M9A Mock Exam 2 CMFAS

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CMFAS Quizzes & Trivia

Questions and Answers
  • 1. 

    (C1/S1.1) 1. An equity-linked note combines zero-coupon bond with

    • A.

      an equity

    • B.

      a swap of an underlying equity asset

    • C.

      a warrant of an underlying equity asset

    • D.

      an option of an underlying equity asset

    Correct Answer
    D. an option of an underlying equity asset
    Explanation
    An equity-linked note combines a zero-coupon bond with an option of an underlying equity asset. This means that the investor receives the fixed interest payments from the bond, but also has the opportunity to benefit from the performance of the equity asset through the option. The option gives the investor the right, but not the obligation, to buy or sell the equity asset at a predetermined price within a specific time period. This combination allows the investor to potentially earn a higher return if the equity asset performs well, while still receiving the fixed income from the bond.

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  • 2. 

    (C1/S1.1) 2. A 5-year note is linked to BBD Company and has a share price of S$ 100. 80% of the money of the investor is used to buy a zero-coupon with a par value of S$ 100 maturing in 5 years’ time. The remaining S$ 20 is used to buy a call option with a strike price of S$ 110. If the share price drops to S$ 50 on maturity, the investor would

    • A.

      Receive his capital of S$ 100 but lost S$ 20 on the price paid for the option

    • B.

      receive his capital of S$ 100

    • C.

      receive S$ 50

    • D.

      not receive any money

    Correct Answer
    A. Receive his capital of S$ 100 but lost S$ 20 on the price paid for the option
    Explanation
    The investor would receive his capital of S$ 100 because the zero-coupon bond would mature and pay out the par value of S$ 100. However, the investor would also lose S$ 20 on the price paid for the call option because the share price dropped to S$ 50, which is below the strike price of S$ 110.

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  • 3. 

    (C1/S1.2) 3. Which statement regarding wrappers is FALSE?

    • A.

      Different wrappers can have different regulatory restrictions on the issuers

    • B.

      Some wrappers are subject to more specific investment restrictions than others

    • C.

      Wrappers, regardless of their formats, are subject to the same costs

    • D.

      None of the above

    Correct Answer
    C. Wrappers, regardless of their formats, are subject to the same costs
    Explanation
    This statement is false because different wrappers can have different costs associated with them. The costs of a wrapper can vary depending on factors such as the type of investment, the issuer, and the specific regulations and restrictions that apply to the wrapper. Therefore, wrappers are not subject to the same costs regardless of their formats.

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  • 4. 

    (C1/S3.3) 4. A ________ comes with conditional downside protection which depends on a pre-determined barrier.

    • A.

      Contract for differences

    • B.

      Bonus certificate

    • C.

      Discount certificate

    • D.

      Tracker certificate

    Correct Answer
    B. Bonus certificate
    Explanation
    A bonus certificate is a type of financial instrument that offers conditional downside protection based on a pre-determined barrier. This means that if the underlying asset falls below the barrier, the investor is protected from losses. The bonus certificate also offers the potential for additional returns or bonuses if the underlying asset performs well. Therefore, a bonus certificate fits the description provided in the question.

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  • 5. 

    (C1/S1.2/T1.1) 5. Investors of structured deposits

    • A.

      Are protected against loss of their capital

    • B.

      get higher returns on their investments

    • C.

      are unsecured creditors of the issuer in the event liquidation

    • D.

      are provided with insurance coverage

    Correct Answer
    C. are unsecured creditors of the issuer in the event liquidation
    Explanation
    Investors of structured deposits are unsecured creditors of the issuer in the event of liquidation. This means that if the issuer goes bankrupt, the investors will not have priority in receiving their money back. They will be treated the same as other unsecured creditors and may only receive a portion of their investment, if any, after secured creditors and other expenses are paid. This highlights the potential risk involved in investing in structured deposits, as there is no guarantee of full capital protection.

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  • 6. 

    (C1/S2.2/Fig1.3) 6. Those investments that carry a low probability of returns while carrying a low probability of loss can be said to be:

    • A.

      Safe instruments

    • B.

      Rare gems

    • C.

      Unworthy investments

    • D.

      Bold investments

    Correct Answer
    A. Safe instruments
    Explanation
    Investments that carry a low probability of returns while carrying a low probability of loss are considered safe instruments. This means that these investments have a low risk of losing money and also have a low potential for generating high returns. Safe instruments are often preferred by conservative investors who prioritize the preservation of capital over aggressive growth.

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  • 7. 

    (C1/S3.3b) 7. When a bonus certificate is knocked-out it means that

    • A.

      The investor will not be paid anything on maturity

    • B.

      the investor is paid the principal investment amount and the contract is terminated

    • C.

      the protection no longer applies and the investor is paid the value of the underlying asset at maturity

    • D.

      the investor has to top up cash

    Correct Answer
    C. the protection no longer applies and the investor is paid the value of the underlying asset at maturity
    Explanation
    When a bonus certificate is knocked-out, it means that the protection provided by the certificate is no longer applicable. In this case, the investor will be paid the value of the underlying asset at maturity. This means that the investor will not receive any additional bonus payment, but will still receive the value of their investment based on the underlying asset's performance.

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  • 8. 

    (C1/S3.2b) 8. Which of the following products have a cap on their upside potential ?

    • A.

      Air-bag certificates

    • B.

      Discount certificates

    • C.

      Bonus certificates

    • D.

      Tracker certificates

    Correct Answer
    B. Discount certificates
    Explanation
    Discount certificates have a cap on their upside potential. This means that the return on investment for discount certificates is limited and cannot exceed a certain level. This is different from other products like air-bag certificates, bonus certificates, and tracker certificates, which do not have a cap on their upside potential and can potentially generate higher returns.

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  • 9. 

    (C1/S3.1) 9. Which of the following structured products is designed to protect capital?

    • A.

      Credit-linked notes

    • B.

      structured funds

    • C.

      structured notes

    • D.

      structured ILPs

    Correct Answer
    A. Credit-linked notes
    Explanation
    Credit-linked notes are structured products that are designed to protect capital. These notes are linked to the creditworthiness of an underlying entity, such as a corporate borrower or a specific portfolio of loans. If the creditworthiness of the underlying entity deteriorates, the value of the credit-linked notes may decrease. However, if the creditworthiness remains stable or improves, the notes provide protection for the investor's capital. Therefore, credit-linked notes are specifically structured to mitigate the risk of capital loss.

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  • 10. 

    (C1/S2.2/Fig1.3) 10. Investments that offer high return at high risk are called

    • A.

      Bold investments

    • B.

      worthy investments

    • C.

      safe investments

    • D.

      rare gems

    Correct Answer
    A. Bold investments
    Explanation
    Investments that offer high return at high risk are called bold investments. This means that these investments have the potential to provide significant returns, but they also come with a higher level of risk compared to other investment options. The term "bold" suggests that these investments require a certain level of confidence and willingness to take risks in order to potentially achieve higher returns.

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  • 11. 

    (C1/S4.4a) 11. Listed products in Singapore are under the oversight of the

    • A.

      Associated Banks of Singapore

    • B.

      Singapore Exchange

    • C.

      Investment Managers of Singapore

    • D.

      Brokers Association of Singapore

    Correct Answer
    B. Singapore Exchange
    Explanation
    The correct answer is the Singapore Exchange because it is responsible for overseeing the listed products in Singapore. The Associated Banks of Singapore, Investment Managers of Singapore, and Brokers Association of Singapore may have their own roles and responsibilities, but they do not have the authority to oversee the listed products in Singapore.

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  • 12. 

    (C1/S5.1) 12. Which of the following statements is TRUE?

    • A.

      The market fair value of structured products are not easy to determine

    • B.

      One of the advantages is that structured products are liquid

    • C.

      Structured products are generally not as complicated as they are made out to be

    • D.

      All structured products can be cashed out anytime

    Correct Answer
    A. The market fair value of structured products are not easy to determine
    Explanation
    The statement that the market fair value of structured products is not easy to determine is true. Structured products often have complex underlying assets and features, making it difficult to accurately assess their market value. This lack of transparency can make it challenging for investors to determine the true worth of these products.

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  • 13. 

    (C2/S4) 13. In 2006, a US$ investment that is denominated in Singapore dollars was issued at the exchange rate of US$ 1 = S$ 1.5336. In 2010, the investment income earned in the foreign currency is US$ 50, but the US$ exchange rate has dropped against the S$ to US$ 1 = S$ 1.2875. The rate of return of the initial investment when converted back to S$ is ______

    • A.

      Lower than that in US$

    • B.

      Higher than that in US$

    • C.

      The same as that in US$

    • D.

      Not ascertainable

    Correct Answer
    B. Higher than that in US$
    Explanation
    To calculate the rate of return of the initial investment when converted back to Singapore dollars (S$), we need to find the value of the investment in Singapore dollars in 2010 and then compare it with the initial investment.
    Calculate the initial investment in Singapore dollars: Initial investment = US$ 1 Exchange rate in 2006: US$ 1 = S$ 1.5336 Initial investment in S$ = US$ 1 * S$ 1.5336 = S$ 1.5336
    Calculate the investment income earned in Singapore dollars in 2010: Investment income in US$ = US$ 50 Exchange rate in 2010: US$ 1 = S$ 1.2875 Investment income in S$ = US$ 50 * S$ 1.2875 = S$ 64.375
    Calculate the rate of return in S$: Rate of return in S$ = (Final value of investment in S$ - Initial investment in S$) / Initial investment in S$ = (S$ 64.375 - S$ 1.5336) / S$ 1.5336 ≈ S$ 62.8414 / S$ 1.5336 ≈ 40.9512
    Since the rate of return in Singapore dollars (40.9512) is higher than the rate of return in US dollars (50), the correct answer is:
    b) higher than that in US$

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  • 14. 

    (C2/S5.2) 14. An investment technique used to increase the potential rate of return is

    • A.

      Switching

    • B.

      short selling

    • C.

      gearing

    • D.

      forward pricing

    Correct Answer
    C. gearing
    Explanation
    Gearing is an investment technique that involves borrowing money to invest in order to increase the potential rate of return. This is done by leveraging funds and using borrowed capital to make additional investments. By using gearing, investors can potentially increase their returns by taking advantage of the difference between the cost of borrowing and the return on the investment.

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  • 15. 

    (C2/S5) 15. If the exercise price of an option is S$ 15 and the spot price of a stock is S$ 20, what is the intrinsic value of the option?

    • A.

      S$ 2

    • B.

      S$ 5

    • C.

      S$ 25

    • D.

      S$ 35

    Correct Answer
    B. S$ 5
    Explanation
    The intrinsic value of an option is the difference between the spot price of the underlying asset and the exercise price. In this case, the exercise price is S$ 15 and the spot price of the stock is S$ 20. Therefore, the intrinsic value of the option is S$ 5.

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  • 16. 

    (C2/S5) 16. The spot price of a particular company’s share is S$ 12. An option to buy it at S$ 8 has an intrinsic value of S$ 4. What is the percentage change in the intrinsic value of the option if the share price rises 10%?

    • A.

      10%

    • B.

      12%

    • C.

      20%

    • D.

      30%

    Correct Answer
    D. 30%
    Explanation
    The intrinsic value of an option is the difference between the spot price and the strike price. In this case, the intrinsic value is S$4 (12 - 8). If the share price rises by 10%, the new spot price would be S$13.20 (12 + 10% of 12). The new intrinsic value would be S$5.20 (13.20 - 8). The percentage change in the intrinsic value is calculated by taking the difference between the new and old intrinsic values (5.20 - 4) and dividing it by the old intrinsic value (4), and then multiplying by 100. This gives a percentage change of 30%.

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  • 17. 

    (C2/S5.5) 17. A collateral risk occurs when

    • A.

      The collateral increased in value after it was pledged

    • B.

      the risk exposure was not adequately collateralised from the start

    • C.

      the risk exposure is reduced

    • D.

      the contract has been terminated

    Correct Answer
    B. the risk exposure was not adequately collateralised from the start
    Explanation
    A collateral risk occurs when the risk exposure was not adequately collateralized from the start. This means that the value of the collateral provided to secure a loan or contract was insufficient to cover the potential losses in the event of default or non-performance. Inadequate collateralization increases the risk for the lender or counterparty, as they may not be able to recover their losses in full if the borrower or counterparty fails to fulfill their obligations.

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  • 18. 

    (C2/S6.2) 18. Two securities are perfectly correlated if

    • A.

      The prices of both move up or down in the same direction, by the same percentage

    • B.

      the prices of both move up or down in opposite directions, by the same percentage

    • C.

      the prices move up in the same direction, by different percentages

    • D.

      the prices of the securities move at random

    Correct Answer
    A. The prices of both move up or down in the same direction, by the same percentage
    Explanation
    Two securities are considered perfectly correlated if their prices move up or down in the same direction, by the same percentage. This means that when one security's price increases or decreases, the other security's price will do the same, and by the same proportion. In other words, the two securities have a strong positive relationship, with their prices moving in sync with each other.

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  • 19. 

    (C2/S6.4) 19. The early redemption of units feature in structured products may be triggered when

    • A.

      The kick-in levels are breached

    • B.

      the knock-out levels are breached

    • C.

      callable bonds are called

    • D.

      all of the above

    Correct Answer
    D. all of the above
    Explanation
    The early redemption of units feature in structured products may be triggered when any of the following events occur: the kick-in levels are breached, the knock-out levels are breached, or callable bonds are called. This means that if any of these conditions are met, the issuer of the structured product has the right to redeem the units before their maturity date.

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  • 20. 

    (C2/S1) 20. Which of the following is NOT an issuer-specific risk?

    • A.

      Business risk

    • B.

      Regulatory action

    • C.

      Interest rate risk

    • D.

      Operational risk

    Correct Answer
    C. Interest rate risk
    Explanation
    Interest rate risk is not an issuer-specific risk because it is a risk that affects all issuers and is not specific to any particular issuer. Issuer-specific risks, on the other hand, are risks that are specific to a particular issuer and can include business risk, regulatory action, and operational risk.

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  • 21. 

    (C3/S1) 21. The value of a derivative contract depends on the value of the underlying assets. These underlying assets could be

    • A.

      Agricultural products

    • B.

      currency

    • C.

      energy

    • D.

      all of the above

    Correct Answer
    D. all of the above
    Explanation
    The value of a derivative contract depends on the value of the underlying assets, which in this case can be agricultural products, currency, and energy. This means that the price or worth of the derivative contract will be influenced by the performance and fluctuations in these underlying assets. Therefore, all of the mentioned options - agricultural products, currency, and energy - can be considered as possible underlying assets for a derivative contract.

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  • 22. 

    (C3/S2) 22. Futures contracts have specified

    • A.

      settlement dates

    • B.

      delivery price

    • C.

      quantity

    • D.

      all of the above

    Correct Answer
    D. all of the above
    Explanation
    Futures contracts have specified settlement dates, delivery price, and quantity. This means that when entering into a futures contract, the parties involved agree on a specific date for the contract to be settled, a predetermined price at which the underlying asset will be delivered, and the quantity of the asset to be delivered. Therefore, all of the options mentioned (settlement dates, delivery price, and quantity) are correct.

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  • 23. 

    (C3/S2.2b) 23. In a forward contract, Cost-Insurance-Freight (CIF) means that

    • A.

      the total cost of the contract including delivery is known to the buyer

    • B.

      the buyer of the forward contract has to arrange for delivery

    • C.

      the seller of the forward contract will arrange for delivery

    • D.

      the seller of the forward contract will pay for the delivery arranged by the buyer

    Correct Answer
    A. the total cost of the contract including delivery is known to the buyer
    Explanation
    In a forward contract with Cost-Insurance-Freight (CIF) terms, the total cost of the contract including delivery is known to the buyer. This means that the buyer is aware of the total cost they will incur, including the cost of the goods, insurance, and freight charges for delivery. The seller is responsible for arranging the delivery, but it is the buyer who is aware of the total cost involved.

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  • 24. 

    (C3/S2.5) 24. When the futures price is higher than the spot price, the situation is called a

    • A.

      Backwardation

    • B.

      contango

    • C.

      mark to market

    • D.

      kick-in

    Correct Answer
    B. contango
    Explanation
    When the futures price is higher than the spot price, it is called contango. In a contango situation, the price of the futures contract is higher than the current price of the underlying asset. This typically occurs when there is an expectation of higher prices in the future or when there are costs associated with holding the underlying asset. Traders can take advantage of contango by buying the asset at the spot price and selling it in the futures market at a higher price, profiting from the price difference.

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  • 25. 

    (C3/S2.5) 25. If the futures price of a commodity in March is S$ 3.00 and its spot price is S$ 2.70, the basis is said to be

    • A.

      30 cents on par

    • B.

      30 cents over March

    • C.

      30 cents under March

    • D.

      15 cents on average

    Correct Answer
    C. 30 cents under March
    Explanation
    The basis is said to be "30 cents under March" because the futures price is higher than the spot price. In this case, the futures price is S$ 3.00 and the spot price is S$ 2.70, so the difference between the two prices is 30 cents. When the futures price is higher than the spot price, it indicates that the market expects the commodity price to increase in the future.

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  • 26. 

    (C3/S2.7) 26. A fund manager who is managing a portfolio of stocks, tracks the Straits Times Index (STI). He is expecting a near term market decline. To hedge against any adverse effects on his portfolio without liquidating now, he can

    • A.

      Sell futures of STI

    • B.

      buy futures of STI

    • C.

      buy stocks of STI

    • D.

      sell stocks of STI

    Correct Answer
    A. Sell futures of STI
    Explanation
    The fund manager can hedge against any adverse effects on his portfolio by selling futures of STI. Selling futures allows the fund manager to lock in a future selling price for the STI, protecting the value of his portfolio if the market declines. This strategy allows the fund manager to maintain his current stock holdings without liquidating them, while still mitigating potential losses.

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  • 27. 

    (C3/S3.4b) 27. If an investor own stocks which he intends to keep but he is expecting a near-term fall in price, he can still make additional income by

    • A.

      Buying a put option

    • B.

      buying a long put

    • C.

      selling a naked call

    • D.

      selling a covered call

    Correct Answer
    D. selling a covered call
    Explanation
    If an investor owns stocks that they intend to keep but expect a near-term fall in price, they can still make additional income by selling a covered call. This strategy involves selling a call option on the stocks that they already own. By doing so, the investor collects a premium from the buyer of the call option. If the stock price does not rise above the strike price of the call option, the investor keeps the premium and their stocks. However, if the stock price does rise above the strike price, the investor may be obligated to sell their stocks at the strike price, but they still keep the premium received. This allows the investor to generate income even if the stock price falls.

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  • 28. 

    (C3/S3.5) 28. Tom owns 100 shares of a stock which he paid S$10 per share. He is expecting the price of the stock to fall, and bought a _____ to protect against unlimited downside losses

    • A.

      Protective put

    • B.

      long put

    • C.

      long call

    • D.

      short call

    Correct Answer
    B. long put
    Explanation
    Tom owns 100 shares of a stock and is expecting the price to fall. To protect against unlimited downside losses, he bought a long put. A long put gives the holder the right to sell the stock at a specified strike price within a certain time frame. If the stock price falls below the strike price, Tom can exercise the put option and sell the stock at a higher price, limiting his losses.

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  • 29. 

    (C3/S3.6) 29. When an investor expects the market not to move much, up or down, he can sell a call and sell a put at the same strike price and expiration. This is called a

    • A.

      bull straddle

    • B.

      bear straddle

    • C.

      business risk

    • D.

      credit risk

    Correct Answer
    B. bear straddle
    Explanation
    When an investor expects the market not to move much, they can sell a call and sell a put at the same strike price and expiration. This strategy is called a bear straddle. By selling both options, the investor is betting that the market will remain stagnant and they will profit from the premiums received from selling the options. This strategy is used when the investor believes that the market will not experience significant price movements in either direction.

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  • 30. 

    (C3/S4.4) 30. Which of the following statements about equity swaps is FALSE ?

    • A.

      They are used to substitute for a direct investment in the stock market

    • B.

      An equity swap is an exchange of cash flows between two parties

    • C.

      One set of cash flow is equity-based while the other is derivatives-based

    • D.

      They can also be used to avoid local dividend tax

    Correct Answer
    B. An equity swap is an exchange of cash flows between two parties
    Explanation
    Equity swaps do not necessarily involve an exchange of cash flows between two parties. Instead, they typically involve the exchange of one set of cash flows, which could be equity-based (such as dividends or capital appreciation) for another set of cash flows, which could be derivatives-based (such as fixed or floating interest rates). Therefore, the statement that equity swaps involve an exchange of cash flows between two parties is false.

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  • 31. 

    (C3/S2/T3.1) 31. Futures are different from forwards in that

    • A.

      Futures are subject to margin requirements but forwards are not

    • B.

      the settlement of gains and losses of futures are done through a daily mark-to-market process but that for forwards are done on the delivery date only

    • C.

      futures are standardized contracts but forwards are not

    • D.

      all of the above

    Correct Answer
    D. all of the above
    Explanation
    Futures are different from forwards in multiple ways. Firstly, futures are subject to margin requirements, which means that traders must deposit a certain amount of money to cover potential losses. On the other hand, forwards do not have margin requirements. Secondly, the settlement of gains and losses for futures is done through a daily mark-to-market process, where the profits and losses are calculated and settled on a daily basis. Forwards, in contrast, have their gains and losses settled only on the delivery date. Lastly, futures are standardized contracts, meaning that they have specific terms and conditions set by the exchange, while forwards have more flexibility and can be customized between the parties involved.

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  • 32. 

    (C3/S2.1) 32. When the forward price is higher than the spot price, the cost of carry is known as a

    • A.

      breakeven

    • B.

      discount

    • C.

      premium

    • D.

      mark-up

    Correct Answer
    C. premium
    Explanation
    When the forward price is higher than the spot price, it means that the cost of carry is positive. This indicates that the carrying costs, such as storage, insurance, and financing, are higher than the income generated from holding the asset. In this situation, the forward price includes a premium, which compensates for the higher carrying costs. Therefore, the correct answer is premium.

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  • 33. 

    (C3/S3.2) 33. An exotic option like a ‘chooser option’ allows an investor to

    • A.

      terminate the contract before the specified date

    • B.

      choose whether the option will become a call or a put by a specified date

    • C.

      receive either another option or a warrant on the expiry date

    • D.

      choose between a swap or a forward on the expiry date

    Correct Answer
    B. choose whether the option will become a call or a put by a specified date
    Explanation
    A chooser option is a type of exotic option that gives the investor the ability to choose whether the option will become a call or a put by a specified date. This means that the investor has the flexibility to decide whether they want to exercise the option as a call option (to buy the underlying asset) or a put option (to sell the underlying asset) based on their market outlook or investment strategy. This feature adds an additional level of customization and adaptability to the option contract, allowing the investor to tailor it to their specific needs and objectives.

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  • 34. 

    34. Examples of financial futures include

    • A.

      grains and oilseeds

    • B.

      crude oil and gas

    • C.

      gold and silver

    • D.

      bond prices

    Correct Answer
    D. bond prices
    Explanation
    Financial futures are contracts that allow investors to buy or sell an underlying financial asset at a predetermined price in the future. Examples of financial futures include commodities like grains and oilseeds, energy products like crude oil and gas, and precious metals like gold and silver. However, bond prices are also considered financial futures as investors can speculate on the future prices of bonds. Therefore, bond prices are a valid example of financial futures.

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  • 35. 

    (C3/S2.8b) 35. The hedge ratio is

    • A.

      the number of futures that must be sold in a portfolio to protect against a market decline

    • B.

      the number of futures that must be bought in a portfolio to protect against a market decline

    • C.

      the maintenance margin in the futures contract

    • D.

      the maximum decline in the price of the futures contract before a margin call

    Correct Answer
    A. the number of futures that must be sold in a portfolio to protect against a market decline
    Explanation
    The hedge ratio refers to the number of futures contracts that need to be sold in a portfolio in order to protect against a market decline. By selling futures contracts, an investor can offset potential losses in the portfolio if the market experiences a decline. This is a risk management strategy that helps to mitigate the impact of market downturns on the portfolio's value.

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  • 36. 

    (C3/S3.1) 36. When the market turns bearish, a holder of a call option will

    • A.

      Buy the underlying when it is out of the money

    • B.

      lose the premium when it is in the money

    • C.

      buy the underlying when it is at the money

    • D.

      lose the entire premium he paid for the option when it is out of the money

    Correct Answer
    D. lose the entire premium he paid for the option when it is out of the money
    Explanation
    When the market turns bearish, the price of the underlying asset decreases. As a result, the call option becomes out of the money, meaning that the strike price is higher than the current market price. In this scenario, the holder of the call option will not exercise the option and will lose the entire premium that was paid for the option. This is because the option is no longer profitable and it would be more cost-effective to let the option expire worthless rather than buying the underlying asset at a higher price than its current market value.

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  • 37. 

    (C4/S1) 37. The investment experience of an investment fund of participating policies is ‘smoothed’ so as to

    • A.

      give the policy owner the maximum upside of the investment returns on his money

    • B.

      maintain a degree of certainty of stability in the non-guaranteed benefits to policy owners

    • C.

      give the policy owner a limited downside of the investment returns on his money

    • D.

      to an average return to policy owners

    Correct Answer
    B. maintain a degree of certainty of stability in the non-guaranteed benefits to policy owners
    Explanation
    The investment experience of an investment fund of participating policies is 'smoothed' in order to maintain a degree of certainty and stability in the non-guaranteed benefits to policy owners. This means that the fund aims to minimize fluctuations in investment returns, providing a more consistent and predictable outcome for policy owners. This approach is designed to offer a level of security and assurance to policy owners, ensuring that their non-guaranteed benefits remain stable over time.

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  • 38. 

    (C4/S1.2) 38. Which of the following charges and fees are NOT included in the expense ratio of a sub-fund?

    • A.

      Initial sales charges and redemption fees

    • B.

      custodial expenses and investment management fees

    • C.

      auditing fees

    • D.

      legal fees

    Correct Answer
    A. Initial sales charges and redemption fees
    Explanation
    The expense ratio of a sub-fund includes charges and fees related to custodial expenses, investment management fees, auditing fees, and legal fees. However, initial sales charges and redemption fees are not included in the expense ratio. These charges and fees are typically paid by investors when buying or selling shares of the sub-fund, and they are separate from the ongoing expenses that are reflected in the expense ratio.

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  • 39. 

    (C4/S1.2) 39. The turnover ratio measures __________________________________ as a percentage of the daily average NAV.

    • A.

      the highest number of purchases of underlying investments of a fund

    • B.

      the lowest number of sales of underlying investments of a fund

    • C.

      the largest volume of transactions of underlying investments of a fund D. the lower of the purchases or sales of underlying investments of a fund

    • D.

      the lower of the purchases or sales of underlying investments of a fund

    Correct Answer
    D. the lower of the purchases or sales of underlying investments of a fund
    Explanation
    The turnover ratio measures the lower of the purchases or sales of underlying investments of a fund as a percentage of the daily average NAV. This ratio helps to assess the level of trading activity within the fund and indicates how frequently the fund's investments are bought and sold. A higher turnover ratio suggests more frequent trading, while a lower ratio indicates less turnover and potentially a more long-term investment approach.

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  • 40. 

    (C4/S2.2) 40. Structured ILPs have their drawbacks too. One of them is that

    • A.

      Some investments are issued in large sizes, making it difficult for investors to have the financial means

    • B.

      the portfolio is spread out in too many different assets and asset classes which investors may not be knowledgeable about

    • C.

      there is an element of opportunity costs as non-performing assets in the portfolio reduces the gains from those that are performing well

    • D.

      there are transaction costs to be incurred

    Correct Answer
    C. there is an element of opportunity costs as non-performing assets in the portfolio reduces the gains from those that are performing well
    Explanation
    One of the drawbacks of structured ILPs is the presence of opportunity costs. This means that when non-performing assets are included in the portfolio, they reduce the overall gains from the assets that are performing well. This can result in lower returns for investors.

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  • 41. 

    (C4/S2.4a) 41. Which of the following statements describe a structure ILP that provides regular payments?

    • A.

      They have the same risk profile as ordinary bonds

    • B.

      The regular payouts, at the stated level, are made annually to provide the investor with an annual income

    • C.

      The capital invested is guaranteed at maturity

    • D.

      The insurer is not obligated to make good at maturity if the investments don’t deliver

    Correct Answer
    D. The insurer is not obligated to make good at maturity if the investments don’t deliver
    Explanation
    This statement describes a structure ILP that provides regular payments. It means that if the investments do not deliver as expected, the insurer is not obligated to make good on the maturity payment. This suggests that there is a level of risk involved in this ILP and the regular payments may not be guaranteed.

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  • 42. 

    42. A structured ILP linked to index return uses derivatives to track the performance of a selected index. To protect the downside, it uses

    • A.

      Equities

    • B.

      fixed income instruments

    • C.

      options

    • D.

      swaps

    Correct Answer
    B. fixed income instruments
    Explanation
    The structured ILP linked to index return uses fixed income instruments to protect the downside. Fixed income instruments such as bonds provide a steady income stream and are considered less risky compared to equities. By including fixed income instruments in the ILP, the investor can mitigate potential losses in case the selected index performs poorly. This diversification strategy helps to protect the downside and provide a more stable return on investment.

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  • 43. 

    (C4/S6.1c) 43. Which of the following is a requirement/s that must be met in preparing the Product Highlights Sheet?

    • A.

      There must be at least 4 pages, including glossary and diagrams

    • B.

      The text should be a font size of at least 10-point Times New Roman

    • C.

      Disclaimers must be included

    • D.

      Technical jargon should be used for greater clarity

    Correct Answer
    B. The text should be a font size of at least 10-point Times New Roman
    Explanation
    The requirement that must be met in preparing the Product Highlights Sheet is that the text should be a font size of at least 10-point Times New Roman.

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  • 44. 

    44. When switching of ILP sub-funds is allowed free of charge, the switch is done on a

    • A.

      Offer-to-bid basis

    • B.

      bid-to-offer basis

    • C.

      offer-to-offer basis

    • D.

      lowest bid basis

    Correct Answer
    C. offer-to-offer basis
    Explanation
    When switching of ILP sub-funds is allowed free of charge, the switch is done on an offer-to-offer basis. This means that the switch is based on the net asset value (NAV) of the sub-funds at the time of the switch. The investor will sell their units in one sub-fund at the NAV of that sub-fund and then purchase units in the other sub-fund at the NAV of that sub-fund. This ensures that the investor is not disadvantaged by any bid-ask spread or market fluctuations during the switch.

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  • 45. 

    (C4/S5) 45. Structured ILPs have to comply with various requirements, regulations, guidelines and codes set out under the

    • A.

      Financial Advisers Act (Cap 110)

    • B.

      Insurance Act (Cap 142)

    • C.

      Code on Collective Investment Scheme

    • D.

      All of the above

    Correct Answer
    D. All of the above
    Explanation
    Structured ILPs have to comply with various requirements, regulations, guidelines, and codes set out under the Financial Advisers Act (Cap 110), Insurance Act (Cap 142), and Code on Collective Investment Scheme. This means that structured ILPs must adhere to the rules and regulations outlined in all three of these acts and codes.

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  • 46. 

    (C5/S1.1) 46. To avoid potential market disruption when switching funds in large quantities, the process that can be applied is

    • A.

      drip feeding

    • B.

      sub-fund switching

    • C.

      portfolio rebalancing

    • D.

      leveraging

    Correct Answer
    A. drip feeding
    Explanation
    Drip feeding refers to gradually investing or withdrawing funds over a period of time, rather than making a large and sudden transaction. This approach helps to minimize the impact on the market and reduces the risk of market disruption. It allows for a smoother transition and helps to avoid sudden price fluctuations that could negatively affect the overall market. Therefore, drip feeding is the most suitable process to avoid potential market disruption when switching funds in large quantities.

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  • 47. 

    (C5/S1) 47. Portfolio bonds are

    • A.

      insurance wrappers that provide a wide range of investment choices

    • B.

      like conventional bonds that offer a regular income to the investor

    • C.

      investments that offer investors protection of capital

    • D.

      none of the above

    Correct Answer
    A. insurance wrappers that provide a wide range of investment choices
    Explanation
    Portfolio bonds are insurance wrappers that provide a wide range of investment choices. This means that portfolio bonds are investment products that are wrapped in an insurance policy. They offer investors the ability to choose from a variety of investment options, such as stocks, bonds, and mutual funds, within the wrapper. This allows investors to diversify their portfolio and potentially earn higher returns. The insurance aspect of the product may also provide certain tax advantages or other benefits.

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  • 48. 

    (C5/S2) 48. As ‘lifestyle’ policies, portfolio investments with an insurance element

    • A.

      Offer investors the highest protection and adjustable investment

    • B.

      offer policy owners the choice of changing asset allocation, or select funds, or regular withdrawals according to their changing financial needs

    • C.

      allow investors to change selected conditions in the contract according to their changing financial needs

    • D.

      can keep the various charges and fees at a certain level

    Correct Answer
    B. offer policy owners the choice of changing asset allocation, or select funds, or regular withdrawals according to their changing financial needs
    Explanation
    Portfolio investments with an insurance element, also known as 'lifestyle' policies, provide policy owners with the flexibility to make changes to their investment strategy based on their changing financial needs. This includes the ability to adjust asset allocation, select different funds, or make regular withdrawals. This feature allows investors to adapt their investments to align with their evolving financial goals and preferences. Additionally, these policies can help keep charges and fees at a certain level, providing further protection for the investors.

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  • 49. 

    (C6/S2) 49. Joe invested S$ 25 000 in a structured Whole Life ILP that invests into a structured fund. One of the funds is a closed-ended fund with a fixed maturity date. A penalty will be imposed on early redemption by the investor. 90% of the assets in the fund is invested into zero-coupon bonds, 5% into derivatives and 5% in cash deposits. The risk that Joe would most likely be concerned with if he needs cash is

    • A.

      Counterparty risk

    • B.

      market risk

    • C.

      liquidity risk

    • D.

      geographical risk

    Correct Answer
    C. liquidity risk
    Explanation
    Joe would most likely be concerned with liquidity risk if he needs cash because the structured Whole Life ILP has a penalty for early redemption. This means that if Joe wants to withdraw his investment before the fixed maturity date, he may face difficulties in accessing his funds. Liquidity risk refers to the risk of not being able to quickly and easily convert an investment into cash without incurring significant costs or losses. In this case, the penalty for early redemption indicates a lack of liquidity, which could pose a risk to Joe if he needs cash urgently.

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  • 50. 

    (C6) 50. Tom has invested in a recurrent single premium Whole Life ILP which invests in a structured fund. On his death,

    • A.

      Nothing is payable

    • B.

      a minimum payout is made

    • C.

      an annual payout is payable

    • D.

      the value in the structured fund is payable

    Correct Answer
    B. a minimum payout is made
    Explanation
    When Tom invests in a recurrent single premium Whole Life ILP, it means that he pays a premium at regular intervals for the entire duration of his life. In this case, if Tom were to pass away, a minimum payout would be made. This means that there would be a guaranteed amount that would be paid out to Tom's beneficiaries or estate upon his death. This minimum payout ensures that there is some form of financial support provided to Tom's loved ones after his passing.

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Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Feb 14, 2024
    Quiz Edited by
    ProProfs Editorial Team
  • Oct 18, 2014
    Quiz Created by
    Jen1980
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