Axa CMFAS M9A Mock 5
Questions and Answers
- 1.
(C4/S1) 1 Compared to an ILP, a structured ILP
- A.
Has a more complex structure
- B.
Has a higher insurance element
- C.
Is not as heavily regulated
- D.
Is less risky
Correct Answer
A. Has a more complex structureExplanation
A structured ILP has a more complex structure compared to a regular ILP. This means that it may have additional features or components that make it more intricate and potentially harder to understand or manage. The complexity of a structured ILP could be due to the inclusion of various investment options, additional guarantees or riders, or more sophisticated investment strategies.Rate this question:
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- 2.
(C4/S2.1) 2 The advantages of investing in a structured ILP may include the following, EXCEPT
- A.
Portfolio diversification
- B.
Access to bulky investments
- C.
Economies of scale
- D.
Low fees and charges
Correct Answer
D. Low fees and chargesExplanation
The advantages of investing in a structured ILP may include portfolio diversification, access to bulky investments, and economies of scale. However, the exception is low fees and charges. This means that investing in a structured ILP may not necessarily come with low fees and charges.Rate this question:
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- 3.
(C4/S5) 3 For counterparty risk, the counterparty exposure is capped at
- A.
5%
- B.
9%
- C.
10%
- D.
15%
Correct Answer
C. 10%Explanation
The correct answer is 10% because counterparty risk refers to the risk that the counterparty in a financial transaction will default or fail to fulfill their obligations. By capping the counterparty exposure at 10%, the risk is limited to a manageable level, reducing the potential losses in case of default.Rate this question:
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- 4.
(C6/S2.4) 4 Publicly traded investments tend to have ________ over OTC investments.
- A.
Poorer liquidity
- B.
Greater liquidity
- C.
Poorer stability
- D.
Greater stability
Correct Answer
B. Greater liquidityExplanation
Publicly traded investments tend to have greater liquidity compared to OTC (Over-the-Counter) investments. Liquidity refers to the ease with which an investment can be bought or sold without causing significant price changes. Publicly traded investments are traded on organized exchanges, such as stock markets, where there is a larger pool of buyers and sellers, resulting in higher liquidity. On the other hand, OTC investments are traded directly between two parties, which can limit the number of potential buyers or sellers and reduce liquidity. Therefore, publicly traded investments generally offer more liquidity than OTC investments.Rate this question:
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- 5.
(C4/S1.1) 5 The payouts under a structured ILP include the following, EXCEPT
- A.
Death benefits
- B.
Maturity benefits
- C.
Cash benefits
- D.
Survival benefits
Correct Answer
C. Cash benefitsExplanation
A structured ILP (Investment-Linked Policy) is a type of insurance policy that combines investment and insurance components. It provides various benefits such as death benefits, maturity benefits, and survival benefits. Cash benefits, however, are not included in a structured ILP. Cash benefits typically refer to immediate cash payments made to policyholders for certain events, such as hospitalization or critical illness. In a structured ILP, the focus is on the investment aspect, and cash benefits are not part of the policy's features.Rate this question:
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- 6.
(C6/S2.4) 6 Mary has invested in a structured ILP that invests in a structured fund where 95% of the assets are invested in 4 properties worth $10 million. She should be MOST concerned with _________ if she wants to be able to withdraw cash at any time,
- A.
Market risk
- B.
Counter party risk
- C.
Interest rate risk
- D.
Liquidity risk
Correct Answer
D. Liquidity riskExplanation
Mary should be most concerned with liquidity risk if she wants to be able to withdraw cash at any time. Liquidity risk refers to the risk of not being able to sell an investment quickly and at a fair price. In this case, even though Mary has invested in a structured ILP that invests in a structured fund, the fact that 95% of the assets are invested in 4 properties worth $10 million raises concerns about the ease and speed with which she can convert her investment into cash. This lack of liquidity could hinder her ability to withdraw cash when needed.Rate this question:
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- 7.
(C3/S2.3) 7 What does the term ‘basis’ refer to?
- A.
The difference between future price and spot price
- B.
The sum of the spot price and future price
- C.
The difference between the margin and the future price
- D.
The difference between the spot price and the margin
Correct Answer
A. The difference between future price and spot priceExplanation
The term 'basis' refers to the difference between the future price and spot price.Rate this question:
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- 8.
(C3/S3) 8 A call option is said to be _________ when the market price is less than the strike price.
- A.
At-the-money
- B.
In-the-money
- C.
Out-of-the-money
- D.
None of the above
Correct Answer
C. Out-of-the-moneyExplanation
A call option is said to be out-of-the-money when the market price is less than the strike price. This means that if the option were to be exercised, the investor would not make a profit because the market price is lower than the price at which they have the right to buy the underlying asset. Therefore, the option has no intrinsic value and is considered out-of-the-money.Rate this question:
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- 9.
(C1/S2) 9 In a structured product, derivatives ________.
- A.
Invest in fixed income
- B.
Provide upside potential
- C.
Provide the return of principal
- D.
All of the above
Correct Answer
B. Provide upside potentialExplanation
A structured product is a financial instrument that combines multiple investments, typically including derivatives, to provide specific investment characteristics. One of the common characteristics of structured products is the potential for upside gains, which is provided by the derivatives component. Therefore, the correct answer is "Provide upside potential."Rate this question:
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- 10.
(C3/S2.1) 10 The current spot price is $120,000. A forward contract has been purchased at $100,000. The cost of carry is therefore equal to a:
- A.
Discount of $20,000
- B.
Discount of $120,000
- C.
Premium of $20,000
- D.
Premium of $120,000
Correct Answer
A. Discount of $20,000Explanation
The cost of carry refers to the expenses associated with holding an asset, such as storage costs, insurance, and financing costs. In this case, the forward contract was purchased at a price lower than the current spot price, indicating a discount. The difference between the forward contract price ($100,000) and the spot price ($120,000) is $20,000, which represents the cost of carry. Therefore, the correct answer is a discount of $20,000.Rate this question:
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- 11.
(C3/S3.6) 11 Taking a short position on both a call and a put at the same strike price is called:
- A.
Bull straddle
- B.
Bear straddle
- C.
Bear swap
- D.
Bear swap
Correct Answer
B. Bear straddleExplanation
Taking a short position on both a call and a put at the same strike price is called a bear straddle. In this strategy, the investor is expecting the price of the underlying asset to remain relatively stable or decrease. By selling both the call and put options, the investor collects the premiums and profits if the price of the underlying asset stays below the strike price at expiration. This strategy is often used when the investor believes that the market will not experience significant price movements in the near future.Rate this question:
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- 12.
(C1/S3.6) 12 Structured ILPs can only be issued by ________.
- A.
Insurance companies
- B.
Banks
- C.
Fund managers
- D.
Brokerages
Correct Answer
A. Insurance companiesExplanation
Structured ILPs, or Structured Investment-Linked Policies, are investment products offered by insurance companies. These policies combine life insurance coverage with investment options, allowing policyholders to invest in various asset classes. Insurance companies are the primary providers of these policies as they have the expertise and regulatory framework to offer them. Banks, fund managers, and brokerages may offer other investment products, but structured ILPs specifically are issued by insurance companies.Rate this question:
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- 13.
(C1/S3.1) 13 The downside protection is only as good as the _________ of the party providing the protection.
- A.
Fund manager
- B.
Reputation
- C.
Credit worthiness
- D.
Performance
Correct Answer
C. Credit worthinessExplanation
The correct answer is credit worthiness. Downside protection refers to the measures taken to minimize losses in an investment. In this context, the effectiveness of downside protection depends on the credit worthiness of the party providing the protection. This means that if the party is not financially stable or reliable, their ability to provide the promised protection may be questionable. Therefore, credit worthiness is crucial in determining the reliability of downside protection.Rate this question:
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- 14.
(C3/S3.6) 14 Which of the following option strategies would be LEAST appropriate if an investor is bullish on a certain stock?
- A.
Long a stock
- B.
Long a call
- C.
Short a call
- D.
Bull straddle
Correct Answer
C. Short a callExplanation
Shorting a call involves selling a call option, which can lead to unlimited losses if the stock price rises significantly. Since the investor is bullish (expecting the stock to rise), shorting a call would expose them to potential losses as there's no cap on how high the stock price can go. The other strategies (long a stock, long a call, bull straddle) are more aligned with a bullish outlook.Rate this question:
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- 15.
(C5/S1.1) 15 Drip feeding is ____________.
- A.
Done to maintain the original level of risk exposure
- B.
Fund switching done in small doses
- C.
Not an option a customer can choose for portfolio bonds
- D.
Is an automatic rebalancing of customer’s portfolio
Correct Answer
B. Fund switching done in small dosesExplanation
Drip feeding is the process of gradually switching funds in small amounts rather than making one large switch. This allows for a more controlled and gradual transition, reducing the risk of market timing and potential losses. This option is available for customers who want to make changes to their portfolio bonds in a more cautious and measured manner.Rate this question:
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- 16.
(C3/S3.2) 16 The value of a plain vanilla option is based on the following factors, EXCEPT
- A.
Exercise price
- B.
Time until expiry
- C.
Risk tolerance
- D.
Interest rate
Correct Answer
C. Risk toleranceExplanation
The value of a plain vanilla option is determined by factors such as exercise price, time until expiry, and interest rate. Risk tolerance, however, is not a factor that directly affects the value of the option. Risk tolerance refers to an individual's willingness to take on risk, but it does not have a direct impact on the pricing of options. Therefore, risk tolerance is the correct answer as it is the only factor listed that is not directly related to the value of the option.Rate this question:
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- 17.
(C3/S2.5) 17 What is backwardation?
- A.
Bearish performance in the futures market
- B.
Futures price being the same as the spot price
- C.
Futures price being lower than the spot price
- D.
Futures price being higher than the spot price
Correct Answer
C. Futures price being lower than the spot priceExplanation
Backwardation refers to a situation in the futures market where the futures price is lower than the spot price. This indicates that the market expects the price of the underlying asset to decline in the future. It is often seen as a bearish signal as it suggests that investors are willing to sell the asset at a lower price in the future, indicating a lack of confidence in its value.Rate this question:
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- 18.
(C3/S3) 18 Which of the following gives the investor the right to sell the underlying security?
- A.
A call warrant
- B.
A put warrant
- C.
An European style warrant
- D.
An American style warrant
Correct Answer
B. A put warrantExplanation
A put warrant gives the investor the right to sell the underlying security. A put warrant is a financial instrument that gives the holder the option to sell a specified amount of an underlying security at a predetermined price within a specified time period. This allows the investor to profit from a decline in the price of the underlying security by selling it at a higher price than the market value.Rate this question:
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- 19.
(C4/S1.2) 19 Redemption in a structured ILP refers to __________.
- A.
The price at which units are redeemed
- B.
The price at which units are subscribed
- C.
Return of units in ILP sub-fund for cash
- D.
Purchase of units in ILP sub-fund
Correct Answer
C. Return of units in ILP sub-fund for cashExplanation
Redemption in a structured ILP refers to the process of returning units in an ILP sub-fund for cash. This means that investors can choose to sell their units and receive cash in return. It is the opposite of subscription, which is the process of purchasing units in an ILP sub-fund. The price at which units are redeemed refers to the amount of cash that investors receive when they redeem their units.Rate this question:
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- 20.
(C3/S5) 20 Contract For Differences are similar to futures and options, EXCEPT that futures and options
- A.
Have expiry dates
- B.
Are more profitable
- C.
Are less risky
- D.
Are not renewable
Correct Answer
A. Have expiry datesExplanation
Contract For Differences (CFDs) are financial derivatives that allow investors to speculate on the price movements of an underlying asset without owning the asset itself. CFDs are similar to futures and options in that they allow investors to profit from price movements without actually buying or selling the underlying asset. However, the key difference is that futures and options have expiry dates, while CFDs do not. This means that CFDs can be held indefinitely, allowing investors to potentially benefit from long-term price movements.Rate this question:
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- 21.
(C4/S4.3) 21 A bank can use ______ to transfer the credit risk of a borrower in exchange for a series of fee payments.
- A.
Currency swaps
- B.
Credit default swaps
- C.
Interest rate swaps
- D.
Equity swap
Correct Answer
B. Credit default swapsExplanation
A bank can use credit default swaps to transfer the credit risk of a borrower in exchange for a series of fee payments. Credit default swaps are financial derivatives that allow the bank to transfer the risk of a borrower defaulting on their debt to another party. In this arrangement, the bank pays a series of fees to the party taking on the credit risk, and in return, the party agrees to compensate the bank in the event of a default. This helps the bank mitigate its exposure to potential losses from borrower defaults.Rate this question:
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- 22.
(C5/S3) 22 Portfolio of investments with an insurance element are also known as
- A.
Mutual funds
- B.
Structured funds
- C.
Bond funds
- D.
Portfolio bonds
Correct Answer
D. Portfolio bondsExplanation
Portfolio bonds refer to a type of investment that combines elements of both insurance and investment. These bonds are typically offered by insurance companies and allow investors to allocate their funds across a range of assets, such as stocks, bonds, and mutual funds. The insurance element of portfolio bonds provides certain benefits, such as tax advantages and protection against market downturns. Therefore, portfolio bonds are considered a type of investment portfolio that includes an insurance component.Rate this question:
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- 23.
(C1/S3.2) 23 A reverse convertible bond is a/an
- A.
Secured debt instrument
- B.
Unsecured debt instrument
- C.
Secured futures product
- D.
Unsecured futures product
Correct Answer
B. Unsecured debt instrumentExplanation
A reverse convertible bond is an unsecured debt instrument. This means that it does not have any collateral backing it up. Unlike secured debt instruments, which are backed by specific assets that can be seized in case of default, unsecured debt instruments rely solely on the issuer's creditworthiness. In the case of a reverse convertible bond, the issuer agrees to pay a fixed interest rate and return the principal amount at maturity, regardless of the performance of the underlying asset.Rate this question:
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- 24.
(C4/S1) 24 While smoothing process maintains certain degree of __________ in the non-guaranteed benefits, it means that policy owners may not receive the full upside’ downside of investment return on this money.
- A.
Stability
- B.
Benefits
- C.
Profit
- D.
Performance
Correct Answer
A. StabilityExplanation
The correct answer is Stability. The question is asking about the effect of the smoothing process on the non-guaranteed benefits of a policy. Smoothing is a technique used by insurance companies to even out the investment returns over time, which helps to provide stability in the benefits paid to policy owners. This means that policy owners may not receive the full upside or downside of investment returns, but it ensures a more stable and predictable outcome.Rate this question:
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- 25.
(C1/S1.1) 25 Which of the following products is designed to protect capital?
- A.
Air-bag certificates
- B.
Portfolio bonds
- C.
Equity-linked note
- D.
Reverse convertible bond
Correct Answer
C. Equity-linked noteExplanation
Equity-linked notes are designed to protect capital because they are structured products that combine the characteristics of a bond with the potential for equity-like returns. They typically guarantee the return of the initial investment at maturity, providing a level of capital protection. Additionally, the returns of equity-linked notes are linked to the performance of an underlying equity index or stock, allowing investors to participate in potential upside gains. This combination of capital protection and potential for higher returns makes equity-linked notes a suitable product for investors looking to protect their capital.Rate this question:
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- 26.
(C3/S3) 26 A put warrant is said to be ___________ when the strike price is less than the market price.
- A.
In-the-money
- B.
At-the-money
- C.
Out-of-the-money
- D.
None of the above
Correct Answer
C. Out-of-the-moneyExplanation
A put warrant is said to be out-of-the-money when the strike price is less than the market price. This means that the holder of the put warrant would not make a profit if they were to exercise the warrant at the current market price.Rate this question:
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- 27.
(C2/S3) 27 A structured ILP with valuation done _________ will pose MORE liquidity risk for investors.
- A.
Daily
- B.
Every 2 weeks
- C.
Monthly
- D.
Quarterly
Correct Answer
D. QuarterlyExplanation
A structured ILP with valuation done quarterly will pose more liquidity risk for investors because the longer the time period between valuations, the less frequently investors have the opportunity to exit their investment or make changes to their portfolio. This lack of liquidity can be risky for investors as they may not be able to access their funds when needed or take advantage of potential market opportunities.Rate this question:
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- 28.
(C2/S2) 28 Which of the following may be used to mitigate counterparty default risk?
- A.
Invest in OTC derivatives products
- B.
Asking for a collateral from the counterparty
- C.
Invest in regulated products only
- D.
Only deal with companies using the same foreign currency
Correct Answer
B. Asking for a collateral from the counterpartyExplanation
Asking for a collateral from the counterparty may be used to mitigate counterparty default risk. By requiring the counterparty to provide collateral, the party is ensuring that they have some form of security in the event that the counterparty defaults on their obligations. This collateral can be used to offset any losses or damages incurred as a result of the default, reducing the overall risk to the party. Investing in OTC derivatives products, dealing with companies using the same foreign currency, or investing in regulated products only may not necessarily mitigate counterparty default risk.Rate this question:
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- 29.
(C4/S2.4) 29 The fund seeks daily investment results, before fees and expenses that correspond to twice the inverse of the daily performance of NASDAQ-100 index. This best describes an
- A.
ILP providing regular payments
- B.
ILP linked to index returns
- C.
ILP with capital appreciation potential
- D.
ILP with term insurance component
Correct Answer
B. ILP linked to index returnsExplanation
The given statement describes an ILP (Investment-Linked Policy) that seeks to provide daily investment results corresponding to twice the inverse of the daily performance of the NASDAQ-100 index. This indicates that the ILP is linked to the returns of the index, as it aims to replicate the inverse performance of the index. Therefore, the correct answer is ILP linked to index returns.Rate this question:
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- 30.
(C4/S1.2) 30 Which of the following is an example of soft dollars?
- A.
Bid-offer spread
- B.
Net asset value of investment
- C.
Commission payable for sale of structured ILP
- D.
Research and advisory services from broker
Correct Answer
D. Research and advisory services from brokerExplanation
Soft dollars refer to the practice of using client commissions to pay for research and advisory services provided by brokers. In this case, the correct answer is "Research and advisory services from broker" as it aligns with the definition of soft dollars. The other options, such as bid-offer spread, net asset value of investment, and commission payable for the sale of structured ILP, do not involve the use of client commissions for research and advisory services.Rate this question:
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- 31.
(C4/S4) 31 Which one of the following is LEAST likely to be an investor’s reason for investing in structured products?
- A.
They allow investors to have a tailor-made product
- B.
They offer investors access to exotic asset classes
- C.
They allow investors to have direct access to restricted markets
- D.
They provide investors with a financial product that is easy to understand
Correct Answer
D. They provide investors with a financial product that is easy to understandExplanation
Investors typically invest in structured products because they offer unique features and benefits, such as tailor-made products, access to exotic asset classes, and direct access to restricted markets. These features provide investors with opportunities for diversification, enhanced returns, and exposure to different investment strategies. However, structured products are often complex and may not be easy to understand for the average investor. Therefore, the statement "They provide investors with a financial product that is easy to understand" is least likely to be a reason for investing in structured products.Rate this question:
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- 32.
(C3/S2) 32 Which of the following is NOT a difference between forwards and futures?
- A.
Forwards are non-standardized contracts while futures are standardized contracts
- B.
Forwards are traded over the counter while futures are traded on exchanges
- C.
Forwards are normally not subject to margin requirements while Futures are subject to margin requirements
- D.
None of the above
Correct Answer
D. None of the aboveExplanation
Forwards and futures have several differences, but all of the options provided in the question are incorrect. The first option states that forwards are non-standardized contracts while futures are standardized contracts, which is incorrect. Both forwards and futures can be standardized or non-standardized depending on the agreement between the parties involved. The second option states that forwards are traded over the counter while futures are traded on exchanges, which is also incorrect. Both forwards and futures can be traded on exchanges or over the counter. The third option states that forwards are normally not subject to margin requirements while futures are subject to margin requirements, which is again incorrect. Both forwards and futures can be subject to margin requirements. Therefore, none of the options provided are correct.Rate this question:
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- 33.
(C1/S1) 33 Which of the following investment assets are the usual make-up of structured products?
- A.
Equities and bonds
- B.
Derivatives
- C.
Bonds and notes
- D.
Bonds and options
Correct Answer
D. Bonds and optionsExplanation
Structured products are investment instruments that are created by combining different financial assets, such as bonds and options. These products are designed to provide investors with specific risk and return characteristics that may not be available through traditional investments. By combining bonds and options, structured products can offer investors a range of features, such as capital protection, enhanced returns, or exposure to specific market trends. Therefore, the correct answer is "Bonds and options".Rate this question:
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- 34.
(C6/S1.4) 34 An investor placed S$40,000 into a structured Investment-linked Life Insurance policy with a sum assured of S$50,000. If an early redemption event is triggered, the investor will MOST likely receive the:
- A.
Initial capital amount with the accrued payouts
- B.
Amount of total sum assured with accrued payouts
- C.
Amount based on the total sum assured plus initial capital amount
- D.
Accrued payouts but the initial capital amount is kept by the insurance company
Correct Answer
A. Initial capital amount with the accrued payoutsExplanation
If an early redemption event is triggered, the investor will most likely receive the initial capital amount with the accrued payouts. This means that the investor will receive the original amount they invested (S$40,000) along with any additional payouts that have accrued over time. The sum assured amount of S$50,000 is not mentioned in the answer, indicating that it is not relevant to the early redemption event.Rate this question:
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- 35.
(C2/S6.3) 35 Which one of the following is NOT a drawback of investing in structured Investment-linked Life Insurance policies (ILPs)?
- A.
Ability to diversify portfolio
- B.
Exposure to counterparty risk
- C.
Several layers of fees and charges
- D.
Loss of investment control by the investor
Correct Answer
A. Ability to diversify portfolioExplanation
Investing in structured Investment-linked Life Insurance policies (ILPs) has several drawbacks, including exposure to counterparty risk, several layers of fees and charges, and loss of investment control by the investor. However, the ability to diversify the portfolio is not a drawback of ILPs. ILPs typically offer a range of investment options, allowing investors to diversify their investments across different asset classes and sectors, which can help mitigate risk and potentially enhance returns.Rate this question:
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- 36.
(C4/S1.2) 36 Bid price in an ILP refers to
- A.
Price at which units are redeemed
- B.
Price at which units are subscribed
- C.
Return of units in ILP sub-fund for cash
- D.
Purchase of units in ILP sub-fund
Correct Answer
A. Price at which units are redeemedExplanation
The bid price in an ILP refers to the price at which units are redeemed. This means that when an investor wants to sell their units in an ILP sub-fund, they will receive the bid price for each unit. The bid price is typically lower than the offer price, which is the price at which units are subscribed or purchased. Therefore, the correct answer is "Price at which units are redeemed."Rate this question:
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- 37.
(C5/S1) 37 Portfolio bonds are also known as the following, EXCEPT
- A.
Investments with insurance element
- B.
Conventional bonds
- C.
Insurance wrappers
- D.
ILPs
Correct Answer
B. Conventional bondsExplanation
Portfolio bonds are a type of investment that combines elements of insurance and investment. They are often referred to as insurance wrappers or ILPs (investment-linked policies). However, they are not considered conventional bonds, which are a type of fixed-income investment that pays a regular interest payment to the bondholder. Therefore, the correct answer is "Conventional bonds."Rate this question:
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- 38.
(C4/S2.2) 38 Which one of the following statements about structured Investment-linked Life Insurance policies (ILPs) is FALSE?
- A.
They offer death benefits on top of investment gains
- B.
They are offered as a short-term investment instrument
- C.
They typically have higher fees than a normal unit trust
- D.
They typically suffer a capital loss if an early redemption is carried out
Correct Answer
B. They are offered as a short-term investment instrumentExplanation
Structured Investment-linked Life Insurance policies (ILPs) do not typically offer short-term investment options. ILPs are long-term investment products that combine life insurance coverage with investment opportunities. They offer death benefits in addition to investment gains, often have higher fees compared to normal unit trusts, and may suffer a capital loss if redeemed early. However, they are not designed as short-term investment instruments.Rate this question:
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- 39.
(C4/S6) 39 Point-of-sales disclosure includes the following, EXCEPT
- A.
Application form
- B.
Product summary
- C.
Benefit illustration
- D.
Product highlights sheet
Correct Answer
A. Application formExplanation
The point-of-sales disclosure includes various documents that provide information about a product to potential customers. These documents include the product summary, benefit illustration, and product highlights sheet. However, the application form is not considered a point-of-sales disclosure document. It is a separate document that customers fill out to apply for the product.Rate this question:
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- 40.
(C3/S4) 40 The exchange of interest payment on a fixed rate loan to the payments on a floating rate loan is called the
- A.
Interest rate swap
- B.
Currency swap
- C.
Credit default swap
- D.
Equity swap
Correct Answer
A. Interest rate swapExplanation
The exchange of interest payment on a fixed rate loan to the payments on a floating rate loan is known as an interest rate swap. This involves two parties agreeing to exchange interest payments, with one party paying a fixed rate and the other paying a floating rate. This allows both parties to manage their interest rate risk and potentially benefit from changes in interest rates. It is different from other types of swaps such as currency swaps, credit default swaps, and equity swaps, which involve different types of financial instruments or risks.Rate this question:
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- 41.
(C2/S3) 41 If an institution is about to declare bankruptcy, which one of the following risks is being faced by the investors?
- A.
Issuer risk
- B.
Market risk
- C.
Liquidity risk
- D.
Foreign exchange risk
Correct Answer
A. Issuer riskExplanation
If an institution is about to declare bankruptcy, the investors are facing issuer risk. Issuer risk refers to the risk that the issuer of a financial instrument, such as a bond or stock, will default on their obligations and be unable to repay the investors. In this case, if the institution is on the verge of bankruptcy, it indicates that they may not be able to fulfill their financial obligations, leading to potential losses for the investors.Rate this question:
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- 42.
(C3/S3) 42 Which of the following has/have a positive intrinsic value? I. In-the-money II. At-the-money III. Out-of-the-money
- A.
I only
- B.
I and II
- C.
III only
- D.
None of the above
Correct Answer
A. I onlyExplanation
Intrinsic value refers to the value that an option would have if it were exercised immediately. In-the-money options have a positive intrinsic value because the strike price is lower than the current market price for call options, and higher than the current market price for put options. At-the-money options have no intrinsic value because the strike price is equal to the current market price. Out-of-the-money options also have no intrinsic value because the strike price is higher than the current market price for call options, and lower than the current market price for put options. Therefore, only in-the-money options have a positive intrinsic value.Rate this question:
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- 43.
(C3/S3.2) 43 The pay-off is determined by the average price of the underlying assets over a preset period of time. This best describes:
- A.
Asian option
- B.
Forward-start option
- C.
Compound option
- D.
Binary option
Correct Answer
A. Asian optionExplanation
An Asian option is a type of financial derivative whose pay-off is determined by the average price of the underlying assets over a preset period of time. This means that the final pay-off of the option is based on the average price of the underlying assets, rather than just the price at a specific point in time. This distinguishes it from the other options listed, which have different ways of determining their pay-offs. Therefore, the correct answer is Asian option.Rate this question:
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- 44.
(C3/S3.2) 44 The option only comes into effect at a future date. This best describes:
- A.
Rainbow option
- B.
Forward-start option
- C.
Swaption
- D.
Binary option
Correct Answer
B. Forward-start optionExplanation
A forward-start option is an option that becomes active at a future date, allowing the holder to buy or sell an asset at a predetermined price. This means that the option only comes into effect at a later time, making it the best fit for the given description. A rainbow option is a type of option with multiple underlying assets, a swaption is an option to enter into a swap agreement, and a binary option is a type of option with a fixed payout.Rate this question:
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- 45.
(C4/S6.4) 45 Foreign exchange risks can be transferred away using _________.
- A.
Swaps
- B.
Insurance
- C.
Portfolio bonds
- D.
None of the above
Correct Answer
A. SwapsExplanation
Foreign exchange risks can be transferred away using swaps. A swap is a financial derivative contract in which two parties agree to exchange cash flows based on a notional amount and predetermined terms. In the case of foreign exchange swaps, the parties exchange currencies at a specified exchange rate for a specific period of time. This allows them to mitigate the risk of adverse currency fluctuations and protect themselves from potential losses. Insurance and portfolio bonds do not specifically address foreign exchange risks, making them incorrect choices.Rate this question:
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- 46.
(C3/S2.6) 46 A client has opened a margin account with an initial margin of S$3,000 and a maintenance margin of S$2,000. He has purchased an oil futures contract using this margin account with a broker. The broker will issue a margin call when the price of the contract falls by:
- A.
S$3,000
- B.
S$600
- C.
S$900
- D.
S$1,200
Correct Answer
D. S$1,200Explanation
When a client opens a margin account, they are required to maintain a certain level of equity in the account. In this case, the initial margin is S$3,000 and the maintenance margin is S$2,000. A margin call is issued by the broker when the equity in the account falls below the maintenance margin.
To determine the price at which the margin call will be issued, we need to calculate the decrease in equity that would trigger the margin call. The decrease in equity is equal to the initial margin minus the maintenance margin, which is S$3,000 - S$2,000 = S$1,000.
Therefore, the price of the contract would need to fall by S$1,000 for the broker to issue a margin call.Rate this question:
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- 47.
(C3/S4.3) 47 Which of the following swaps can be used to reduce counterparty risk?
- A.
Equity swap
- B.
Currency swap
- C.
Credit default swap
- D.
Interest rate swap
Correct Answer
C. Credit default swapExplanation
A credit default swap can be used to reduce counterparty risk because it is a financial contract that allows an investor to transfer the credit risk of an underlying asset to another party. In the event of a default by the issuer of the underlying asset, the party that sold the credit default swap is obligated to compensate the buyer for the loss. This helps to mitigate the risk of default and reduces the counterparty risk for the investor.Rate this question:
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- 48.
(C2/S4) 48 A customer invest S$150,000 into US$ investment in 2006 which matured in 2012 with the following exchange rates. Exchange rate (2006): US$1 = S$1.50 Exchange rate (2012): US$1 = S$1.30 By 2012, the investment has appreciated by 10% in US$ terms. What is the investor’s percentage net gain/loss is as measured in SGD terms?
- A.
Loss of 4.7%
- B.
Gain of 4.7%
- C.
Loss of 11.5%
- D.
Gain of 11.5%
Correct Answer
A. Loss of 4.7%Explanation
The investor initially invested S$150,000 in US$ in 2006. At that time, the exchange rate was US$1 = S$1.50. Therefore, the investor would have received US$100,000 (S$150,000 / 1.50) in 2006.
By 2012, the investment appreciated by 10% in US$ terms. So, the value of the investment in US$ would be US$110,000 (US$100,000 + 10% of US$100,000).
At that time, the exchange rate was US$1 = S$1.30. Therefore, the value of the investment in SGD would be S$143,000 (US$110,000 x 1.30).
To calculate the net gain/loss, we need to compare the final value of the investment in SGD with the initial investment in SGD. The initial investment was S$150,000 and the final value was S$143,000.
The net loss is calculated as (Final Value - Initial Investment) / Initial Investment x 100%.
Using this formula, we get (S$143,000 - S$150,000) / S$150,000 x 100% = -4.7%.
Therefore, the investor's percentage net gain/loss is a loss of 4.7% in SGD terms.Rate this question:
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- 49.
(C2/S4) 49 A Singaporean investor, as compared to an US investor who invests in US Treasury bills, will MOST likely face additional ________ risks.
- A.
Market
- B.
Liquidity
- C.
Issuer
- D.
Foreign exchange
Correct Answer
D. Foreign exchangeExplanation
A Singaporean investor, as compared to a US investor who invests in US Treasury bills, will most likely face additional foreign exchange risks. This is because the Singaporean investor is investing in a foreign currency, which exposes them to fluctuations in exchange rates. These fluctuations can impact the value of their investment when it is converted back into their home currency.Rate this question:
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- 50.
(C3/S1) 50 Which one of the following statements does NOT apply to a derivative?
- A.
It can be used as a directional bet on price movements
- B.
The holder of a derivative owns the underlying asset
- C.
It can be used as a hedging tool to improve stability
- D.
It is a right or obligation to purchase or sell an asset at a pre-determined date and price
Correct Answer
B. The holder of a derivative owns the underlying assetExplanation
A derivative is a financial instrument whose value is derived from an underlying asset, such as stocks, bonds, commodities, or currencies. It is a contract between two parties, where one party agrees to buy or sell the underlying asset at a specified price and date in the future. However, the holder of a derivative does not actually own the underlying asset. Instead, they have the right or obligation to buy or sell the asset. Therefore, the statement "The holder of a derivative owns the underlying asset" does not apply to a derivative.Rate this question:
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Jan 30, 2024Quiz Edited by
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Oct 23, 2014Quiz Created by
Jen1980
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