Foreign Exchange Certification Quiz: Trivia!

30 Questions | Total Attempts: 54

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Foreign Exchange Certification Quiz: Trivia!

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Questions and Answers
  • 1. 
    A US-based client with receivables in EUR says he believes the EUR/USD rate will move up but that he must hedge the exposure. As an alternative to a forward you suggest, he considers using a Forward Extra.  You explain this is because:
    • A. 

      The forward extra will still give him protection at the Forward Rate but allow him to benefit should EUR/USD in fact move in his favour

    • B. 

      The forward extra will give him protection at slightly worse rate than the Forward but potentially allow him to benefit from a significant move of EUR/USD in his favour

    • C. 

      Give him protection at a slightly better rate than the forward rate and allow him to benefit from a EUR/USD move in his favour

  • 2. 
    You are pricing up a zero cost participating forward on USD/CHF to enable you to sell USD.  The 1-year forward rate for USD/CHF is currently 0.91.  The Notional on the put leg is 10m and on the call leg is 20m. Will the forward rate for this structure be higher or lower than the relevant one-year forward rate?
    • A. 

      It will be lower

    • B. 

      It will be higher

    • C. 

      It is impossible to say as it depends on the level of implied volatility

  • 3. 
    An investor seeks a better return than the risk-free rate and is offered a DCD by his bank. He is a little confused about this type of deposit. You explain to him that:
    • A. 

      This is a capital-protected investment since the investor deposits money and buys an option. However the coupon is conditional on spot reaching a ceratin level

    • B. 

      This is not a capital-protected investment since the investor deposits money and sells an option. In any case the coupon is conditional on spot reaching a ceratin level

    • C. 

      This is a capital-protected investment since the investor deposits money and buys an option. In any case, the coupon is guaranteed.

    • D. 

      This is not a capital-protected investment since the investor deposits money and sells an option. In any case, the coupon is guaranteed.

  • 4. 
    Which of the following best describes the theoretical value (TV) shown for any vanilla option:
    • A. 

      The price achieved by plugging the historical volatility into Black and Scholes formula

    • B. 

      The price achieved by plugging the market volatility into Black and Scholes formula

    • C. 

      The price achieved by plugging the ‘at the money’ volatility into Black and Scholes formula

  • 5. 
    You are attempting to sell a customer a 1 year GBP/USD forward extra to enable him to buy GBP with a forward rate of 1.5500. The knock-in trigger on the put leg would be set at 1.4000. The customer is concerned with spot hitting the trigger level.  Which SD feature would be relevant to use in this case?
    • A. 

      Run the pricing table on this structure

    • B. 

      Backtest a 1 year one touch with a trigger at 1.4

    • C. 

      Check whether the one year forward rate is above or below 1.4

    • D. 

      Backtest the forward extra you have priced

  • 6. 
    Discussing the functionalities of the Risk Matrix features with a middle office prospect that monitors an FX portfolio of 10 different currency pairs, you explain to him that a key benefit to him would be the ability to...
    • A. 

      Compare the performance of his portfolio to the performance of forwards

    • B. 

      Show the worse case scenario for his entire portfolio with a confidence level of 95%

    • C. 

      Assess potential losses on his position based on simultaneous shifts of spot and volatility

    • D. 

      View a matrix of the influence of spot, time and interest rate changes on his portfolio

  • 7. 
    A sales person in a bank uses SD's Find Strategy tool to look for a ZERO COST strategy. Which of the following strategies will not be suggested by the system?
    • A. 

      Risk Reversal

    • B. 

      Participating Forward

    • C. 

      Forward Extra

    • D. 

      Straddle

  • 8. 
    Before showing the system to a new prospect at a bank, he tells you that he typically uses vanillas and occasionally barrier options.  He tells you that in the current climate, clients have stopped using leverage to enhance the performance of hedges. What does he mean by leverage in this context?
    • A. 

      Using digital options, with binary payouts, in order to improve the strike attached to the protection leg of strategies.

    • B. 

      Options have leveraged payoffs, which by definition, offer the client potential protection levels at preferable rates to simply forwards.

    • C. 

      Creating strategies where the sell (funding leg) has a greater notional than the buy (protection leg) in order to achieve more attractive strike levels.

  • 9. 
    A US-based company with 10m Euro worth of sales enters into a forward extra with a forward rate of $1.25 and a barrier of $1.50 (given the underlying forward rate of $1.30). Which is the best-case scenario for the company from the following scenarios?
    • A. 

      The market finishes at $1.20 and they exercise their option when it is ITM and sell at $1.30.

    • B. 

      The market rises to $1.45 on expiry without touching $1.50 and the company has no obligation from the forward extra.

    • C. 

      The market rises to $1.60 and finishes at $1.49 on expiry.

  • 10. 
    A new customer of SD, who works on the corporate sales desk of a bank, wants to use SDX-FX to price zero cost structures with his sales margin built-in. He asks you to explain to him how to do this with a risk reversal to ensure he makes a sales margin of $5,000. You explain to him that the best way to do this is to:
    • A. 

      Use the solver to solve for the financing leg strike of the risk reversal for the ask price of -$5000

    • B. 

      Use the solver to solve for the financing leg strike of the risk reversal for the bid price of -$5000

    • C. 

      Generate the pricing table and find the parameters that make the price $5,000

    • D. 

      It is impossible to tell him how to do this as he is pricing a zero cost structure

  • 11. 
    A trader who does a lot of EUR/USD options wants to use his own vols for this currency pair. You tell him:
    • A. 

      It is possible to upload his own data. The system will then adjust volatility data for other currency pairs based on what he uploaded for EUR/USD.

    • B. 

      It is possible to upload his own data for EUR/USD. The system will use SD data for other currency pairs.

    • C. 

      This is not possible as SD's main advantage is that we show non-biased independent market data.

  • 12. 
    Which of these USD/JPY options is the most expensive: Forward Rate = 80 Notional = 1m Strike = 85
    • A. 

      USD put JPY call, expiry one year

    • B. 

      USD call JPY put, expiry one year

    • C. 

      USD call JPY put, expiry one month

    • D. 

      USD put JPY call, expiry three months

  • 13. 
    An option will always be cheaper if priced using historical volatility rather than implied volatility - Is this statement by a client true or false?
    • A. 

      True

    • B. 

      False

  • 14. 
    If a US Company with 10m Euros worth of receivables (sales) to collect in one year's time enters into an option contract where they buy a EUR Put with a strike of $1.25 at a cost of $0.06 per Euro. Which of the following is true if on expiry the EUR/USD finishes at $1.23:
    • A. 

      They will exercise their option and receive $12.5m.

    • B. 

      They will not exercise their option since it will not breakeven.

    • C. 

      They will exercise their option and receive $11.9m.

  • 15. 
    A corporate price up a risk reversal in SD that was offered to them at zero cost with a notional of $1M. They see that the market value of the structure is -$10,000. What does this value mean?   
    • A. 

      The corporate should receive 10K but in fact the bank is keeping this as a sales margin

    • B. 

      The structure actually costs $10k but because of the CVA adjustment they don’t need to pay anything

    • C. 

      $10k is a negligible amount on this size of notional therefore requiring no payment by the corporate

  • 16. 
    Japanese Exporters prefer a weak Yen over a strong Yen.
    • A. 

      True

    • B. 

      False

  • 17. 
    A call option is an American style when it can be exercised ...
    • A. 

      Only on the expiry date

    • B. 

      Any time from the trade date to expiry

    • C. 

      When the expiry is set to 10:00 AM New York time

    • D. 

      Only by an American bank with clearinghouse acceptance

  • 18. 
    A company based in Europe comes to you for advice on what to do with the $10m USD they will receive in one year from a large sale in US.  Which of the following best describes the company’s position:
    • A. 

      They are NOT exposed since the amount of their US sales is known in advance

    • B. 

      They are NOT exposed since the Euro forward rate is higher than the spot rate and therefore the Euro is expected to rise

    • C. 

      They would like protection against the Euro weakening against the USD

    • D. 

      They would like protection against the Euro strengthening against the USD

  • 19. 
    When you price up an option on GBP/THB in the single options page and the ATM vol turns pink. Why is this?
    • A. 

      It means the volatility is cross-calculated

    • B. 

      It means the volatility is stale

    • C. 

      It means the volatility is about to change

    • D. 

      It means the volatility is from one source

  • 20. 
    Which of the following represents a situation where the price of the call option you buy equals the price of the put option you sell?
    • A. 

      A. The strike of the options is the prevailing forward rate

    • B. 

      B. Zero cost risk reversal

    • C. 

      C. Risk reversal with total premium of -10,000

    • D. 

      D. Both A & B

  • 21. 
    The pricing of a quanto option takes into account:
    • A. 

      The market data of the Quanto's underlying currency pair

    • B. 

      The market data of the currency pair created as a result of the payout currency

    • C. 

      The correlation between the underlying currency pair and the currency pair created as a result of the payout currency

    • D. 

      All of the above

  • 22. 
    A vanilla option cannot be priced without a notional.
    • A. 

      True

    • B. 

      False

  • 23. 
    As an employee of SD, your family always think you are a master of derivatives and ask lots of questions. While going through one of your lengthy explanations of volatility and vega, you try and explain to them about the relationship between Time Value and the value of an option. Which of the following options will have the highest Time Value?
    • A. 

      Short dated, ATM option.

    • B. 

      Long dated, ATM option.

    • C. 

      Long dated, deeply OTM option.

    • D. 

      Long dated, deeply ITM option.

  • 24. 
    While standing in the elevator with the head of trading on the way to a meeting room, he mumbles that the EUR/USD has moved 'a big figure' in the first hour of trading. If the opening EUR/USD rate was 1.3250, which of the following would represent a move of one big figure?
    • A. 

      1.4250

    • B. 

      1.3350

    • C. 

      1.3260

    • D. 

      1.3251

  • 25. 
    A trader believes there will be a large movement in Spot (larger then 25d) but is uncertain as to the direction. Identify a strategy the trader can follow...
    • A. 

      Buy a call and sell a put both at 25d, thus creating a 25d risk reversal

    • B. 

      Buy a strangle

    • C. 

      Sell a strangle

    • D. 

      Sell a double-one-touch (DOT) with triggers at 25d call and 25d put

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