Structured Products Quiz Questions

Hedgers participate in the future market to achieve protection against unfavourable price changes. They use futures contracts to hedge their positions in the underlying asset. By taking opposite positions in the futures market, they can offset potential losses in the cash market. This allows them to protect themselves from adverse price movements and manage their risk effectively.

The holder of a call option has the right, but not the obligation, to buy the underlying asset at a specified price (exercise price) within a specified period of time. This means that the holder has the choice to exercise the option and buy the asset if it is profitable to do so. The other statements are not true for call options. The seller of the call option receives the premium, not pays it. The buyer of the call option has limited downside, as they can only lose the premium paid for the option. The exercise price is predetermined and decided by the option contract, not by the seller.

When an institution does not have enough cash to meet its cash flow obligations, it is experiencing a liquidity problem. Liquidity refers to the ability of an institution to quickly convert its assets into cash in order to meet its short-term financial obligations. In this scenario, the institution may struggle to pay its bills, loans, or other financial commitments due to a lack of available cash. This can lead to financial difficulties and potentially impact the institution's operations and overall financial health.

John is bearish about the market because he has taken a put option. A put option gives the holder the right to sell a specific asset at a predetermined price within a certain timeframe. This indicates that John believes the market price of the asset will decrease in the future, as he wants the ability to sell it at a higher price than the market value. This aligns with a bearish outlook, where an individual expects the market to decline.

The combination of a synthetic bond and a derivative is the most risky investment because both synthetic bonds and derivatives are complex financial instruments that involve a higher level of risk compared to conventional bonds and insurance. Synthetic bonds are created by combining different financial instruments, such as options or swaps, to mimic the characteristics of a bond. Derivatives, on the other hand, derive their value from an underlying asset and can be highly leveraged and speculative. Therefore, the combination of these two instruments increases the overall risk of the investment.

When someone is bullish about the market, it means they have a positive outlook and believe that the market will go up. In this scenario, they can leverage their position by using a long call strategy. A long call involves buying a call option, which gives the holder the right to buy the underlying asset (in this case, stocks) at a specified price (strike price) within a certain period of time. If the market goes up, the value of the call option increases, allowing the investor to profit from the price difference.

Investors of structured products may face counterparty risks, which means that the counterparty may fail to meet its contractual obligations to the issuers. This implies that the party on the other side of the trade may not fulfill their end of the agreement, such as making payments or delivering the agreed-upon assets. This can result in financial losses for the investors. It is important for investors to assess the counterparty's creditworthiness and financial stability before engaging in structured product investments.

A speculator is someone who engages in buying and selling investments with the intention of making a profit from price fluctuations. This means that they may buy when prices are low and sell when prices are high, or they may even sell first and then buy back later at a lower price. In either case, the goal is to profit from both falling and rising prices.

A non-standardized contract refers to a contract that is tailored to the specific needs and requirements of the parties involved, rather than following a standardized format or terms. In this case, a forward contract traded over the counter would be considered non-standardized as it is negotiated directly between the buyer and seller, allowing them to customize the terms to suit their individual circumstances. On the other hand, commodity future contracts and financial future contracts are standardized contracts that follow predetermined terms and conditions set by the exchange.

The strike price of the put option is higher than the market price, indicating that the option is out-of-the-money. In this case, exercising the put option would result in a loss as the market price is higher than the strike price.

James can adopt the Bull straddle strategy because it allows him to profit from a large movement in the price of gold, regardless of whether it goes up or down. This strategy involves buying both a call option and a put option with the same strike price and expiration date. If the price of gold increases significantly, James can exercise the call option and profit from the price increase. If the price of gold decreases significantly, James can exercise the put option and profit from the price decrease.

In the BEST possible market performance scenario, the investor will receive the Single Initial Capital of S$100,000 at maturity. In addition, they will receive a guaranteed 1% of the initial capital, which is S$1,000. Furthermore, they will receive a bonus payout of 3% of the initial capital amount, which is S$3,000, as the price of all 6 stocks has increased by 10% on maturity. Therefore, the total amount that the investor will receive at the end of the 3 years is S$100,000 + S$1,000 + S$3,000 = S$104,000.

All three structured products, bonds, and options have fixed maturity dates. This means that they all have a specified date on which they will mature or expire. This characteristic provides certainty and allows investors to plan their investments accordingly.

The number of investors for the underlying asset has the least impact on the price of derivatives. The price of derivatives is primarily influenced by factors such as the current spot price of the underlying asset, the market demand for the underlying asset, and the volatility of the underlying asset. The number of investors may have some impact on the overall demand for the derivatives, but it is not as significant as the other factors mentioned.

The correct answer is that the death benefit is more than the single premium invested. This means that if an individual invests a certain amount as a single premium in a Structure ILP, the death benefit that will be paid out in the event of their death will be greater than the amount they initially invested.

The role of a market maker is to ensure there is a seller and a buyer in the market. They facilitate the trading of securities by being willing to buy or sell at any given time. This helps to maintain liquidity in the market and ensures that there is always someone available to trade with. Market makers help to create a fair and efficient market by providing liquidity and narrowing the bid-ask spread.

Based on the given information, the most concerning risk for an investor would be credit risk. This is because the credit rating of Company Y is C, indicating a higher level of risk associated with the issuer's ability to repay the investment. The investor may be concerned about the possibility of default or the issuer's financial stability, which could result in a loss of capital.

Structure Investment-linked Life Insurance policies are suitable for buyers who are seeking capital appreciation with medium to high risk of losing the principal. This type of insurance policy allows individuals to invest their premiums in various investment funds, such as stocks or bonds. The policy value is linked to the performance of these funds, providing the potential for capital appreciation. However, there is also a risk of losing the principal investment if the funds perform poorly. Therefore, this type of policy is suitable for individuals who are willing to take on a higher level of risk in exchange for potential higher returns.

A structured ILP fund is governed by the Code on Collective Investment Scheme. This code provides regulations and guidelines for the operation and management of collective investment schemes, including ILP funds. It ensures that these funds are structured and managed in a way that protects the interests of investors and promotes transparency and accountability. The Banking Act, Company Act, and Deposit Insurance Act do not specifically apply to structured ILP funds.

The product is likely to comprise of Bond + Derivative + Insurance because it offers a death benefit and a maturity benefit, which are typical features of an insurance product. Additionally, the maturity payout is dependent on the performance of the stock market, indicating the presence of derivatives. The inclusion of bonds suggests a conservative investment approach, which is common in insurance products.

A reverse convertible bond is a type of structured product, meaning it is a complex financial instrument that is designed to meet specific investment objectives. Unlike conventional bonds, reverse convertible bonds have features that make them unique and different from traditional fixed income securities. These features may include embedded options, such as the ability to convert the bond into a predetermined number of shares of the underlying stock. Therefore, the statement that reverse convertible bonds are structured products is true.

A swap is a financial derivative contract in which two parties agree to exchange cash flows or ownership of certain assets. In the context of the given question, it is stated that a swap will not result in a change in ownership. This means that even though there may be a transfer of cash flows or other financial obligations, the ownership of the underlying assets or entities involved in the swap remains the same.

John's main concern is about getting his money when he needs it. This indicates that he is most concerned about liquidity risk. Liquidity risk refers to the risk of not being able to easily convert an investment into cash without incurring a significant loss. In this case, if John needs to access his investment in the structured product, he wants to ensure that he can do so without facing any difficulties or loss of value.

Structure deposits are considered as investment products because they offer potential high returns to investors. They are structured financial products that are designed to provide a specific return based on the performance of an underlying asset or index. These deposits are typically offered by financial institutions and are often marketed to investors who are seeking higher returns than traditional savings accounts or fixed deposits. However, it is important to note that structure deposits also carry higher risks compared to traditional deposits, as their returns are dependent on the performance of the underlying asset or index.

Long a call option is the most appropriate option strategy for an investor who wishes to use leverage and is bullish on a certain stock. When an investor buys a call option, they have the right to buy the underlying stock at a predetermined price (strike price) within a specified time period. This strategy allows the investor to control a larger number of shares with a smaller investment, providing leverage. If the stock price increases, the investor can exercise the option and profit from the price difference. However, if the stock price decreases, the investor's loss is limited to the premium paid for the option.

Jasmine will not receive the sum assured in the event of early redemption. The sum assured is the guaranteed amount that the investor will receive at the end of the investment period or in the event of early redemption. Since Jasmine is redeeming early, she will not receive the sum assured of $25,000.

The primary risk relating to the return component of a structured product is market risk. Market risk refers to the potential for the value of the underlying assets or the overall market to fluctuate, which can result in a loss of value for the structured product. This risk is inherent in any investment and is influenced by factors such as economic conditions, market trends, and geopolitical events. It is important for investors to assess and manage market risk when considering structured products.

The coefficient of correlation measures the strength and direction of the relationship between two variables. A coefficient of 0 indicates no correlation between the two securities, meaning that there is no linear relationship between their returns. In other words, the returns of one security do not depend on or predict the returns of the other security.

The Insurance Act provides policy owners with priority claim on insurance fund assets over general creditors in case of bankruptcy. This means that if an insurance company goes bankrupt, policy owners will have a higher priority in receiving their claims compared to other creditors. The Company Act and Code on CIS may have their own regulations and provisions, but they do not specifically address the priority claim of policy owners in the event of bankruptcy.

The additional amount required to restore the account is called the variation margin. This is the amount that must be deposited by the account holder to meet the minimum margin requirements set by the exchange or broker. It is necessary to cover any losses incurred in the account and ensure that the account remains in good standing.

Hoi Seng should adopt the bear straddle strategy. A straddle involves buying both a call option and a put option with the same strike price and expiration date. In this case, since Hoi Seng is not expecting the market to move much in either direction, a bear straddle would be more suitable. A bear straddle involves buying a put option and selling a call option, allowing the investor to profit if the stock price decreases or remains stagnant.

Structured Deposits offer some degree of capital guarantee, meaning that the investor is guaranteed to receive at least the initial amount invested at maturity. This makes them a relatively low-risk investment option compared to other products such as Portfolio Bonds, Structured Notes, and Traditional fixed income instruments, which may not offer the same level of capital protection.

A warrant is a financial instrument that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specific price within a specific time period. This means that the holder of a warrant has the choice to exercise their contractual rights or not. They are not obligated to fulfill the rights granted by the warrant. Therefore, the statement "The holder of warrant may choose whether or not to exercise their contractual rights" is true.

A Bonus Certificate provides a conditional return based on the performance of the underlying asset, with a potential "bonus" if certain conditions are met at maturity. However, it may include a knockout feature that comes into play at maturity.

An Airbag Certificate is designed to offer protection against price declines of the underlying asset, thus reducing the risk for the investor. It often has limited upside potential due to the built-in protective features.

The "Statement to Policy Owners" provides information about the number and value of units held at the end of the previous statement period. This information is important for policy owners to track the performance and value of their policy. It allows them to understand how their investments are performing and make informed decisions about their policy.

Participating products are unsecured debentures, meaning that they do not have any collateral or security backing them. This implies that if the issuer of the participating product defaults, the investor may not be able to recover their investment.

Michael can use the strategy of long puts to protect himself from the potential unlimited losses of selling a stock short. By purchasing long puts, he has the right to sell the stock at a predetermined price, known as the strike price, within a specified time frame. This allows him to profit from a decrease in the stock's price without the risk of unlimited losses.

A structured fund is described as having a trust structure. This means that the fund is set up as a trust, with a trustee holding and managing the assets on behalf of the investors. This structure provides legal protection for the assets and allows for efficient management and distribution of the fund's investments. The other options mentioned in the question, such as being distributed by the bank channel, having a factsheet as the main disclosure document, and having low administration costs, may or may not be true for a structured fund, but they do not specifically describe the fund's structure.

The offer price is the best description for the price at which units of a portfolio bond are subscribed. This is the price at which investors can buy units of the bond from the fund manager. It is also known as the "ask" price and is typically higher than the bid price, which is the price at which the fund manager is willing to buy back units from investors. Forward pricing refers to the pricing of units based on the next available net asset value, while historic pricing refers to pricing based on past net asset values.

Derivatives are financial instruments whose value is derived from an underlying asset, such as an index. When the index moves in one direction, derivatives can be used to track and profit from the opposite direction. This is because derivatives allow investors to take positions that are inversely related to the underlying asset. Therefore, if an index is moving in a certain direction, derivatives can be used to track and profit from the opposite direction, making them the correct answer in this case.

Asking the counterparty for margin is not a method to mitigate liquid risk of a portfolio bond. Margin refers to the collateral that an investor must deposit with a counterparty when engaging in certain financial transactions. While margin can help mitigate credit risk, it does not directly address the issue of liquid risk. Liquid risk refers to the possibility that an asset cannot be easily sold or converted into cash without a significant loss in value. Investing in publicly traded products, shares with high trading volume, and shares that are high in demand are all strategies that can help mitigate liquid risk by ensuring that the assets can be easily bought or sold in the market.

Portfolio Bond is different from Unit Trust because it offers a Dealing Account feature. This means that investors can actively buy and sell individual investments within the portfolio, providing more flexibility and control over their investments. Unit Trusts, on the other hand, do not typically offer this feature and instead pool investors' funds to invest in a diversified portfolio managed by a professional fund manager.

The statement "Investor of portfolio bond can choose to invest in funds outside the insurer's platform" is true. Portfolio bonds offer investors the flexibility to choose from a wide range of investment options, including funds outside the insurer's platform. Therefore, this statement is false.

Investing via the subsidiaries of the counterparty cannot be used to mitigate counterparty risk of a portfolio bond because the risk still remains with the parent company. The subsidiaries are essentially extensions of the parent company and any financial troubles or default by the parent company can still impact the subsidiaries. Therefore, this option does not provide a sufficient means of mitigating counterparty risk.

Issuer-specific risk refers to risks that are specific to a particular company and not related to external factors. In this case, the other options all describe risks that are specific to a particular issuer. The internal operations of Company A, the regulatory impact on the industry of Company B, and the downgrade in credit rating of Company C are all factors that directly affect the respective companies. However, the exchange rate of securities in which Company D is traded is not directly related to the operations or characteristics of the company itself, making it the least descriptive of an issuer-specific risk.

Callable structured products are financial instruments that give the issuer the right to redeem the product before its maturity date. This feature exposes investors to interest rate and reinvestment risks, as the issuer may choose to redeem the product at a time when interest rates are lower, resulting in lower reinvestment rates for the investor. Callable structured products are usually cheaper than straight, non-callable securities and pay higher coupons to compensate investors for the added risk. However, the statement that the price of a callable bond is more than the price of a call option is incorrect. Callable bonds are typically priced lower than non-callable bonds due to the added risk of early redemption.

Portfolio rebalancing refers to the process of adjusting the allocation of assets in a portfolio to maintain the desired level of risk and return. It can be done by fund managers as well as individual investors. This process can be carried out in various investment vehicles, including portfolio bonds. By rebalancing the portfolio, investors can ensure that their desired level of performance is not adversely affected by market fluctuations. Therefore, the given answer, "It can be done in portfolio bond," accurately describes one of the characteristics of portfolio rebalancing.

The given statement is false because portfolio rebalancing is not used across all structured ILP (Investment-Linked Policies). Portfolio rebalancing is a strategy used to maintain the original risk exposure by moving funds from outperforming investments to underperforming investments. It is typically done on a regular basis, such as monthly, quarterly, half yearly, or annually, but it is not used in all structured ILP.

If the Thai Baht appreciates against the SGD, it means that the Baht is stronger compared to the SGD. For a Thai restaurant in Singapore, this means it would cost more SGD to buy the same amount of raw materials from Thailand. However, earning less does not directly follow from the currency appreciation; it might increase costs but does not inherently reduce earnings. This part of the scenario is not necessarily true.

A call option is the right to buy a specified quantity of an underlying asset at a predetermined price within a specific time period. This statement is true, as a call option gives the holder the right, but not the obligation, to buy the underlying asset.