Axa M9A Mock Exam 6

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  • 1/50 Questions

    (C2/S6.1) 26 The legislation or regulations may change during the life of the financial contract. This is known as ___________.

    • Business risk
    • Concentration risk
    • Structural risk
    • Regulatory risk
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Risk Management Quizzes & Trivia
About This Quiz

AXA M9a Mock exam 6 assesses knowledge in finance, focusing on structured products, legal risks, investment strategies, and derivatives. This quiz is essential for learners aiming to understand complex financial instruments and risk management techniques.

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  • 2. 

    (C5/S1) 10 Portfolio of investments with an insurance element may be known as

    • Term insurance

    • Unit Trust

    • Portfolio bond

    • Equity Bond

    Correct Answer
    A. Portfolio bond
    Explanation
    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.

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  • 3. 

    (C3/S2.7) 37 The players in the futures market fall into 2 categories – hedgers and speculators. Which of the following statements regarding hedgers is CORRECT? Hedgers seek to:

    • Buy low and sell high

    • Lock in prices to obtain protection from rising prices

    • Benefit from price volatility

    • Sell to profit from a price decrease

    Correct Answer
    A. Lock in prices to obtain protection from rising prices
    Explanation
    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.

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  • 4. 

    (C2/S5.4) 4 One of the solutions to investment concentration risk is:

    • Dollar Cost Averaging

    • Drip-Feeding

    • Diversification

    • None of the above

    Correct Answer
    A. Diversification
    Explanation
    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.

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  • 5. 

    (C3/S3.2) 17 Which of the following allows the investor to exercise the option only on expiry date?

    • Asian option

    • Swaption

    • European style option

    • American style warrant

    Correct Answer
    A. European style option
    Explanation
    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.

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  • 6. 

    (C1/S4.1) 32 One similarity amongst the various structured products is that:

    • There is no lock-in period

    • There are guaranteed returns for the investor

    • There is high dividend income for the investor

    • They use financial derivatives

    Correct Answer
    A. They use financial derivatives
    Explanation
    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.

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  • 7. 

    (C1/S4) 1 One similarity among the various structured products is that there is:

    • No lock-in period

    • The use of financial derivatives

    • Guaranteed returns for the investors

    • High dividend income for the investors

    Correct Answer
    A. The use of financial derivatives
    Explanation
    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.

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  • 8. 

    (C2/S2) 45 The counterparty’s inability to meet contractual obligation is known as ________.

    • Option

    • Transaction

    • Default

    • Obligation

    Correct Answer
    A. Default
    Explanation
    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.

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  • 9. 

    C4/S6.2) 14 Which of the following is NOT required at the point-of-sale for a structured ILP?

    • Product highlights sheet

    • Benefit Illustration

    • Product summary

    • Fund report

    Correct Answer
    A. Fund report
    Explanation
    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.

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  • 10. 

    (C1/S1) 19 Structured products are _________ of the issuer.

    • Unsecured debt securities

    • Financial derivatives

    • Fixed income instruments

    • Equity-like products

    Correct Answer
    A. Unsecured debt securities
    Explanation
    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.

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  • 11. 

    (C3/S2.1) 39 The forward price for a contract is the sum of the spot price at the time of transaction and the ___________.

    • Loading

    • Cost of carry

    • Difference between the highest and lowest price for a given period

    • The average price for a given period

    Correct Answer
    A. Cost of carry
    Explanation
    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.

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  • 12. 

    (C5/S1.1) 22 Portfolio rebalancing is essential to maintain original level of

    • Diligence

    • Ratio

    • Capital

    • Risk exposure

    Correct Answer
    A. Risk exposure
    Explanation
    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.

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  • 13. 

    (C1/S3) 46 A structured product designed to be linked to interest rates such as Libor or Euribor is known as

    • Hybrid-linked

    • Equity-linked

    • Interest-rate linked

    • Market-linked

    Correct Answer
    A. Interest-rate linked
    Explanation
    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.

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  • 14. 

    (C6/S1.4) 23 Ms Tan placed $10,000 in a structured ILP with sum assured of $12,500. If there is an early redemption, she will most likely receive

    • Total sum assured plus initial capital amount

    • Accrued payout only

    • Initial capital with accrued payout

    • Amount of total sum assured with accrued payout

    Correct Answer
    A. Initial capital with accrued payout
    Explanation
    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.

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  • 15. 

    (C3/S2) 29 Mark-to-market is the daily process of revaluing outstanding positions to the daily settlement price at the

    • Start of each trading day

    • Mid of each trading day

    • End of each trading day

    • Request of the investors

    Correct Answer
    A. End of each trading day
    Explanation
    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.

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  • 16. 

    (C3/S3.2) 48 The option only comes into effect at a future date. This best describes a/an __________.

    • Asian option

    • Forward start option

    • Compound option

    • Binary option

    Correct Answer
    A. Forward start option
    Explanation
    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.

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  • 17. 

    (C2/S5.2) 12 A highly geared structured product _________.

    • Is also called a portfolio bond

    • Uses equities

    • Increase the potential rate of return of an investment asset

    • Reduces losses

    Correct Answer
    A. Increase the potential rate of return of an investment asset
    Explanation
    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.

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  • 18. 

    (C5/S1.1) 27 Which of the following statements about portfolio rebalancing is TRUE?

    • Portfolio rebalancing is fund switching implemented in small doses

    • Fund managers use portfolio rebalancing to increase risk exposure

    • Portfolio rebalancing is done to revert the portfolio to its original level of risk exposure

    • Portfolio rebalancing reduces the overall risk of the portfolio

    Correct Answer
    A. Portfolio rebalancing is done to revert the portfolio to its original level of risk exposure
    Explanation
    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.

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  • 19. 

    (C4/S6.4) 18 A common method to reduce market risks is using securities with _______. A. Positive correlation B. Negative correlation C. Zero correlation D. Higher correlation

    • Positive correlation

    • Negative correlation

    • Zero correlation

    • Higher correlation

    Correct Answer
    A. Negative correlation
    Explanation
    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.

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  • 20. 

    (C2/S6.1) 2 Which of the following statements BEST describes legal risk?

    • Change of regulations on selling of structured products

    • Hedging of investments in structured products with derivatives

    • Interest rate environment changes due to market conditions

    • Investment in various structured products with the same underlying assets

    Correct Answer
    A. Change of regulations on selling of structured products
    Explanation
    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.

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  • 21. 

    (C4/S3) 47 Investors may wish to invest in structured ILPs as they:

    • Are highly liquid assets

    • Carry low investment risk

    • Provide access to bulky investments

    • Are simple products to understand

    Correct Answer
    A. Provide access to bulky investments
    Explanation
    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.

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  • 22. 

    (C3/S3.2) 20 The investor decides whether the option will become a call or a put by a specified choice date. This best describes a/an _________.

    • Asian option

    • Forward-start option

    • Chooser option

    • Binary option

    Correct Answer
    A. Chooser option
    Explanation
    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.

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  • 23. 

    (C1/S1.1) 11 A structured product manager purchased a zero-coupon bond at $80 for every $100 invested in the structured product. The structured product aims to provide a return of the capital portion to investors at maturity. Assuming the zero-coupon bond matures at the same time as the structured product, what must the maturity value of the zero-coupon be in order to return the principal to the investor?

    • $0

    • $80

    • $100

    • 120

    Correct Answer
    A. $100
    Explanation
    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.

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  • 24. 

    (C1/S1.2) 28 Which of the following include the use of Collective Investment Schemes?

    • Structured deposits

    • Structured deposits

    • Structured funds

    • Reverse convertible bonds

    Correct Answer
    A. Structured funds
    Explanation
    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.

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  • 25. 

    (C2/S4) 42 When investments are converted back to local currency upon maturity, there is a

    • Foreign exchange risk

    • Liquidity risk

    • Currency risk

    • Local currency risk

    Correct Answer
    A. Foreign exchange risk
    Explanation
    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.

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  • 26. 

    (C3/S2.1) 43 A forward contract has been purchased at S$50,000. The current spot is S$45,000. The cost of carry is therefore equal to a:

    • Discount of S$5,000

    • Discount of S$10,000

    • Premium of S$5,000

    • Premium of $10,000

    Correct Answer
    A. Premium of S$5,000
    Explanation
    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."

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  • 27. 

    (C3/S3.2) 13 At expiry, the option-holder receives another option. This best describes a/an _________.

    • Asian option

    • Forward-start option

    • Compound option

    • Binary option

    Correct Answer
    A. Compound option
    Explanation
    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.

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  • 28. 

    (C3/S3) 8 A put warrant is said to be ________ when the strike price is more than the market price.

    • In-the-money

    • At-the-money

    • Out-of-the-money

    • None of the above

    Correct Answer
    A. In-the-money
    Explanation
    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.

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  • 29. 

    (C3/S3.6) 3 Which of the following option strategies should you use if you are not sure about the direction of the stock price?

    • Covered calls

    • Protective puts

    • Bear straddle

    • Long puts

    Correct Answer
    A. Bear straddle
    Explanation
    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.

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  • 30. 

    (C3/S3.2) 21 This option pays off either nothing or predetermined amount. This best describes a/an _________.

    • Asian option

    • Forward – start option

    • Chooser option

    • Binary option

    Correct Answer
    A. Binary option
    Explanation
    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.

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  • 31. 

    (C1/S4.4) 33 The main advantage of listed structured products over other structured products is

    • Guaranteed capital

    • Lower charges

    • Lower risk

    • Liquidity

    Correct Answer
    A. Liquidity
    Explanation
    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.

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  • 32. 

    (C2/S6.2) 36 Which of the following statement about positive correlation is TRUE?

    • The prices of positively correlated securities move in opposite direction

    • Positively correlated securities are not able to enhance portfolio diversification

    • Positively correlated securities reduce fee charges for the investor

    • Positively correlated securities prevent early redemption

    Correct Answer
    A. Positively correlated securities are not able to enhance portfolio diversification
  • 33. 

    (C3/S3.4) 6 Which of the following is/are NOT bullish strategies? I. Long calls II. Covered calls III. Protective puts IV. Selling naked puts

    • I and II

    • III and IV

    • II and IV

    • None of the above

    Correct Answer
    A. None of the above
    Explanation
    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.

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  • 34. 

    (C1/S1.1) 30 A/An _________ provides regular coupon payments and repayment of the par value at maturity.

    • Option

    • Contract for differences

    • Equity

    • Bond

    Correct Answer
    A. Bond
    Explanation
    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.

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  • 35. 

    (C2/S4) 50 An investor placed S$100,000 in a New Zealand dollar (NZD) investment when NZD $1 was worth S$1.40. The NZD has since depreciated against the S$ and is not worth only S$1.20. On the other hand, the NZD investment has appreciated by 10% in NZD terms. What is the investor’s net gain/loss on the investment, as measured in S$?

    • Gain of 10%

    • Gain of 22%

    • Loss of 6%

    • Loss of 9%

    Correct Answer
    A. Loss of 6%
    Explanation
    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.

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  • 36. 

    (C3/S3) 16 Which of the following gives the investor the right to sell the underlying security?

    • Call option

    • Put warrant

    • European style option

    • American style warrant

    Correct Answer
    A. Put warrant
    Explanation
    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.

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  • 37. 

    (C3/S3.7) 25 As a seller of a call option, you have _________.

    • An obligation to buy the underlying assets

    • An obligation to sell the underlying assets

    • A right to buy the underlying assets

    • A right to sell the underlying assets

    Correct Answer
    A. An obligation to sell the underlying assets
    Explanation
    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.

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  • 38. 

    (C1/S3.3) 38 Which of the following is not a participation product?

    • Tracker certificate

    • Bonus certificate

    • Discount certificate

    • Airbag certificate

    Correct Answer
    A. Discount certificate
    Explanation
    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.

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  • 39. 

    (C1/S3.2) 24 A reverse convertible bond consist of a bond and a

    • Put option

    • Call option

    • Chooser option

    • Swap option

    Correct Answer
    A. Put option
    Explanation
    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.

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  • 40. 

    (C1/S3.1) 34 A structured product delivers returns to investors when the following occurs, EXCEPT

    • The desired investment freedom is made available to investors is appropriate

    • Anticipated market view is correct

    • Strategy or structure to capture the market view is appropriate

    • Pricing on the structure is reasonable

    Correct Answer
    A. The desired investment freedom is made available to investors is appropriate
    Explanation
    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.

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  • 41. 

    (C5/S1) 44 Portfolio bonds are:

    • Lifestyle-policies

    • Conventional bonds

    • Portfolio of investments with high insurance element

    • All of the above

    Correct Answer
    A. Lifestyle-policies
    Explanation
    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".

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  • 42. 

    (C3/S2) 49 Your client has asked you to distinguish between a futures contract and a forward contract. Which of the following comparisons is CORRECT?

    • Forwards are a type of derivative contract whereas futures are not

    • Forwards are standardized contracts traded on exchanges where futures are customized private contracts traded over-the-counter between two parties

    • Forwards are subject to margin requirements whereas futures are not

    • Settlement of forwards occurs on delivery date whereas futures are marked-to-market on a daily basis

    Correct Answer
    A. Settlement of forwards occurs on delivery date whereas futures are marked-to-market on a daily basis
    Explanation
    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.

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  • 43. 

    (C4/S1.2) 9 Which one of the following options does NOT fall under the soft dollar commission?

    • Management fee

    • Research services

    • Economic analyses

    • Entertainment expense

    Correct Answer
    A. Management fee
    Explanation
    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.

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  • 44. 

    (C2/S1) 31 Factors such as interest rates, inflation, exchange rate, commodity prices can cause price fluctuation, directly affecting __________.

    • Stability

    • Risk appetite

    • Value

    • Profitability

    Correct Answer
    A. Profitability
    Explanation
    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.

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  • 45. 

    (C3/S2.8) 5 Given the following information; Value of portfolio = S$1 million; Portfolio beta = 2; Multiplier = S$10 per point The index is currently at 1,600 points and the futures contract is priced at 1,500. Calculate the hedge ratio.

    • 50 contracts

    • 67 contracts

    • 100 contracts

    • 134 contracts

    Correct Answer
    A. 134 contracts
    Explanation
    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.

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  • 46. 

    (C2/S5.2) 35 Leverage is used on the following, EXCEPT

    • Trading on margin

    • Use of derivatives

    • Borrowing money to trade

    • Investing heavily in equities

    Correct Answer
    A. Investing heavily in equities
    Explanation
    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.

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  • 47. 

    (C6/S1.4) 41 An investor placed $50,000 in a 10 years single-premium structured ILP with a sum assured of $62,500 with the following features: - Return of principal at maturity - 5%p.a. if all the 6 underlying stocks remains at 90% of their initial share price - 10% guaranteed return at the end of 5 years In the WORST case scenario, what is the maturity amount that the customer will receive?

    • $50,000

    • $55,000

    • $62,500

    • 80000

    Correct Answer
    A. $55,000
    Explanation
    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.

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  • 48. 

    (C4/S2.4) 15 This fund pays out annually 3.5% of Initial Unit Price per unit held by policy owner as at each policy anniversary and is 100% capital protected on maturity. This best describes an

    • ILP providing regular payments

    • ILP linked to index returns

    • ILP with capital appreciation potential

    • ILP with term insurance component

    Correct Answer
    A. ILP providing regular payments
    Explanation
    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.

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  • 49. 

    (C6/S2.4) 40 A structured ILP has the following features: Credit rating of issuer = B- Tenure = 5 years Maturity value = 100% of the initial amount of single premium Payout = 2% of the initial amount of single premium per annum Early redemption clause = yes, if the 6 underlying stocks outperforms the benchmark by 20% at the end of any trading day Which one of the following risks will be of LEAST concern to an investor based on the above-mentioned information?

    • Credit risk

    • Market risk

    • Reinvestment risk

    • Leverage risk

    Correct Answer
    A. Leverage risk
    Explanation
    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.

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  • Current Version
  • Mar 20, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Oct 23, 2014
    Quiz Created by
    Jen1980

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