Paper 7 Exercise 1

Question 1 Recent corporate collapses illustrate limitations in financial risk management procedures. Which of the following is a /are desirable risk management procedure(s)? i. ii. iii. iv. Setting a business culture of transparency and accountability Supplying high quality, accurate and true information to shareholders. Hedging long-term risks with short-term instruments. Avoiding conflict of interest among employees, directors and the auditors.

A. i, iii & iv. B. i, ii, iii & iv. C. i, ii & iv. D. i, ii, & iii.

Question 2 Which of the following scenarios BEST illustrates what is meant by floating exchange rates? A Exchange rates are determined by the central banks or monetary authorities. Exchange rates are determined by the trading surplus or deficits with the countrys major trading partner. Exchange rate are determined by market forces. Exchange rates are determined by the largest note-issuing bank.

C D

Question 3. In Hong Kong, which of the following bodies are not responsible for regulating authorized institutions as defined in the Banking Ordinance? i. China Securities Regulatory Commission. ii. Securities and Futures Commission. iii. The Central Bank of Hong Kong. iv. Hong Kong Monetary Authority. A. i, iii & iv. B. I & iii. C. i, ii & iv. D. i, ii, & iii.

Question 4 If the real interest rate is 3% while the deflation rate is 3.5%, what is the nominal interest rate? A B C D 6.605% -0.5% -0.605% 6.5%

Question 5. Which of the following statements are FALSE? i) Swaps enhance the credit rating of a company. ii) Forward Rate Agreements lock-in the futures borrowing rates for the borrower. iii) Warrants are issued for investments banks to raise new capital for the underlying company. iv) Options can be regarded as either rights to holders or obligations to sellers. A B C D i) and iii) only. ii) and iv) only. iii) and iv) only. ii), iii) and iv) only.

Question 6 National Company announces a 1 for 6 bonus issue. National Company shares are trading at HKD1.50 before the bonus issue. What would be the theoretical price of National Companys shares immediately after the bonus issue? A B C D HKD1.286 HKD0.831 HKD1.75 HKD1.50

Question 7 Which of the following is generally accepted as the MAIN objective of the International Finance Corporation (IFC)? A To act as a forum for international monetary and financial cooperation among central banks. To help governments tackle the economic, social and governance issues of a globalised economy. To provide a surveillance facility and also to provide technical and financial assistance to member countries. To act as an agent or trustee, facilitating the implementation of various international financial agreements.

Question 8 Company C announces a 1 for 4 rights issue, at issue price of HKD2.50. Just before the rights issue, the share is trading at HKD5.00. What will the theoretical value of the shares be after the rights issue? A B C D HKD2.50 HKD2.00 HKD3.00 HKD4.50

Question 9 What type of financial institution typically performs the following duties? Conducts the nations monetary policy; Supervises and regulates banking institutions; Maintains the stability of the financial system; and Provides certain financial services to the government, the public, financial institutions and foreign official institutions. A B C D The stock exchange. The central bank. The Treasury. The Executive Council.

Question 10 Which of the following statements BEST describes a debt security? A It is an obligation by one person or company to pay a specific amount to another. It is the most illiquid form of investment. It provides evidence of ownership of the capital of a company. It is a piece of paper representing the right to demand an interest payment & repayment of principal .

B C D

Question 11 Which of the following is an example of a secondary market? A B C D The new issue of shares on the stock market. Trading of shares on the stock exchange. Any activity on the money market. Providing collateral of bonds to an investment bank.

Question 12. Which of the following is normally a characteristic of equity? A B C D Maturity. Interest calculation. Dividend payment. Denomination in a currency.

Question 13 Which of the following sets of instruments includes ONLY debt securities? A B C D Commercial bill, warrants, bankers acceptance. Debenture, treasury bill, preference share. Unit trust, treasury bill, euronote. Exchange Fund Notes, debenture, commercial paper.

Question 14 Which of the following BEST describes an amortising loan? A B A loan which is repaid as lump sum at the end of a agreed period. A loan which provides for the repayment of interest and principle in regular installments. A secured loan. An unsecured loan.

C D

Question 15 Which of the following statements BEST describes the difference between futures and options? A Futures place equal but opposite obligations on both parties, whereas options place an obligation on the buyer only. Futures are used for hedging, whereas options are used for speculating. Over-the-counter options are tailor-made according to the requirements of the two transaction parties, whereas exchange traded futures have standardised features. Futures are transacted on an exchanges, whereas options are traded overthe-counter.

B C

Question 16 Which of the following statements BEST describes a stop-loss limit order for a long stock position? A To buy at market price in the event that the stock price falls to a certain limited. To sell at market price in the event that the stock price falls to a certain limit. To buy at market price in the event that the stock price rises to a certain limit. To sell at market price in the event that the stock price rises to a certain limit.

Question 17 Asset managers manage collective, pooled or investment funds. Which of the following activities is usually associated with asset management? i. ii. iii. iv. A B C D Analysing publicly available information on specific companies, including financial information. Valuing individual securities based on technical analyses. Raising capital for corporations in forms of debt, equity and hybrids. Monitoring the performance of specific companies and specific securities. i and iii only. ii and iv only. i and iv only. ii, iii and iv only.

Question 18 Which of the following statements in relation to corporate finance is(are) FALSE? i. ii. iii. iv. A B C D Corporate finance includes the application of a range of economic and financial principles to maximize the overall value of a business. Corporate finance may assist in making key compensation decisions for the company. Corporate finance includes the certification of the financial statements of the company. Corporate finance engages in primary market activities. iv only. i and iv only. iii and iv only. i, iii and iv only.

Question 19 Assume it is IBC Banks HKD102.00 put options are trading at a premium of HKD5.50 and IBC Banks shares are trading at HKD100.00 per share. Which of the following statement(s) is(are) TRUE? i) This option is in-the-money. ii) This option has time value. iii) This option has intrinsic value. iv) This option is out-of-the-money. A B C D i) only. ii) and iv) only. i) and iii) only. i), ii) and iii) only.

Question 20 Which of the following statements in relation to risk are TRUE? i) ii) iii) iv) Market risk is the potential for loss as a result of a company being unable to convert its assets into cash at reasonable prices. Liquidity risk is the potential for loss as a result of changes in the prices of securities. Basis risk refers to the risk of potential loss due to a failure to deliver the underlying assets when an option is exercised. Credit risk is the potential for financial loss as a result of the counter-party failing to fulfil his contractual obligations.

A) B) C) D)

iv only. i and ii only. ii and iv only. i, ii and iv only.

Question 21 What are COMMON activities of offshore financial centres? i) ii) iii) iv) A) B) C) D) Asset Protection & Trust Advisory Asset Management Financial & Risk Insurance Planning Debt equity issuances

ii) and iv) only. ii), iii) and iv) only. i), ii) and iii) only. all of the above.

Question 22 Which of the following financial institutions is an authorised institution as defined in the Banking Ordinance in Hong Kong? A B C D Security brokerages. Investment Banks. Deposit-taking companies. Insurance companies.

Question 23 Which of the following statements relating to equity warrants are FALSE? i) Put warrants benefit from a upward price movement in the underlying stock. ii) The expiry date is the last date on which the warrant can be exercised. iii) European style warrants can only be exercised during the life of the warrant. iv) The conversion ratio is the number of warrants that must be exercised to buy or sell one unit of the underlying share. A B C D i) and ii) only. iii) and iv) only. i) and iii) only. ii) and iv) only.

Question 24 Assume you deposit HKD500 for one year at a nominal interest rate of 3.50% p.a. paid quarterly. What is the effective annual interest rate? A B C D 0.875% 3.45% 3.55% 3.65%

Question 25 A bank currently offers a 3-year time deposit, paying 4.25% p.a. What interest would you earn after 3 years on a HKD8,000 deposit? A B C D HKD1,020.00 HKD1,033.96 HKD1,063.96 HKD1,329.95

Question 26 Which of the following financial instruments can be used by investment institutions to raise equity investment money? i) Exchange-traded funds ii) Convertible notes iii) Preference shares iv) Ordinary shares A B C D i) and iii) only. iii) and iv) only. i) and ii) only. ii) and iv) only.

Question 27 Which of the following actions taken by the government is considered to be indicative of an contractionary fiscal policy? A B C D Decrease government expenditure and discourage investment. Discourage investment but encourage household spending. Increase government expenditure and encourage domestic consumption. Increase the tax rate and issue more government bonds.

Question 28 Calculate the price of a treasury bill with face value of HKD500, yield of 2.5 per cent per annum and 183 days until maturity. Assume 360 days in a year. A B C D HKD482.74 HKD493.73 HKD498.34 HKD507.37

Question 29 A government bond with a face value of HKD150,000 has a coupon payment of HKD20,000 paid semi-annually. The maturity date is 30 December 2004. If the bond is transacted on 30 December 2002, at a yield of 10%, what is the price of the bond? A B C D HKD43,686.80 HKD155,104.65 HKD158,865.73 HKD194,325.46

Question 30. Assuming there are 365 days in a year, what is the price of a 100-day certificate of deposit which has a face value of HKD100,000 and an annual interest rate of 10%? A B C D HKD78,494.62 HKD97,326.21 HKD97,333.32 HKD99,726.78

Question 31 Which of the following instruments is NOT a short term debt instrument? A B C D Commercial paper. Exchange fund notes. Certificates of deposit. Bankers Acceptance.

Question 32 Which of the following statements relating to the price of warrants is FALSE? A B The larger the time to expiry, the higher the price of the warrant. The more volatile the price of the underlying securities, the higher the price of the warrant. The higher the interest rate, the higher the price of the warrant. The higher the conversion ratio, the higher the price of the warrant.

C D

Question 33 Which of the following capital raising methods require a prospectus as a supporting document for the issue? i) Rights issue ii) Open offer iii) Consideration issue iv) Placement A B C D i) and ii) only. ii) and iv) only. i) and iv) only. ii), iii) and iv) only.

Question 34 In Hong Kong, which of the following activities MUST be licensed by the Securities and Futures Commission (SFC)? i) Providing margin finance for trading listed stocks ii) Dealing in securities iii) Giving advice on gearing to purchase property iv) Trading financial futures contracts A B C D i) and ii) only. i), ii) and iii) only. i), ii) and iv) only. ii), iii) and iv) only.

Question 35 Which organisation is responsible for listing of securities in Hong Kong? A B C D Stock Exchange of Hong Kong (SEHK). Hong Kong Monetary Authority (HKMA). Hong Kong Securities Clearing Company Limited (HKSCC). Securities and Futures Commission (SFC).

Question 36 Equity funds can be raised via a number of methods. What method is used when new shares are offered at a discount to market price to existing shareholders in proportion to their existing shareholdings? A B C D Bonus issue. Rights issue. Offer for sale. Placement.

Question 37 A warrant does NOT have which of the following features? A B C D Entitlement to buy. Entitlement to sell. Underlying asset. Variable expiry date.

Question 38 The codes of conduct and guidelines issued by the Securities and Futures Commission (SFC) require that securities firms have a disaster recovery plan. What type of risk does this mitigate? A B C D Liquidity risk. Operational risk. Market risk. Credit risk.

Question 39 Which of the following activities is NOT the responsibility of the Securities and Futures Commission (SFC)? A B C Enforcing the Securities and Futures Ordinance. Investigating unusual price movement of listed securities. Suspending or delisting a company that fails to comply with the listing rules. Issuance of licence to market participants in securities trading.

Question 40 Which of the following market participants would NOT, normally, be an issuer of warrants? v) Investment banks vi) Retail investor vii) Listed company viii) Futures trader A B C D i) and ii) only. iii) and iv) only. ii) and iv) only. i), ii) and iii) only.

Question 41 When a company lists on the Stock Exchange of Hong Kong, which of the following market participants are involved in the listing process? i) Sponsor ii) Regulator iii) Auditor iv) Arbitrageur A B C D i) and ii) only. ii) and iv) only. i), ii) and iii) only. ii), iii) and iv) only.

Question 42 The seller of NTT DoCoMo calls would hedge his position by engaging in which of the following transaction? A B C D Sell NTT DoCoMo futures contracts. Buy NTT DoCoMo put options with same strike price and maturity. Buy NTT DoCoMo futures contracts. Sell NTT DoCoMo shares.

Question 43 What is the MAIN difference between the HSBC Holdings futures contract on HKFE and the HSBC Holdings options contract on SEHK? A B C D Cash settlement versus physical delivery of underlying shares. Different contract multiplier. Different contract months. Different minimum price fluctuation.

Question 44. Which of the following derivatives trades would protect a lender against falling interest rates? A B C D Buying an interest rate floor. Selling an interest rate floor. Buying an interest rate cap. Buying an interest rate cap.

Question 45 A farmer is at risk of a fall in the price of soya bean between now and when the corp will be ready for sale. Which of the following derivatives positions would hedge this risk? A B C D Buy soya bean futures contracts. Sell soya bean futures contracts. Buy soya bean call option. Sell soya bean put option.

Question 46 Over-the-counter derivatives markets have which of the following characteristic? A B C D Centralised market place for trading. Clearing and settlement by a Clearing House. Standardised products. Counter-party risk.

Question 47 When market volatility goes down, what happens to the premium of exchange traded options? A B C D Call premiums increase and put premiums decrease. Call premiums decrease and put premiums increase. Call premiums decrease and put premiums decrease. Call premiums increase and put premiums increase.

Question 48 What will the buyer of a three-month interest rate cap receive at maturity? A Compensation from the seller if interest rates rise above a specified strike rate. Compensation from the seller if interest rates fall below a specified rate. A fixed interest rate for a 3-month period. A 3-month interest rate product at a fixed price.

B C D

Question 49 A gold producer believes that gold prices will fall continually over the next few years. Which of the following derivative strategies is the MOST appropriate action to take according to his outlook? A B C D Buy gold futures. Enter a gold swap. Sell a gold put option. Buy a gold forward contract.

Question 50 Which of the following is NOT a characteristic of exchange-traded derivatives markets? A B C D Price transparency. Centralised market place. Standardised products. Buy and sell settle directly with each other.

Question 51 What is the breakeven at expiry of a short 11,000 Hang Seng Index (HSI) put if the premium is 50 points? A B C D 11,050 11,000 10,950 10,900

Question 52 A floating rate lender wishes to protect himself against a fall in interest rates and wishes to use a zero cost collar. What derivatives are used to create this strategy?

A B C D

Buy a cap and buy a floor. Buy a cap and sell a floor. Buy a floor and sell a cap. Sell a floor and sell a cap.

Question 53 What is the intrinsic value of a call option? A The market value of the underlying assets minus the exercise price of the option, or zero, whichever is higher. The strike price minus the expiry price, or zero, whichever is higher. The exercise price minus the strike price, or zero, whichever is higher. The market value of the underlying assets minus the premium paid, or zero, whichever is higher .

B C D

Question 54 A corporation is seeking to make a cash takeover bid and will have to borrow HKD50,000,000 on a floating rate basis in three months time. Which of the following derivatives will provide a suitable hedge against an unfavorable change in interest rates over the next six months? A B C D Buy 3-year exchange-fund notes futures contracts. Sell 3-year exchange-fund notes futures contracts. Sell 3-month HIBOR futures contracts. Buy 3-month HIBOR futures contracts.

Question 55 Profit/Loss

50

2,000

2,100 Index

-10

The above option trading strategy is : A B C D a bear spread. a bull spread. a straddle. a strangle.

Question 56 Which of the following is TRUE about derivative warrants in Hong Kong? A B C D They are only issued over individual stock. They are only issued over an index. They are only issued over a basket of stocks. They can be issued over a stock, an index or a basket of stocks.

Question 57 Why would a speculator prefer to trade corn commodity futures than corn commodity forwards? A B C D Higher profit margin. No basis risk. Greater liquidity. Less price risk.

Question 58 Which of the following features of an options contract is NOT defined in the standard specification set out by the Hong Kong Futures Exchange (HKFE)? A B C D Premium. Expiry date. Quantity of underlying asset. Strike price.