difference in the secondary trading of ETFs on exchange for physical and swap-based ETFs.
NO
Primary liquidity of ETFs relates to ______
the creation and redemption process
The creation/redemption process in an ETF can be done ______
in-kind with the underlying securities
In the context of risks associated with structured products, the structured product is considered the issuer’s _____
Currency risk can be a type of ____ risk
There’s default risk associated with ______ risk
liability
return
principal risk and return risk
Shock absorbers _____ when markets experience significant volatility.
It ____ halt trading completely.
SLOW DOWN trading
DOES NOT
Market (systematic) risk refers to _____.
Market risk is _____ as counterparty risk, which is a ____ risk
Price movements in the financial markets and its influence on the asset’s price
NOT the same
product-specific risk
Which type of bonds are less sensitive to interest rate?
Short-term bonds with high coupons and high initial yields
The ISDA 1 classifies credit default as ____ (6 types)
Bankruptcy
Obligation Acceleration
Obligation Default
Failure to Pay
Repudiation/Moratorium
Restructuring
A pay-fixed swap options protects the investor against _____
If the structured product involves shorting an interest rate put swaption, investors are liable to ____
The pay-fixed swaption buyer will exercise the swaption when _____
The losses to the swaption SELLER are ____and dependent on ____
interest rate increase
Pay out a FLOATING rate when the option is exercised by the buyer.
when the market rate is higher than the strike rate.
unlimited and dependent on how high the floating rate is when the option is exercised.
If the structured product involves shorting an interest rate call swaption, investors of the structured product are liable to _____
pay out a fixed rate when the option is exercised (i.e. selling protection against decrease in interest rates) while receiving the floating rate in the swap.
In normal cases, the loss to swaption seller is limited to the fixed rate when the floating rate declines to zero when the option is exercised by the swaption buyer.
In rare market conditions where negative interest rates occur, the investor may have pay the floating interest leg of the swaption as well.
In the case of Receive-Fixed Interest Rate Call Swaption, if the investor is the swaption seller, exercise of the option implies _____
The investor pays ____ and receives ____
Investor’s loss is ______
selling protection against decrease in interest rates.
PAYs fixed rate and Receives a floating rate.
Investor’s loss is limited to a predetermined FIXED rate when option is exercised.
If the value of the call option in a callable bond increases, the value of the callable bond will ____ because _____
decrease
the bond holders will have sold a call option component to the issuer
The Modified Duration measures _____.
A higher modified duration implies ____
A modified duration of 5 means _____
The bond price’s sensitivity to changes in interest rate.
A higher modified duration implies that a security is more interest rate sensitive.
If the YTM of Bond decrease by 1%, its value will increase by 5%
What’s “duration” of the bond?
It’s the weighted average time to maturity of a bond in present value terms
For fixed income securities, _____ is a better measure for interest rate risk as it reflects _____
DV01 (Dollar value per basis point)
the dollar, rather than the percentage change, in price with respect to the yield of a fixed-income security or a swap.
VaR is more widely used for ____
VaR reflects ____
measuring risk for a specified portfolio of financial assets
the potential loss amount
A higher modified duration implies that a security is more interest rate sensitive. It reflects ______
the greater risks of longer-dated exposures compared to shorter-dated ones.
Open contracts limit is determined after studying the contract’s ______ and _____.
More volatile contracts are subject to a _____ open contract limit.
Different open contracts limit can be set for _____ trades
volatility and estimating the expected maximum LOSS
smaller
outright and spread trades
Outright and spread trades can have ___ open contract limit
Different
If the 1-day 99% VaR of a portfolio is $100,000, it means
the portfolio is 1% = 100% - 99% likely to fall by more than $100,000 over a 1-day period
Maximum loss limit is set for each trader/trading group in terms of _____ maximum losses. (frequency)
weekly and monthly
By setting a lower VaR, the portfolio size has to be ____ and/or _____ have to be reduced.
Lower
Highly correlated risks
What’re two methods to restrict gamma?
- Limiting the absolute change in DELTA
- Applying risk tolerance amounts expressed as maximum loss, both for a given moment in the spot price.
Delta (change in the asset price) limits are normally set in terms of ______ currency amount
USD or the local currency amount
Theta is limited by ______
potential loss over a specified period, such as a 1-day period.
Gamma, vega and theta are sometimes controlled together by _____
setting the maximum loss for all THREE COMBINED
In an equity-linked structured note having a zero-coupon bond and a long position in a call option, the participation rate can be ______ than 100%.
This’s becasue ______
less than, equal to or more than
The discount sum can be less than, equal to, or more than the call option price.
The barrier level in a up & out knock-out equity option is calculated as _____
a pre-decided percentage above the strike price of the option
The recurring management and administration fees in an Equity-Linked Structured Fund ranges between _____
1%~2%
The upfront sales commission in an Equity-Linked Structured Fund ranges between _____
3%~5%
The yield from a Reverse Convertibles comprised of a zero-coupon bond and a short put is sum of ______
Sum of the accretion of interest from the bond and the premium income
For an Equity Discount Certificate, the premium received from the sale of the calls _____
partially offsets the amount paid for purchase of a zero-strike call option
For an Equity Discount Certificate, the amount paid for purchase of a zero-strike call option is partially offset by _____
the premium received from the sale of the calls
For an Equity Discount Certificate, the amount paid by an investor is ____ than that paid for a similar Reverse Convertible.
less
At maturity of an Equity Discount Certificate, ____ is received.
Face value of the certificate
The equity discount certificate consists of ______.
The upside pay-out of discount certificate is _____ as ______.
On the downside, the _____ component of the discount certificate exposes the investor to ______ with ______ at risk.
A long position zero-strike call option and a short call position on given stock with a strike that is ATM or OTM.
Capped as the product gets knocked out when the asset price rises and breaches the barrier level.
short call; FULL adverse movement of the stock price, with the entire amount of the investment capital at risk
Exercise of warrants ____ the company earnings per share
dilute
Commodity warrant structured and marketed by _____ (institutions) are generally _____ settled.
Banks
cash
The demand for structured products has grown due to ____ interest rate environment.
Low
What is the meaning of cushion in the context of a structured fund?
The proportion of the fund’s assets that can be exposed to risk without risking the preservation feature.
