M9A Quiz Mock Exam 3 CMFAS

Market risk refers to the potential for the prices of underlying assets in the market to fluctuate, resulting in price volatility. This risk arises due to various factors such as economic conditions, market trends, and investor sentiment. It is important for investors and financial institutions to assess and manage market risk as it can lead to potential losses. The correct answer states that market risk is the price volatility that comes from the fluctuation in market prices of the underlying assets, which accurately describes this concept.

Interest rates, inflation rates, and exchange rates can all cause price fluctuation in the market price of a security. Interest rates influence borrowing costs and can affect the demand for securities. Inflation rates can erode the purchasing power of investors, leading to changes in demand and prices. Exchange rates can impact the value of securities denominated in foreign currencies. Therefore, all three factors can contribute to price fluctuations in the market.

In the event of liquidation, owners of senior bonds have the highest priority for repayment. This means that they will be the first to receive payment from the company's assets before any other creditors or shareholders. Senior bonds are considered less risky than subordinated bonds and company stocks, as they have a higher likelihood of being repaid in full. Therefore, in a liquidation scenario, the owners of senior bonds are given the highest priority for repayment.

Structured deposits are a type of financial product that is only available through banks. They are designed to provide investors with a potentially higher return than traditional savings accounts, but they also come with a higher level of risk. Structured notes, structured funds, and structured ILPs are all different types of investment products that may be available through banks, but they are not exclusive to banks and can also be offered by other financial institutions. Therefore, the correct answer is structured deposits.

The correct answer is "All of the above" because the underlying assets of a derivative contract can include market indices, prices of oil, and interest rates. Derivatives are financial instruments that derive their value from an underlying asset, and these assets can vary widely depending on the type of derivative. Market indices, such as the S&P 500, can be used as the underlying asset for derivatives like index futures or options. Prices of oil can be the underlying asset for derivatives like oil futures contracts. Interest rates can be used as the underlying asset for derivatives like interest rate swaps or options on interest rates. Therefore, all three options are correct.

The correct answer is "Unsecured debt securities" because structured products are typically issued by financial institutions and are not backed by any specific collateral. Instead, the issuer's creditworthiness is the main source of repayment for the investors. Unsecured debt securities include bonds, notes, and debentures, which are issued with a promise to repay the principal amount plus interest to the investors.

Contango refers to a situation in the futures market where the future price of a commodity or financial instrument is higher than the spot price. This indicates that there is an expectation of higher prices in the future. It is often seen in markets where there is high demand or uncertainty, leading investors to be willing to pay a premium for future delivery.

A commodity-linked structured product is a financial product that is tied to the performance of a specific commodity, in this case, precious metals such as gold. This means that the value of the structured product will be influenced by the price movements of gold. It allows investors to gain exposure to the commodity market without directly owning the physical commodity. This type of product is popular among investors who want to diversify their portfolio and potentially benefit from the price fluctuations of precious metals.

To ensure liquidity, SGX requires that at least 75% of the securities must be spread out to a minimum of 100 investors in the case of ETNs and certificates. This means that a significant portion of the securities must be held by a diverse group of investors, rather than concentrated in the hands of a few. This helps to ensure that there is a market for the securities and that there is sufficient trading activity to maintain liquidity.

The difference between the spot price and the futures price is known as the basis. The basis represents the cost of carrying the underlying asset from the spot market to the futures market. It is calculated by subtracting the futures price from the spot price. A positive basis indicates that the futures price is higher than the spot price, while a negative basis indicates that the futures price is lower than the spot price. The basis is an important concept in futures trading as it can provide insight into market expectations and potential arbitrage opportunities.

Drip feeding refers to the practice of gradually investing or switching funds in small increments over time. This approach is often used to reduce risk and volatility in the market. By investing in small doses, investors can spread out their investments and potentially minimize the impact of market fluctuations. Therefore, the correct answer is "In small doses."

Liquidity from an investor's perspective refers to the ease of converting their investments into cash. This means that the investor can easily sell their investments and receive cash in return whenever they need it. This is important for investors as it provides them with flexibility and the ability to access their funds quickly if needed.

A portfolio of investments with an insurance element allows customers to appoint managers of their portfolio. This means that customers have the ability to choose someone to manage their investments within the portfolio. This allows for more personalized and tailored management of the investments, giving customers more control over their portfolio.

Investments that carry a low probability of returns while carrying a high probability of loss can be described as "unworthy investments." This means that these investments are not worth pursuing because the potential for loss outweighs the potential for gain. They are considered risky and not recommended for individuals looking to make profitable investments.

The given statement states that the fund aims to provide long-term capital appreciation and achieve the best possible result. This indicates that the fund is focused on maximizing the growth of capital over the long term. Therefore, the best description for this statement is an ILP (Investment-Linked Policy) with capital appreciation potential.

A Tracker certificate is one of the few structured products that may have no expiry date. This means that the certificate does not have a predetermined end date and can be held indefinitely. The other options, such as Bonus certificate, Discount certificate, and Airbag certificate, typically have expiry dates or certain conditions attached to them.

A structured product that is linked to a certain basket of market indices is referred to as market-linked. This means that the performance and returns of the structured product are dependent on the performance of the underlying market indices. The investor's returns will vary based on the movements of these market indices, making it a market-linked product.

The expense ratio is the ratio of the sub-fund's operating expenses to the daily average NAV. This means it calculates the percentage of the fund's assets that are used to cover operating expenses such as management fees, administrative costs, and other expenses. It is an important measure for investors as it helps them understand the cost of investing in a particular fund and compare it to other funds. A lower expense ratio is generally preferred as it means a higher portion of the fund's assets are being used for investment purposes rather than expenses.

A default by the counterparty refers to a situation where the counterparty fails to fulfill its obligations as stated in a contract. In this case, failing to deliver on a futures contract is an example of a default by the counterparty as it means that the counterparty did not fulfill its obligation to deliver the underlying asset as agreed upon in the contract.

A structured product is a type of investment that can potentially replicate or mirror the returns of equities (stocks) by using a fixed income structure. This means that investors can potentially achieve similar returns to owning stocks, but with the stability and fixed income characteristics of bonds. Structured products are designed to provide investors with a way to diversify their portfolios and potentially benefit from the performance of different asset classes, including equities, while still having the security and predictability of fixed income investments.

The correct answer is "Current market price." A Contract For Differences (CFD) provider quotes bid and offer prices based on the current market price of the underlying stock. The bid price is the price at which the provider is willing to buy the stock, while the offer price is the price at which the provider is willing to sell the stock. These prices are determined by the current market price of the stock, which is the most up-to-date price at which the stock is being traded in the market.

A structured deposit is a type of structured product that is excluded from the Deposit Insurance Scheme in Singapore. This means that if the structured deposit were to fail or become insolvent, the depositor would not be protected by the Deposit Insurance Scheme and may lose their investment. Therefore, the description given in the question best fits a structured deposit.

Reserve convertible bonds are constructed by combining a bond with a put option. A put option gives the bondholder the right to sell the bond back to the issuer at a specified price, providing a form of protection or insurance against potential losses. This combination allows the bondholder to convert the bond into another security, typically equity, at a later date if desired.

The correct answer is "Basis is 'US$15 over January'". In futures trading, the basis refers to the difference between the cash price and the futures price. In this situation, the cash price is higher than the futures price, indicating a positive basis. The statement "US$15 over January" accurately describes this situation where the cash price is $15 higher than the futures price.

Structured deposits are considered investment products because they involve the investment of funds with the expectation of earning returns. Unlike traditional deposits, structured deposits are not protected under the Deposit Insurance Scheme in Singapore, which further emphasizes their nature as investment products.

When the initial margin is eroded with losses, the broker issues a margin call. A margin call is a demand from the broker for the investor to deposit additional funds to bring the margin account back up to the required initial margin level. This is done to protect the broker from potential losses and ensure that the investor has enough funds to cover their positions.

A portfolio bond is suitable for investors who have a long investment time horizon. This is because a portfolio bond is a long-term investment product that allows investors to hold a diversified portfolio of assets, such as stocks, bonds, and mutual funds, within a single investment vehicle. By having a long investment time horizon, investors can take advantage of the potential growth and compounding of their investments over time. Additionally, a portfolio bond may also offer tax advantages for investors who hold their investments for a longer period.

The use of interest rate futures by ABC Pte Ltd to control its exposure to the interest rate risk indicates that it is using derivatives as a risk management tool. By using interest rate futures, ABC Pte Ltd can mitigate the potential losses or volatility caused by changes in interest rates, thus managing its overall risk exposure.

When an institute is exposed to liquidity risk, its financial position and resulting credit standing are inevitably affected. This means that the institute may face difficulties in meeting its financial obligations and maintaining its creditworthiness. Liquidity risk refers to the risk of not being able to convert assets into cash quickly enough to meet short-term liabilities. This can lead to a decrease in the institute's financial stability and creditworthiness, making it harder for them to borrow money or obtain credit in the future.

Investing in a structured ILP may have several disadvantages, including several layers of fees and charges, loss of investment control, and opportunity cost. However, one disadvantage that is not included is the inaccessibility to bulky investments. This means that investing in a structured ILP does not limit or restrict the investor's ability to invest in large or bulky investments.

The investment restrictions imposed by the Code on CIS include liquidity risk, concentration risk, and credit risk. However, guarantee capital risk is not included as one of the investment restrictions. This means that CIS are not restricted from investing in instruments or assets that involve guaranteeing capital.

Derivative contracts can have underlying assets based on anything. This means that the value of the derivative contract is derived from the value of an underlying asset, which can be a wide range of things such as stocks, bonds, commodities, or even non-financial assets like real estate or weather conditions. The flexibility of derivative contracts allows investors to speculate on the price movements of various assets and manage their risk exposure in different markets.

When Company Alpha's credit rating is downgraded, it presents an issuer-specific risk to the investor. This means that the risk is specific to the company itself and is related to its ability to fulfill its obligations. The downgrade in credit rating indicates a higher likelihood of default or failure to meet financial obligations, which poses a risk to the investor who holds the structured product issued by Company Alpha.

The false statement is that portfolio bond is designed to provide protection for clients. Portfolio bond is a type of investment product that allows individuals to invest in a range of assets, such as stocks, bonds, and mutual funds. It is not specifically designed to provide protection for clients, but rather to provide a convenient and consolidated view of investments in a single statement from the insurer.

The underlying assets of a derivative contract typically include financial instruments such as equity, bonds, and currencies. However, unit trusts are not typically included as underlying assets in derivative contracts.

Speculators buy futures in order to profit from rising prices. By purchasing futures contracts at a lower price and selling them at a higher price in the future, speculators can make a profit. This strategy allows them to take advantage of anticipated price increases and capitalize on market trends.

A naked call is not considered a bullish option strategy because it involves selling call options without owning the underlying asset. This strategy is considered risky as it exposes the investor to unlimited potential losses if the price of the underlying asset rises significantly. In contrast, long calls, covered calls, and protective puts are all bullish option strategies that involve buying call options or using options to protect against potential losses.

Interest rate risk is a general market risk because it refers to the potential for changes in interest rates to negatively impact the value of investments. When interest rates rise, the value of fixed-income securities such as bonds decreases, resulting in a decrease in the overall value of an investment portfolio. Conversely, when interest rates decrease, the value of fixed-income securities increases. Therefore, interest rate risk is a general market risk that affects a wide range of investments and is not specific to any particular industry or sector.

Products that are traded over the counter are most likely to be subject to liquidity risk. This is because over-the-counter (OTC) markets do not have the same level of transparency and regulation as exchange-traded markets. As a result, it can be more difficult to find buyers or sellers for OTC products, leading to lower liquidity. This lack of liquidity increases the risk of not being able to quickly and easily convert the product into cash when needed.

A structured product can be a combination of a bond and a financial derivative, a bond and an option, or a note and an option. This means that a structured product can be created by combining different financial instruments, such as bonds and derivatives or options. Therefore, all of the given options are correct.

Futures contracts are financial derivatives that require the parties involved to post margin, which is a form of collateral, to ensure that they fulfill their obligations. This margin requirement helps to mitigate the risk of default. Therefore, the statement "They are subject to margin requirements" is true.

When collaterals are pledged for a loan, it means that the borrower has provided assets as security for the loan. In this situation, automatic or mandatory redemption would not occur because the borrower has already provided collateral to mitigate the risk of default. Automatic or mandatory redemption typically occurs in situations where there is a default by the bond issuer or derivative counterparty, or when a callable bond is called by the issuer.

The Semi-Annual Report or Relevant Audit Report may exclude the reporting of poor performing funds. This means that these funds, which are not performing well, will not be included in the report. The report may still include newly launched funds, funds that are going to be terminated, and funds reaching maturity soon, but poor performing funds will be excluded.

Call options give the holder the right, but not the obligation, to buy the underlying asset at a specified price before the expiry date. This means that the holder can choose whether or not to exercise the option. However, call options do not give the holder the right to go short, which means selling an asset that they do not own. Therefore, the statement "They have the right to go short" is false for holders of call options.

The correct answer is "With due care and good faith." Fair value is the price that the fund can reasonably expect to receive upon the current sale of the asset. This determination should be made with due care and good faith, meaning that it should be done carefully and honestly, taking into consideration all relevant factors and information. Auditors, due diligence, and fund managers may be involved in the process of determining fair value, but the ultimate responsibility lies with the fund to make this determination with due care and good faith.

To mitigate the credit risk of the fixed income instrument used in structured products, the issuer of the structured product may provide a guarantee by itself or a third party. This means that either the issuer can provide a guarantee on its own or it can seek a guarantee from a third party to ensure that the credit risk is minimized. This allows for additional security and reassurance for investors in the structured product.

Payment netting is commonly used to reduce counterparty risk to both OTC and exchange-traded products. Payment netting involves offsetting payment obligations between parties, which can help to reduce the overall exposure to counterparty risk. Collaterals can also be used to reduce counterparty risk, but the question specifically asks for the option that is commonly used for both OTC and exchange-traded products. CFDs and publicly traded derivatives may also help to mitigate counterparty risk, but they are not mentioned as commonly used for both OTC and exchange-traded products.

Sam invested in a structured deposit issued by a local bank, so he will not be concerned about foreign exchange risk. This is because the investment is made in the local currency and there is no exposure to foreign currencies. Sam's main concern would be the credit rating of the issuer, as it indicates the likelihood of the bank defaulting on its obligations. He would also be concerned about liquidity risk, which refers to the ease of converting the investment into cash without significant loss. Additionally, Sam may be concerned about the value of the underlying assets in the derivative contract, as it can affect the overall performance of the investment.

The policy document of an ILP should include information such as the minimum holding amount, pricing basis, and dealing deadline. However, it does not need to include the potential of funds, as this information is not relevant to the policy document.

Insurers marketing structured ILPs must comply with the Insurance Act. This act provides regulations and guidelines for insurance companies in Singapore, ensuring that they operate in a fair and transparent manner. The Finance Companies Act and the Code of MAS may also have some relevance to insurers, but they are not specifically mentioned in relation to structured ILPs in this question. Therefore, the correct answer is the Insurance Act.