CMFAS: M9A Mock Exam! Quiz

The correct answer is "all of the above". Factors that can affect price fluctuations include business risk, economic conditions, and foreign exchange risk. These factors can all have an impact on the supply and demand of goods and services, which in turn can affect prices. Business risk refers to the potential for a company to experience financial difficulties or failure, which can impact prices. Economic conditions, such as inflation or recession, can also influence prices. Additionally, fluctuations in foreign exchange rates can affect the cost of imported goods and services, which can impact prices as well.

Soft dollars are payments made by fund managers to cover expenses related to portfolio analyses, data and quotation services, and research analyses. This means that all of these options are correct. Soft dollars allow fund managers to use commission dollars to pay for research and other services, instead of using their own money. This can help reduce costs for the fund and potentially improve investment performance.

The price of derivatives can be influenced by various factors, including the price movements of the underlying assets, the creditworthiness of the counterparty, and foreign exchange movements. The price of derivatives is often derived from the value of the underlying assets, so any changes in their prices can directly impact the price of the derivatives. Additionally, the creditworthiness of the counterparty is important as it affects the risk associated with the derivative contract. Lastly, foreign exchange movements can also affect the price of derivatives, especially if the derivative contract involves different currencies. Therefore, all of the mentioned factors can influence the price of derivatives.

The redemption amount for structured notes may be affected negatively by the decrease in market value of the collateral, the issuer of notes not receiving any payments because the notes counterparty defaulted, and the issuer becoming insolvent. These factors can all contribute to a decrease in the value of the structured notes and ultimately impact the redemption amount that investors receive.

Companies that have loans denominated in one currency, but their revenues denominated in another currency are exposed to currency risk. This is because fluctuations in exchange rates between the two currencies can significantly impact the company's financial position. If the currency in which the loan is denominated strengthens against the currency in which the revenues are denominated, the company will have to pay back more in terms of the loan currency, which can lead to financial difficulties.

A hedger is an individual or entity who buys or sells in the futures market to lock in the price in order to protect themselves against potential price movements. By doing so, they are able to mitigate the risk associated with price fluctuations and ensure a certain level of stability in their investments. This strategy allows hedgers to protect themselves from potential losses and secure a predetermined price for their assets or commodities.

Market risks can be diversified across different asset classes, geographical locations, and by using negatively correlated securities. Diversification across different asset classes helps to spread the risk by investing in different types of assets such as stocks, bonds, and commodities. Diversification across different geographical locations helps to reduce the impact of regional economic or political events on the portfolio. Using negatively correlated securities means investing in assets that tend to move in opposite directions, which can help to offset losses in one asset with gains in another. Therefore, all of the above options are correct ways to diversify market risks.

Structured deposits are different from structured ILPs in that they are issued only by banks. This means that only banks have the authority to offer structured deposits to customers. In contrast, structured ILPs may be offered by various financial institutions or insurance companies. This key distinction highlights the exclusivity of structured deposits being limited to banks as the issuing entities.

The correct answer for this question is "rare gems". This term is used metaphorically to describe investments that offer high returns at low risk. Just like rare gems are valuable and hard to find, these investments are considered valuable and hard to come by. The term "rare gems" implies that these investments are unique and highly sought after, making them a desirable choice for investors.

Commodity futures are contracts that allow individuals to buy or sell a specific quantity of a commodity at a predetermined price and date in the future. Precious metals, such as gold and silver, are commonly traded as commodity futures. Bond prices, currency exchange rates, and interest rates, on the other hand, are not considered commodities and therefore are not examples of commodity futures.

Senior bonds are given priority over shares and subordinated bonds during liquidation. This means that if a company goes bankrupt and its assets need to be sold off to repay its debts, senior bondholders will be paid back before shareholders and holders of subordinated bonds. This priority is based on the hierarchy of claims in the event of liquidation, with senior bondholders having the highest priority.

When a portfolio's proportions change due to various investment experiences, the manager can restore it to the original proportions through rebalancing. This involves adjusting the allocation of funds between the different investments in the portfolio, in this case, Funds A and B, to bring it back to the desired 70% in Fund A and 30% in Fund B. This helps maintain the intended risk and return characteristics of the portfolio.

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 any income or benefits from holding the asset. It represents the additional costs or benefits associated with holding the asset until the forward contract expires.

All of the options listed (A, B, and C) can be applied to reduce counterparty risk. Payment netting involves offsetting mutual obligations between two parties, reducing the overall exposure. Requiring the counterparty to put up collaterals provides a form of security in case of default. Using publicly traded derivative products allows for diversification and the ability to transfer risk to other parties. Therefore, all of these measures can help mitigate counterparty risk.

A knock-out feature refers to the condition where the downside protection of bonus certificates is no longer applicable. This means that if the underlying asset's price falls below a predetermined level, the investor will lose the downside protection and be exposed to potential losses. The knock-out feature acts as a trigger that removes the protection, leaving the investor vulnerable to market fluctuations.

When an investor is expecting a stock to move either up or down significantly, he can buy a 'call' and a 'put' at the same time. This strategy is called a bull straddle. A bull straddle allows the investor to profit from a significant price movement in either direction, as the call option will generate profit if the stock price increases and the put option will generate profit if the stock price decreases. This strategy is used when the investor believes that the stock will experience a significant move but is unsure in which direction.

The correct answer is "total value of the assets in the fund less total liabilities" because the Net Asset Value (NAV) of a fund is calculated by subtracting the total liabilities from the total value of the assets in the fund. This gives investors an indication of the per-share value of the fund and helps them understand the financial health of the fund.

The correct answer is "All of the above" because a Dealing Account needs to be set up regardless of whether the investor is investing external funds, family funds, or cash deposits. This account allows the investor to manage and track their investments, regardless of the source of funds.

Options give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price (strike price) within a specified period of time (maturity date). Therefore, a holder of an option can choose not to exercise their contractual rights if it is not beneficial for them to do so. This flexibility is one of the key features of options and allows investors to manage their risk and maximize their potential profit.

The correct answer is "at expiry only". This means that a European warrant can only be exercised on its expiry date and not before. European warrants differ from American warrants in that they can only be exercised on a specific date, while American warrants can be exercised at any time before the expiry date. Therefore, the correct answer indicates the specific exercise period for a European warrant.

A bullish option strategy is one that benefits from an increase in the price of the underlying asset. Long calls involve buying call options, which give the holder the right to buy the underlying asset at a specified price within a certain time period. If the price of the underlying asset increases, the holder of long calls can exercise their option and buy the asset at a lower price, making a profit. Therefore, long calls are an example of a bullish option strategy.

Investors who are in high tax brackets are likely to benefit from portfolio bonds because portfolio bonds offer tax advantages. High-income individuals typically have a higher tax liability, so they can benefit from the tax-deferred growth and potential tax-free withdrawals that portfolio bonds offer. This can help them reduce their overall tax burden and maximize their investment returns. On the other hand, individuals in low tax brackets may not benefit as much from portfolio bonds because they may not have a significant tax liability to offset.

A portfolio beta of 1.1 means that for every increase of 1% in the market index, the portfolio holdings will increase by 1.1%. This indicates that the portfolio is expected to have a slightly higher increase in value compared to the market index.

The statement "All structured products are liquid" is false. Structured products can have varying levels of liquidity depending on their underlying assets and market conditions. Some structured products may have limited liquidity or may not be easily tradable.

Structured ILPs and unit trusts differ in terms of the legal ownership of the assets in the fund. In structured ILPs, the insurer is the legal owner of the assets in the fund. On the other hand, unit trusts do not have the insurer as the legal owner of the assets. This difference in legal ownership has implications for the regulation, risk, and benefits associated with each investment option.

Liquidity risk from the investor's standpoint refers to the ease of converting his investments into cash. This means that the investor is concerned about how quickly and easily he can sell his investments and turn them into cash when needed. Liquidity risk arises when there is a lack of buyers in the market or when there are restrictions on selling certain investments. It is important for investors to consider liquidity risk as it can affect their ability to access their funds and make timely financial decisions.

Structured ILPs (Investment-Linked Policies) are financial products that combine insurance coverage with investment options. They typically have maturity dates and are not renewed at the end of each trading period. This statement is false because structured ILPs do have maturity dates and are not renewed periodically. Instead, they have a fixed term and the policyholder can choose to renew or terminate the policy at the end of the term.

Due to the internal strife and major movements in the upper rung of management, STAR Company may face specific risks that are unique to the company itself. These risks could include management instability, leadership changes, and potential conflicts within the organization. Investors who have invested in STAR securities are therefore exposed to issuer-specific risk, as the company's internal issues may impact its financial performance and the value of its securities.

Buyers of call options have the right to buy the underlying asset, but not the obligation. This means they can choose to exercise the option and buy the asset if it is profitable for them, but they are not obligated to do so. They also enjoy unlimited potential gain because if the price of the underlying asset increases significantly, they can exercise the option and sell it at a higher price. The maximum loss to buyers of call options is the cost of the premium for the options, as this is the most they can lose if the option expires worthless. Therefore, all of the above statements are true.

If the value of the contract drops by S$ 400, the margin call is calculated by subtracting the drop in value from the maintenance margin. In this case, the drop in value is S$ 400 and the maintenance margin is S$ 2,200. Therefore, the margin call is S$ 2,200 - S$ 400 = S$ 1,800. However, since the initial margin is S$ 3,000, which is higher than the margin call, there is no margin call required. Hence, the margin call is S$ 0.

A portfolio of investments with an insurance element is not suitable for those who seek insurance protection because it primarily focuses on investment growth rather than providing comprehensive insurance coverage. It is also not suitable for those who have a short investment time horizon as this type of portfolio typically requires a longer-term commitment to achieve desired returns. Additionally, it may not be suitable for those who seek to receive fixed income regularly as the returns from investments can fluctuate and may not provide a consistent income stream.

One difference between ILPs (Investment-Linked Policies) and portfolio bonds is that policy owners of portfolio bonds have the ability to appoint managers for their portfolios who are within the insurer's platform. This means that policy owners have the option to choose professionals to manage their investments within the framework provided by the insurer. This level of control and customization is not typically available with ILPs, where the investment options are usually predetermined by the insurer.

The statement "They are equity securities" is false. Structured products are not equity securities, but rather unsecured debt securities of the issuer. They are financial instruments that combine different types of investments, such as bonds and derivatives, and their payouts can be based on various factors, including equity price movements. They are also known as hybrid products due to their combination of different investment components.

The Product Highlights Sheet should include information about the key risks of the investments, the frequency of valuations, and the fees and charges payable. However, disclaimers should not be included in the Product Highlights Sheet as they are typically included in separate documents or disclosures.

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This statement is false because structured deposits do not necessarily have low risks. The risk associated with structured deposits depends on the underlying assets and the structure of the deposit. Some structured deposits may have higher risks due to the complexity of the underlying assets or the potential for loss of principal. Therefore, it is not accurate to say that structured deposits have low risks.

A correlation of -1 indicates a perfect negative correlation between two securities. This means that when one security's value increases, the other security's value decreases by the same amount, and vice versa. Having a correlation of -1 between two securities is desirable for greater portfolio diversification because it means that the securities move in opposite directions, reducing the overall risk and volatility of the portfolio.

When the strike price of a call option is higher than the market price, it is said to be out-of-the-money. This means that the option does not have any intrinsic value because the market price is lower than the strike price. Therefore, the option holder would not exercise the option as it would result in a loss.

Structured products typically consist of a combination of bonds and options. Bonds provide a fixed income stream and are considered safer investments, while options offer the potential for higher returns but also come with higher risks. By combining these two assets, structured products aim to provide a balance between stability and potential growth for investors.

Both structured products designed for yield enhancement and those for performance participation have limited downside protection. This means that while they offer some level of protection against losses, it is not unlimited. This suggests that investors may still be exposed to some degree of risk, but the downside is limited.

The total payout to Mr. Tan if there is an early redemption by Gantt can be calculated by multiplying the number of trading days in the 6-month period when all 6 stocks performed above the stipulated minimum (120 days) by the payout per day (S$ 480). Therefore, the total payout would be 120 days * S$ 480/day = S$ 57,600. 

When interest rates drop, the issuer of callable securities is likely to exercise their right to "call" the securities. This means that they can redeem the securities before the maturity date, which allows them to issue new securities at a lower interest rate. This is advantageous for the issuer because they can save on interest payments. Therefore, the statement that when the interest rate drops, the issuer is likely to exercise his right to 'call' is true.

Cash delivery refers to the settlement of a futures contract in which the buyer and seller exchange cash instead of physical delivery of the underlying asset. In cash delivery, the buyer pays the agreed-upon price for the contract, and the seller receives the payment without having to physically deliver the asset. This type of settlement is common in financial futures contracts, where the underlying asset may be difficult or costly to physically deliver.

The annual policy statement to policy owners should include the number and value of units deducted during the statement period. This information is important for policy owners to understand the impact of deductions on their investment. It allows them to track the changes in the number and value of units over time and evaluate the performance of their policy. Additionally, this information helps policy owners in making informed decisions regarding their investment strategy and future contributions.

The amount paid on maturity is S$20200. This is because the maturity value is equal to the single premium plus the last annual payout. In this case, the single premium is S$20000 and the last annual payout is the higher of 1% of the single premium or a non-guaranteed payment based on the performance of the 6 stocks. Since all 6 stocks performed above 110% of their initial stock prices after 6 months, the non-guaranteed payment is 5% x 6/ N. Therefore, the last annual payout is S$20000 x 1% = S$200 and the maturity value is S$20000 + S$200 = S$20200.

Leveraging is actually used to increase the potential returns on an investment by using borrowed money. It involves using debt to finance an investment with the expectation that the returns will be greater than the cost of borrowing. Therefore, the statement that leveraging is used to decrease the risk exposure is false.

Bank Y will pay the par value of the loan to Bank X. This means that if the borrower defaults on the loan, Bank Y will reimburse Bank X for the full amount of the loan. Bank X will not have to incur any of the loan themselves. This arrangement provides Bank X with protection against default and ensures that they will receive the full amount of the loan from Bank Y.

Backwardation refers to a situation in the futures market where the spot price of a commodity is higher than the futures price. This typically occurs when there is a shortage of the commodity or when there are concerns about future supply. None of the options provided in the question (recession, oversupply, reduction in costs) directly suggest a shortage or concerns about future supply, so none of them are likely to cause backwardation. Therefore, the correct answer is "none of the above".

The statement that the maximum loss to the investor on CFDs is the margin amount is FALSE. In CFD trading, the potential loss is not limited to just the margin amount. It is possible for investors to lose more than the initial margin they put in, as they are exposed to the full value of the underlying asset. Therefore, this statement is incorrect.

The potential accumulation policy value is not found in the Product Summary.