Free CISI IAD Derivatives practice questions

Not quite. The answer is A.

Selling index futures produces gains as the market falls that offset the loss on the portfolio, costs no premium and surrenders the upside in equal measure, which is exactly what has been accepted here. Buying a put is the tempting answer, since it also shields a portfolio, but it has to be paid for at the outset and it leaves any rise in the market intact. Writing options brings in a premium, yet the cover it gives stops at the size of that premium.

Not quite. The answer is D.

Sterling Treasury bills are normally issued for a term of 91 days, which is roughly three months, and they are repaid at par when that term ends. The statement about quarterly interest is wrong because these bills carry no coupon at all; the whole of the investor's return comes from buying below par, so nothing is paid out during the life of the bill.

Not quite. The answer is B.

ICE Futures Europe sets its gilt futures block threshold at 500 contracts, so a bilaterally agreed deal must reach that size before it may be registered away from the central order book. The figure of 750 is the threshold the same exchange applies to FTSE futures, and using it for gilts would wrongly shut out qualifying business. Each exchange fixes its own minimum for each product, and once agreed the trade must still be reported into the exchange.

Not quite. The answer is A.

Forwards are settled only on the delivery date, and where they are marked to market any resulting gain is not handed over until the contract matures, so nothing is credited to the holder on the day a gain happens to arise. A futures position, by contrast, is revalued each business day and variation margin passes between the parties and the clearing house, which is why daily margin flows belong to the exchange-traded contract rather than to the forward.

Not quite. The answer is D.

The payment is fixed in euros, so its sterling cost is EUR 360,000 divided by the exchange rate: £288,000 at 1.25 and £300,000 at 1.20, an increase of £12,000. Applying the 4% fall in the rate to the original sterling figure gives £11,520 and understates the effect, because the sterling cost rises by the ratio 1.25 to 1.20, or roughly 4.17%. This exposure is the currency risk that clearing arrangements leave with a member whose reporting currency differs from that of the clearing house.

Not quite. The answer is C.

Rolling forward closes the existing contract and opens one in a later delivery month at the same time, so the maturity of the exposure changes while the market risk carries on unchanged. Closing out is the choice that removes market exposure altogether and realises the profit or loss on the position, which is why treating a rollover as a way of crystallising that profit is wrong. Delivery obligations arise only where a position is left open into the delivery process.

Not quite. The answer is D.

Online news services differ in what they charge for: real-time prices and in-depth analysis usually sit behind a subscription, while up-to-date news and economic releases reach everyone. Adding analysis to the free news is what takes the option beyond what a non-paying user actually gets. Research from brokers and from banks goes to their premium clients first and in full, so it is never what such a user obtains from a news service.

Not quite. The answer is D.

An intra-market spread buys and sells futures on the same underlying asset in different delivery months, so trading two long gilt maturities against each other qualifies. Pairing short sterling against long gilts is tempting because both are sterling interest rate products, but the underlying assets differ, which makes that an inter-market spread. What matters is the identity of the underlying rather than the exchange or the currency.

Not quite. The answer is A.

The starting point of any advisory relationship is a clear understanding of the client's own investment goals, which means settling whether they want capital appreciation, income or some blend of the two. Only once that is fixed can the correct mix of instruments, and the appropriate use of cash or derivatives, be chosen. What the firm happens to favour for clients of that type is not the test, because the objective belongs to the client. Where the orders are routed and where the resulting trades are registered for clearing are execution details that follow from the strategy rather than shaping it.

Not quite. The answer is A.

The Financial Policy Committee sits within the Bank of England and exists to identify, monitor and take action on systemic risks to the economy as a whole, passing its concerns to the Prudential Regulation Authority, which is then obliged to act. The Prudential Regulation Authority is the tempting answer because it supervises deposit takers, insurers and designated investment firms directly, but that entity level prudential remit is exactly what the Financial Policy Committee lacks. The Monetary Policy Committee is concerned with monetary policy rather than financial stability.