Axa M9A Mock Exam 6

Regulatory risk refers to the potential for changes in legislation or regulations that can impact the terms and conditions of a financial contract. This risk arises from the possibility of new laws or regulations being introduced, existing ones being amended, or the interpretation of regulations being altered. These changes can affect the profitability, costs, and overall viability of the financial contract. Therefore, the given correct answer, "Regulatory risk," accurately describes the situation where legislation or regulations may change during the life of a financial contract.

A portfolio bond refers to a type of investment that combines a portfolio of investments with an insurance element. It allows investors to benefit from both the investment returns and the insurance protection. This type of investment is often used by high-net-worth individuals who want to diversify their investments while also ensuring their assets are protected. The other options listed, such as term insurance, unit trust, and equity bond, do not specifically refer to investments with an insurance element, making them incorrect choices.

Hedgers seek to lock in prices in order to obtain protection from rising prices. This means that they enter into futures contracts to secure a fixed price for a commodity or financial instrument, protecting themselves from potential price increases in the future. This strategy allows hedgers to manage their price risk and ensure stability in their operations or investments.

The correct answer is "The use of financial derivatives." This means that all the various structured products have in common the fact that they utilize financial derivatives. Financial derivatives are instruments that derive their value from an underlying asset or group of assets. They are commonly used in structured products to provide investors with exposure to different types of assets or to create specific investment strategies. Therefore, the use of financial derivatives is a common characteristic among structured products.

Diversification is one of the solutions to investment concentration risk. This strategy involves spreading investments across different asset classes, industries, and geographic regions to reduce the impact of any single investment on the overall portfolio. By diversifying, investors can potentially minimize the risk associated with a particular investment or sector, as losses in one area may be offset by gains in another. This approach helps to protect against the potential negative impact of concentrated investments and can potentially improve overall portfolio performance.

An European style option allows the investor to exercise the option only on the expiry date. This means that the investor cannot exercise the option before the expiry date. In contrast, American style options allow the investor to exercise the option at any time before the expiry date. Therefore, the correct answer is European style option.

Structured products are a type of investment that combines different financial instruments, such as bonds, stocks, and derivatives, to create a customized investment product. These products typically use financial derivatives, such as options or swaps, to provide exposure to underlying assets or market indices. By using financial derivatives, structured products can offer investors unique risk and return profiles that may not be available through traditional investment options. Therefore, the correct answer is that structured products use financial derivatives.

The forward price for a contract is the sum of the spot price at the time of transaction and the cost of carry. The cost of carry includes expenses such as storage costs, financing costs, and dividends or interest that could have been earned on the underlying asset. This reflects the additional costs associated with holding the asset until the forward contract's expiration date.

The counterparty's inability to meet contractual obligations is known as default. Default occurs when a party fails to fulfill their obligations, such as making payments or delivering goods or services, as agreed upon in a contract. This can happen due to various reasons, such as financial difficulties or bankruptcy. In such cases, the counterparty is considered to be in default, indicating a breach of contract.

Structured products are unsecured debt securities of the issuer. This means that they are financial instruments that represent a promise by the issuer to repay the principal amount borrowed, along with any interest or other payments, without any specific collateral backing the debt. This distinguishes them from secured debt securities, which are backed by specific assets of the issuer.

A fund report is not required at the point-of-sale for a structured ILP. The other options, such as the product highlights sheet, benefit illustration, and product summary, are typically required to be provided to the customer at the point-of-sale to provide them with important information about the structured ILP. However, a fund report, which provides detailed information about the performance and composition of the funds within the ILP, is not typically required to be provided at the point-of-sale.

Portfolio rebalancing is the process of adjusting the allocation of assets in a portfolio to maintain the desired level of risk exposure. By periodically rebalancing the portfolio, investors can ensure that their risk exposure remains in line with their original investment strategy. This is important because market fluctuations can cause the value of different assets to change over time, potentially altering the risk profile of the portfolio. Therefore, regularly rebalancing the portfolio helps to mitigate the risk and maintain the desired level of risk exposure.

Mark-to-market is the daily process of revaluing outstanding positions to the daily settlement price at the end of each trading day. This means that at the end of each trading day, the value of the positions is adjusted to reflect the current market price. This is important for accurate accounting and risk management purposes, as it ensures that the positions are valued at their current market value. Revaluing positions at the end of the trading day allows for timely and accurate reporting of profits and losses.

A structured product that is designed to be linked to interest rates such as Libor or Euribor is known as an interest-rate linked product. This means that the returns or payments on the product will be determined by the movements in these interest rates.

A forward start option is an option that becomes effective at a future date. It allows the holder to enter into a contract at a predetermined price, but the contract does not start until a specified time in the future. This is different from other options, such as Asian options, compound options, and binary options, which do not have a delayed start date. Therefore, the correct answer is forward start option.

A highly geared structured product increases the potential rate of return of an investment asset. This means that it has the potential to generate higher returns compared to other investment options.

If Ms Tan chooses to redeem her structured ILP early, she will most likely receive the initial capital amount that she invested, along with any accrued payout that has been accumulated over time. This means that she will receive the original $10,000 that she invested, plus any additional earnings or returns that have been generated by the ILP. The total amount she will receive will be the initial capital with the accrued payout.

Portfolio rebalancing is the process of adjusting the weights of assets in a portfolio to bring it back to its original level of risk exposure. This is typically done by selling assets that have become overweighted and buying assets that have become underweighted. By doing so, the portfolio returns to its desired level of risk and ensures that the investor's goals and risk tolerance are maintained. Rebalancing helps to reduce the overall risk of the portfolio by preventing it from becoming too heavily concentrated in certain assets or sectors.

Using securities with negative correlation is a common method to reduce market risks. Negative correlation means that when one security goes up in value, the other security tends to go down in value. By diversifying a portfolio with securities that have negative correlation, the overall risk is reduced because losses in one security can be offset by gains in another. This helps to protect against market downturns and volatility.

A chooser option is an option that allows the investor to choose whether it will become a call or a put by a specified choice date. This means that the investor has the flexibility to decide which type of option they want to exercise based on market conditions or their own investment strategy. It gives the investor more control and adaptability compared to other types of options such as Asian, forward-start, or binary options.

Investors may wish to invest in structured ILPs because they provide access to bulky investments. This means that investors can invest in large and diversified portfolios through structured ILPs, which may not be possible with other investment options. This allows investors to benefit from economies of scale and potentially higher returns.

Legal risk refers to the potential for financial loss or harm that may arise from violations of laws, regulations, or contracts. The statement "Change of regulations on selling of structured products" best describes legal risk as it highlights the potential risk associated with changes in regulations specifically related to the selling of structured products. This suggests that if there are changes in regulations governing the sale of these products, it could lead to legal issues and potential financial losses for the parties involved.

The maturity value of the zero-coupon bond must be $100 in order to return the principal to the investor. This is because the structured product manager purchased the bond at a discount, paying only $80 for every $100 invested. Therefore, in order to return the full principal amount of $100 to the investor at maturity, the maturity value of the bond must also be $100.

When investments are converted back to local currency upon maturity, there is a foreign exchange risk. This means that the value of the investment may be affected by fluctuations in the exchange rate between the foreign currency and the local currency. This risk arises because the value of the investment may decrease if the local currency strengthens against the foreign currency, or increase if the local currency weakens against the foreign currency.

The cost of carry refers to the cost associated with holding a financial instrument, such as a forward contract. In this case, the forward contract was purchased at a higher price (S$50,000) than the current spot price (S$45,000). This indicates that there is a premium of S$5,000, as the buyer paid more than the current value of the contract. Therefore, the correct answer is "Premium of S$5,000."

A compound option is a type of option where the holder receives another option at expiry. In this case, the option-holder receives another option at expiry, which aligns with the definition of a compound option. Therefore, the correct answer is compound option.

Collective Investment Schemes refer to investment vehicles where multiple investors pool their money together to invest in a diversified portfolio of securities. Structured funds are one such type of Collective Investment Scheme where the investments are structured based on certain predetermined criteria or strategies. Structured deposits and reverse convertible bonds are not considered Collective Investment Schemes as they do not involve pooling of funds from multiple investors.

A put warrant is said to be in-the-money when the strike price (the price at which the warrant can be exercised) is higher than the current market price. This means that the holder of the put warrant has the right to sell the underlying asset at a higher price than its current value, making it a profitable option.

A bear straddle is an option strategy that involves buying both a put option and a call option with the same strike price and expiration date. This strategy is used when the investor is uncertain about the direction of the stock price. By buying both a put and a call option, the investor can profit from a significant move in either direction. If the stock price increases, the call option will generate a profit, while if the stock price decreases, the put option will generate a profit. This strategy allows the investor to potentially profit regardless of the stock price movement.

A binary option is a type of financial option where the payoff is either a fixed amount or nothing at all. This means that if the option expires in-the-money, the investor receives a predetermined amount, but if it expires out-of-the-money, the investor receives nothing. Therefore, a binary option best fits the description provided in the question.

Listed structured products have the main advantage of liquidity compared to other structured products. This means that they can be easily bought and sold on a public exchange, providing investors with the ability to enter or exit their positions quickly. This is beneficial as it allows investors to access their capital when needed and provides flexibility in managing their investments. In contrast, other structured products may have limited liquidity, making it more difficult for investors to sell or redeem their investments in a timely manner.

not-available-via-ai

The correct answer is "None of the above". This means that all of the strategies mentioned in the options are bullish strategies. Long calls, covered calls, protective puts, and selling naked puts are all strategies that are used by investors who believe that the price of the underlying asset will increase.

A bond is a financial instrument that provides regular coupon payments and repayment of the par value at maturity. It is a type of debt security where the issuer borrows funds from investors and promises to pay periodic interest payments (coupons) and return the principal amount (par value) when the bond matures. Unlike equity, which represents ownership in a company, a bond represents a loan made by an investor to the issuer. Therefore, a bond is the correct answer as it aligns with the characteristics mentioned in the question.

A put warrant gives the investor the right to sell the underlying security at a specified price within a specific time period. This means that the investor has the option to sell the security, regardless of its current market price. In contrast, a call option gives the investor the right to buy the underlying security, and European and American style options and warrants refer to the exercise style of the option or warrant. Therefore, the correct answer is put warrant.

The investor initially invested S$100,000 when NZD $1 was worth S$1.40. This means that the investor initially bought NZD $71,428.57 (100,000/1.40) with S$100,000.
The NZD has since depreciated against the S$ and is now worth only S$1.20. This means that the investor's NZD $71,428.57 is now worth S$85,714.29 (71,428.57 x 1.20).
The NZD investment has appreciated by 10% in NZD terms, which means that the investor's NZD $71,428.57 has increased by 10% to NZD $78,571.43 (71,428.57 x 1.10).
Converting the NZD $78,571.43 back to S$ using the current exchange rate of S$1.20, the investor's NZD investment is now worth S$94,285.71 (78,571.43 x 1.20).
Therefore, the investor's net loss on the investment is S$5,714.29 (100,000 - 94,285.71), which is a loss of 6% of the initial investment.

The correct answer is "The desired investment freedom is made available to investors." This option is the only one that does not contribute to the delivery of returns to investors. The other options, such as having an appropriate anticipated market view, having a strategy or structure to capture the market view, and having reasonable pricing on the structure, all play a role in delivering returns to investors.

A discount certificate is not a participation product because it does not provide the holder with a share in the profits or performance of an underlying asset or index. Tracker certificates, bonus certificates, and airbag certificates are all examples of participation products that allow investors to participate in the returns of an underlying asset or index. However, a discount certificate typically offers a discount on the purchase price of a specific product or service, rather than providing a direct participation in the financial markets.

A reverse convertible bond consists of a bond and a put option. This means that the holder of the bond has the right to sell the bond back to the issuer at a predetermined price, known as the strike price, before the bond's maturity date. This put option provides the holder with downside protection, as they can exercise the option if the bond's value decreases.

As a seller of a call option, you have an obligation to sell the underlying assets. This means that if the buyer of the call option exercises their right to buy the underlying assets, you are obligated to sell them at the agreed upon price, regardless of the current market price.

Portfolio bonds are not lifestyle-policies, conventional bonds, or a portfolio of investments with a high insurance element. Therefore, the correct answer is not "all of the above".

The correct answer is that settlement of forwards occurs on the delivery date whereas futures are marked-to-market on a daily basis. This means that in a forward contract, the parties involved agree to exchange the underlying asset at a specific date in the future, while in a futures contract, the contract is continuously adjusted based on the daily changes in the value of the underlying asset.

A soft dollar commission refers to the practice of using client funds to pay for services other than traditional brokerage services. Research services, economic analyses, and entertainment expenses are examples of expenses that can be covered by soft dollar commissions. However, a management fee is a separate fee charged by investment managers for their services and is not considered a soft dollar commission.

Factors such as interest rates, inflation, exchange rate, and commodity prices can cause price fluctuations, which directly affect a company's profitability. When these factors change, they can impact the cost of production, the price of goods and services, and the demand for products. This, in turn, affects a company's revenue and expenses, ultimately influencing its profitability. Therefore, the correct answer is profitability.

Leverage is a strategy that involves using borrowed money to increase the potential return on investment. It is commonly used in trading on margin, where investors borrow money from a broker to buy securities. It is also used in the use of derivatives, which are financial instruments that derive their value from an underlying asset. Borrowing money to trade is another form of leverage. However, investing heavily in equities does not necessarily involve borrowing money or using derivatives, so it is not an example of leverage.

The hedge ratio is calculated by dividing the value of the portfolio by the product of the index and the multiplier. In this case, the value of the portfolio is S$1 million, the index is 1,600 points, and the multiplier is S$10 per point. Therefore, the hedge ratio is 1,000,000 / (1,600 * 10) = 62.5 contracts. Since the answer choices are given in whole numbers, the closest whole number to 62.5 is 67 contracts, which is the correct answer.

In the worst case scenario, the investor will receive a maturity amount of $55,000. This is because the investor is guaranteed a return of 10% at the end of 5 years, which amounts to $5,000. Additionally, if all 6 underlying stocks remain at 90% of their initial share price, the investor will receive a return of 5% per year. Since the investment is for 10 years, the total return from this feature will be $25,000. Therefore, the total maturity amount will be the initial investment of $50,000 plus the guaranteed return of $5,000 and the return from the stocks of $25,000, which equals $55,000.

This fund pays out a fixed percentage of the initial unit price annually, indicating that it provides regular payments. The fact that it is 100% capital protected on maturity suggests that it is a conservative investment option. Therefore, the best description for this fund is an ILP providing regular payments.

Options are not traded on a margin because they are already leveraged financial instruments. When an investor purchases an options contract, they have the right but not the obligation to buy or sell an underlying asset at a specific price within a certain time frame. Since options already provide leverage, there is no need for margin trading. Margin trading is typically used in futures and contract for differences (CFDs) trading, where investors borrow funds from a broker to trade larger positions than their account balance allows.

Based on the given information, the investor's least concern would be leverage risk. Leverage risk refers to the risk of using borrowed funds to invest, which can amplify both gains and losses. However, in this case, there is no mention of borrowing or leverage being used in the structured ILP. Therefore, leverage risk would be of least concern to the investor.