paper 7 exercise

7/28/2019 Paper 7 Exercise

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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. Setting a business culture of transparency and accountabilityii. Supplying high quality, accurate and true information to shareholders.iii. Hedging long-term risks with short-term instruments.iv. 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 2Which 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.

B Exchange rates are determined by the trading surplus or deficits with the

countrys major trading partner.

C Exchange rate are determined by market forces.

D Exchange rates are determined by the largest note-issuing bank.


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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 4If the real interest rate is 3% while the deflation rate is 3.5%, what is the

nominal interest rate?

A 6.605%

B -0.5%

C -0.605%

D 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 forthe borrower.

iii) Warrants are issued for investments banks to raise new capital forthe underlying company.

iv) Options can be regarded as either rights to holders or obligations tosellers.

A i) and iii) only.

B ii) and iv) only.

C iii) and iv) only.

D ii), iii) and iv) only.


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Question 6National Company announces a 1 for 6 bonus issue. National Company

shares are trading at HKD1.50 before the bonus issue. What would be thetheoretical price of National Companys shares immediately after the bonus

issue?

A HKD1.286

B HKD0.831

C HKD1.75

D HKD1.50

Question 7Which 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.

B To help governments tackle the economic, social and governance issues

of a globalised economy.

C To provide a surveillance facility and also to provide technical and

financial assistance to member countries.

D To act as an agent or trustee, facilitating the implementation of various

international financial agreements.

Question 8Company C announces a 1 for 4 rights issue, at issue price of HKD2.50. Justbefore the rights issue, the share is trading at HKD5.00. What will thetheoretical value of the shares be after the rights issue?

A HKD2.50

B HKD2.00

C HKD3.00

D HKD4.50


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Question 9What 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 The stock exchange.

B The central bank.

C The Treasury.

D The Executive Council.

Question 10Which of the following statements BEST describes a debt security?

A It is an obligation by one person or company to pay a specific amount toanother.

B It is the most illiquid form of investment.

C It provides evidence of ownership of the capital of a company.

D It is a piece of paper representing the right to demand an interest payment &

repayment of principal .

Question 11Which of the following is an example of a secondary market?

A The new issue of shares on the stock market.

B Trading of shares on the stock exchange.

C Any activity on the money market.

D Providing collateral of bonds to an investment bank.


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Question 12.Which of the following is normally a characteristic of equity?

A Maturity.

B Interest calculation.

C Dividend payment.

D Denomination in a currency.

Question 13Which of the following sets of instruments includes ONLY debt securities?

A Commercial bill, warrants, bankers acceptance.

B Debenture, treasury bill, preference share.

C Unit trust, treasury bill, euronote.

D Exchange Fund Notes, debenture, commercial paper.

Question 14Which of the following BEST describes an amortising loan?

A A loan which is repaid as lump sum at the end of a agreed period.

B A loan which provides for the repayment of interest and principle in

regular installments.

C A secured loan.

D An unsecured loan.


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Question 15Which of the following statements BEST describes the difference betweenfutures and options?

A Futures place equal but opposite obligations on both parties, whereasoptions place an obligation on the buyer only.

B Futures are used for hedging, whereas options are used for speculating.

C Over-the-counter options are tailor-made according to the requirements of

the two transaction parties, whereas exchange traded futures havestandardised features.

D Futures are transacted on an exchanges, whereas options are traded over-

the-counter.

Question 16Which of the following statements BEST describes a stop-loss limit order fora long stock position?

A To buy at market price in the event that the stock price falls to a certain

limited.

B To sell at market price in the event that the stock price falls to a certain

limit.

C To buy at market price in the event that the stock price rises to a certainlimit.

D To sell at market price in the event that the stock price rises to a certain

limit.


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Question 17Asset managers manage collective, pooled or investment funds. Which of the

following activities is usually associated with asset management?

i. Analysing publicly available information on specific companies,including financial information.

ii. Valuing individual securities based on technical analyses.

iii. Raising capital for corporations in forms of debt, equity and hybrids.iv. Monitoring the performance of specific companies and specific securities.

A i and iii only.

B ii and iv only.

C i and iv only.

D ii, iii and iv only.

Question 18Which of the following statements in relation to corporate finance is(are) FALSE?

i. Corporate finance includes the application of a range of economic andfinancial principles to maximize the overall value of a business.

ii. Corporate finance may assist in making key compensation decisions for the

company.

iii. Corporate finance includes the certification of the financial statements of

the company.iv. Corporate finance engages in primary market activities.

A iv only.

B i and iv only.

C iii and iv only.

D i, iii and iv only.


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Question 19Assume it is IBC Banks HKD102.00 put options are trading at a premium ofHKD5.50 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 i) only.

B ii) and iv) only.

C i) and iii) only.

D i), ii) and iii) only.

Question 20Which of the following statements in relation to risk are TRUE?

i) Market risk is the potential for loss as a result of a company beingunable to convert its assets into cash at reasonable prices.ii) Liquidity risk is the potential for loss as a result of changes in the

prices of securities.

iii) Basis risk refers to the risk of potential loss due to a failure todeliver the underlying assets when an option is exercised.

iv) Credit risk is the potential for financial loss as a result of thecounter-party failing to fulfil his contractual obligations.

A) iv only.

B) i and ii only.

C) ii and iv only.

D) i, ii and iv only.


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Question 21What are COMMON activities of offshore financial centres?

i) Asset Protection & Trust Advisoryii) Asset Managementiii) Financial & Risk Insurance Planningiv) Debt equity issuances

A) ii) and iv) only.

B) ii), iii) and iv) only.

C) i), ii) and iii) only.

D) all of the above.

Question 22Which of the following financial institutions is an authorised institution as defined

in the Banking Ordinance in Hong Kong?

A Security brokerages.B Investment Banks.

C Deposit-taking companies.D Insurance companies.

Question 23Which of the following statements relating to equity warrants are FALSE?

i) Put warrants benefit from a upward price movement in the underlyingstock.

ii) The expiry date is the last date on which the warrant can beexercised.

iii)

European style warrants can only be exercised during the life of thewarrant.

iv) The conversion ratio is the number of warrants that must beexercised to buy or sell one unit of the underlying share.

A i) and ii) only.

B iii) and iv) only.

C i) and iii) only.

D ii) and iv) only.


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Question 24Assume 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 0.875%

B 3.45%

C 3.55%

D 3.65%

Question 25A 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 HKD1,020.00

B HKD1,033.96

C HKD1,063.96

D HKD1,329.95

Question 26Which of the following financial instruments can be used by investment

institutions to raise equity investment money?

i) Exchange-traded fundsii) Convertible notesiii) Preference sharesiv) Ordinary shares

A i) and iii) only.


C i) and ii) only.

D ii) and iv) only.


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Question 27Which of the following actions taken by the government is considered to be

indicative of an contractionary fiscal policy?

A Decrease government expenditure and discourage investment.

B Discourage investment but encourage household spending.

C Increase government expenditure and encourage domestic consumption.

D Increase the tax rate and issue more government bonds.

Question 28Calculate 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 HKD482.74

B HKD493.73

C HKD498.34

D 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 HKD43,686.80

B HKD155,104.65

C HKD158,865.73

D HKD194,325.46


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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 annualinterest rate of 10%?

A HKD78,494.62

B HKD97,326.21

C HKD97,333.32

D HKD99,726.78

Question 31

Which of the following instruments is NOT a short term debt instrument?

A Commercial paper.

B Exchange fund notes.

C Certificates of deposit.

D Bankers Acceptance.

Question 32Which of the following statements relating to the price of warrants is FALSE?

A The larger the time to expiry, the higher the price of the warrant.

B The more volatile the price of the underlying securities, the higher the

price of the warrant.

C The higher the interest rate, the higher the price of the warrant.

D The higher the conversion ratio, the higher the price of the warrant.


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Question 33Which of the following capital raising methods require a prospectus as a

supporting document for the issue?i) Rights issueii) Open offeriii) Consideration issueiv) Placement

A i) and ii) only.

B ii) and iv) only.

C i) and iv) only.


Question 34In Hong Kong, which of the following activities MUST be licensed by the

Securities and Futures Commission (SFC)?i) Providing margin finance for trading listed stocksii) Dealing in securitiesiii) Giving advice on gearing to purchase propertyiv) Trading financial futures contracts

A i) and ii) only.

B i), ii) and iii) only.

C i), ii) and iv) only.


Question 35Which organisation is responsible for listing of securities in Hong Kong?

A Stock Exchange of Hong Kong (SEHK).

B Hong Kong Monetary Authority (HKMA).

C Hong Kong Securities Clearing Company Limited (HKSCC).

D Securities and Futures Commission (SFC).


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Question 36Equity 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 existingshareholders in proportion to their existing shareholdings?

A Bonus issue.

B Rights issue.

C Offer for sale.

D Placement.

Question 37A warrant does NOT have which of the following features?

A Entitlement to buy.

B Entitlement to sell.

C Underlying asset.

D Variable expiry date.

Question 38The 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 Liquidity risk.

B Operational risk.

C Market risk.

D Credit risk.


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Question 39Which of the following activities is NOT the responsibility of the Securities

and Futures Commission (SFC)?

A Enforcing the Securities and Futures Ordinance.

B Investigating unusual price movement of listed securities.

C Suspending or delisting a company that fails to comply with the listing

rules.

D Issuance of licence to market participants in securities trading.

Question 40Which of the following market participants would NOT, normally, be an issuerof warrants?

v) Investment banksvi) Retail investorvii) Listed companyviii) Futures trader

A i) and ii) only.


C ii) and iv) only.

D i), ii) and iii) only.

Question 41When a company lists on the Stock Exchange of Hong Kong, which of the

following market participants are involved in the listing process?i) Sponsorii) Regulatoriii) Auditoriv) Arbitrageur

A i) and ii) only.

B ii) and iv) only.

C i), ii) and iii) only.



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Question 42

The seller of NTT DoCoMo calls would hedge his position by engaging inwhich of the following transaction?

A Sell NTT DoCoMo futures contracts.

B Buy NTT DoCoMo put options with same strike price and maturity.

C Buy NTT DoCoMo futures contracts.

D Sell NTT DoCoMo shares.

Question 43What is the MAIN difference between the HSBC Holdings futures contract on

HKFE and the HSBC Holdings options contract on SEHK?

A Cash settlement versus physical delivery of underlying shares.

B Different contract multiplier.

C Different contract months.

D Different minimum price fluctuation.

Question 44.

Which of the following derivatives trades would protect a lender against falling

interest rates?

A Buying an interest rate floor.

B Selling an interest rate floor.

C Buying an interest rate cap.

D Buying an interest rate cap.


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Question 45A 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 wouldhedge this risk?

A Buy soya bean futures contracts.

B Sell soya bean futures contracts.

C Buy soya bean call option.

D Sell soya bean put option.

Question 46Over-the-counter derivatives markets have which of the followingcharacteristic?

A Centralised market place for trading.

B Clearing and settlement by a Clearing House.

C Standardised products.

D Counter-party risk.

Question 47When market volatility goes down, what happens to the premium of exchange

traded options?

A Call premiums increase and put premiums decrease.

B Call premiums decrease and put premiums increase.

C Call premiums decrease and put premiums decrease.

D Call premiums increase and put premiums increase.


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Question 48What 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.

B Compensation from the seller if interest rates fall below a specified rate.

C A fixed interest rate for a 3-month period.

D A 3-month interest rate product at a fixed price.

Question 49A 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 Buy gold futures.

B Enter a gold swap.

C Sell a gold put option.

D Buy a gold forward contract.

Question 50Which of the following is NOT a characteristic of exchange-traded derivatives

markets?

A Price transparency.

B Centralised market place.

C Standardised products.

D Buy and sell settle directly with each other.


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Question 51What is the breakeven at expiry of a short 11,000 Hang Seng Index (HSI) put if

the premium is 50 points?

A 11,050

B 11,000

C 10,950

D 10,900

Question 52A 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 thisstrategy?

A Buy a cap and buy a floor.

B Buy a cap and sell a floor.

C Buy a floor and sell a cap.

D Sell a floor and sell a cap.

Question 53What 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.

B The strike price minus the expiry price, or zero, whichever is higher.

C The exercise price minus the strike price, or zero, whichever is higher.

D The market value of the underlying assets minus the premium paid, or

zero, whichever is higher .


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Question 54A 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 thefollowing derivatives will provide a suitable hedge against an unfavorable

change in interest rates over the next six months?

A Buy 3-year exchange-fund notes futures contracts.

B Sell 3-year exchange-fund notes futures contracts.

C Sell 3-month HIBOR futures contracts.

D Buy 3-month HIBOR futures contracts.

Question 55Profit/Loss

50

-10

The above option trading strategy is :

A a bear spread.

B a bull spread.

C a straddle.

D a strangle.

Index

2,000 2,100


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Question 56Which of the following is TRUE about derivative warrants in Hong Kong?

A They are only issued over individual stock.

B They are only issued over an index.

C They are only issued over a basket of stocks.

D They can be issued over a stock, an index or a basket of stocks.

Question 57Why would a speculator prefer to trade corn commodity futures than corn

commodity forwards?

A Higher profit margin.

B No basis risk.

C Greater liquidity.

D Less price risk.

Question 58Which of the following features of an options contract is NOT defined in thestandard specification set out by the Hong Kong Futures Exchange (HKFE)?

A Premium.

B Expiry date.

C Quantity of underlying asset.

D Strike price.

paper 7 exercise

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