Selena M9A Mock Exam 2

Peter's most concerned risk is liquidity risk because he is worried about being able to liquidate his investments when he needs the money. Liquidity risk refers to the risk of not being able to quickly and easily convert an investment into cash without incurring significant losses.

Structured ILPs (Investment-Linked Policies) are investment products that combine insurance coverage with investment opportunities. They are suitable for buyers who are seeking capital appreciation, which means they want their investment to grow over time. However, structured ILPs also come with a medium to high risk of losing their capital, as investments are subject to market fluctuations. Therefore, this option best describes the type of buyer who would be interested in structured ILPs.

A credit default swap is a financial contract that allows one party to transfer the risk of default on a credit instrument, such as a note or bond, to another party. In this arrangement, the party buying the credit default swap pays a series of fee payments to the party selling the swap. By doing so, the buyer transfers the credit risk to the seller, who will be responsible for any losses that may occur if the credit instrument defaults. Therefore, the correct answer is Credit.

The bear straddle strategy involves selling a call option and a put option with the same strike price and expiration date. This strategy is used when the investor expects the stock price to remain relatively stable or decline slightly. By selling both options, the investor can collect premiums and potentially profit if the stock price stays within a certain range. This strategy is suitable for John's expectation of the stock price not moving much in either direction.

An European option is a security that allows the holder the right to buy or sell an underlying security at a strike price on expiration. This means that the holder has the choice to exercise the option on the expiration date, but not before.

A coefficient of -0.5 indicates a negative correlation between the asset and the portfolio. This means that when the portfolio value goes up, the value of the asset tends to go down, and vice versa. By including assets with negative correlations, the overall risk of the portfolio can be reduced, as losses in one asset may be offset by gains in another. Therefore, a coefficient of -0.5 can enhance portfolio diversification.

Structured Deposits are a type of structured product. They are not investment products and are issued by fund managers. However, they are not covered by the Deposit Insurance Scheme in Singapore.

Negatively correlated securities move in opposite directions in terms of price movements. This means that when one security goes up in value, the other security goes down. This type of correlation can be beneficial for diversifying a portfolio because it helps to reduce overall risk. When one investment is performing poorly, the other investment can potentially offset those losses.

Structured products are typically debt securities that are issued by financial institutions. They are not unsecured debt securities of the issuer. Structured products are designed to have specific risk and return profiles, often combining different types of underlying assets. They are considered hybrid products because they combine elements of both debt and equity. Structured products can be more complex than traditional securities due to their customized structures and features. Therefore, the statement that they have equity-like structures and participate in the profits of the issuer is not true.

The credit risk of the issuer of the structured product refers to the likelihood that the issuer may default on their financial obligations. This risk is considered a primary risk to the principal because if the issuer defaults, the investor may not receive the full amount of their initial investment back. In other words, the credit risk poses a direct threat to the principal amount invested in the structured product.

The forward price of a barrel of oil is lower than the current spot price, indicating a discount. The discount is S$40, as the forward price is S$40 lower than the spot price.

A non-standardized contract refers to a contract that is not traded on an exchange and does not have standardized terms and conditions. Options traded in an exchange and an Exchange Traded Fund (ETF) that tracks the STI index are both examples of standardized contracts as they are traded on an exchange and have predefined terms. Unit trusts issued by a bank may not be standardized contracts, but they are not mentioned as non-standardized in the options. Therefore, the correct answer is the Forward Contract over the counter, which is a type of contract that is not traded on an exchange and does not have standardized terms and conditions.

The statement "Capital is guaranteed upon maturity" is likely to happen because the structured Investment-linked Life Insurance policy guarantees 100% capital guarantee on maturity. This means that John's initial investment of S$300,000 will be guaranteed and returned to him in full when the policy matures on 1 January 2021.

This answer is correct because it states that performance participation products offer full upside potential. This means that investors have the opportunity to earn high returns without any limitations or restrictions. This is a desirable feature for investors as it allows them to benefit fully from positive market movements.

An investor of a structured ILP should be least concerned about the technicalities and mechanics of how the investment works. This is because the investor's primary concern should be the payoff under the worst case scenario, the risk nature of the product, and the expected returns of the product. Understanding the technicalities and mechanics is important, but it is not the primary concern for the investor.

Issuer specific risk refers to the risk that is specific to a particular issuer, such as a company or a government. It is the risk that the issuer may face due to its own operations, management, or financial condition. Operational risk, as mentioned in the answer, is one of the types of issuer specific risk. It refers to the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. Therefore, operational risk is a valid explanation for issuer specific risk.

Automated trading helps fund managers with market pricing by identifying profit opportunities arising from subtle anomalies. This means that the automated trading system is able to analyze market data and identify small discrepancies or patterns that can be exploited for profit. This can help fund managers make more informed decisions and potentially increase their returns. The other options, such as producing research papers, replacing the expertise of fund managers, or exercising judgment calls, do not accurately describe the role of automated trading in market pricing.

The statement "Able to attract more than expected fund size" is false. The other statements are true. Structured products deliver return to investors when the pricing on the structure is reasonable, the anticipated market view is correct, and the strategy or structure to capture market view is appropriate. However, attracting more than expected fund size does not necessarily determine the return on investment for structured products.

The number of investors for the underlying asset has the least impact on the value of derivatives. The value of derivatives is primarily influenced by factors such as the spot price of the underlying asset, price volatility, and dividend rate. The number of investors does not directly affect the value of the derivatives, but rather it may indirectly impact market liquidity and trading volume.

A structured fund is a type of collective investment scheme. It is not issued by a bank or an insurance company specifically, but rather it is a pooled investment vehicle that is managed by a professional fund manager. Structured funds typically have a specific investment strategy or objective, and they may offer investors access to a diversified portfolio of assets. The term "structured" refers to the fact that these funds often have a predetermined investment strategy or set of rules that dictate how the fund manager can invest.

The main difference between futures and forwards is that forwards are traded over the counter. This means that the contracts are privately negotiated between two parties, without the involvement of an exchange. In contrast, futures contracts are standardized and traded on organized exchanges. The other statements in the question are not accurate differentiators between futures and forwards.

In a single premium structured investment linked life insurance policy, the death benefit is greater than the single premium. This means that if the insured person passes away, the beneficiary will receive a payout that exceeds the initial premium paid for the policy. This provides additional financial protection and ensures that the policyholder's loved ones are adequately covered in the event of their death.

In a long put option, the strike price is the price at which the option holder has the right to sell the underlying asset. If the strike price is less than the market price, it means that the option is "out-of-the-money" because it would not be profitable for the option holder to exercise the option and sell the asset at a lower price than the current market price.

Coupon Bearing Bonds give the most capital protection because they provide a fixed rate of interest and return the principal amount at maturity. This means that investors are guaranteed regular income in the form of coupon payments and the return of their initial investment. In contrast, derivatives, options, and real estate investment trusts do not offer the same level of capital protection as they are subject to market fluctuations and may not guarantee a fixed return or the return of the principal amount.

Warrants are financial instruments that give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price before a certain date. The statement "Holders of warrants have the obligation to fulfill contract terms" is false because holders of warrants have the right to exercise the warrant, but they are not obligated to do so. Therefore, they can choose whether or not to fulfill the contract terms.

Futures contracts allow for the negotiation of the price at which the underlying asset will be bought or sold in the future. This means that buyers and sellers can agree on a price that suits both parties, taking into consideration market conditions and their individual preferences. The other conditions listed, such as quality, quantity, and delivery date, are typically standardized and cannot be negotiated.

Market volatility is the correct answer because it refers to the fluctuation in the price or value of a financial instrument, such as a structured product. The return component of a structured product is influenced by market volatility as it affects the underlying assets or indices on which the product is based. Higher market volatility can lead to larger price swings and potentially higher returns, while lower market volatility can result in smaller price movements and potentially lower returns. Therefore, market volatility is directly related to the return component of a structured product.

The statement to Policy Owners will provide information about the transactions that took place during the statement period. This includes any purchases, sales, or transfers of units within the policy. It will also show any changes in the policy's cash value or surrender value. This information is important for policy owners to track the performance and activity of their policy.

If the spot price increased by $20, it means that the current market price for the asset has gone up. This is beneficial to the buyer because they can purchase the asset at a lower price through the forward contract and then sell it at the higher spot price, making a profit.

Leveraging refers to the practice of using borrowed funds or margin to increase the potential return on an investment. Trading on margin is a form of leveraging as it allows investors to trade with borrowed funds. It can magnify both gains and losses because investors are essentially amplifying their exposure to the market. Trading at a lower value than the actual contract value is another form of leveraging, as it allows investors to control a larger position with a smaller amount of capital. However, using collaterals to mitigate counterparty risk does not describe leveraging as it is a risk management technique that involves providing assets as security to protect against the default of the counterparty.

The investment component of a structured ILP fund is governed by the Code on Collective Investment Scheme. This code provides guidelines and regulations for the management and operation of collective investment schemes, which includes ILP funds. It ensures that these funds are managed in a transparent and responsible manner, protecting the interests of investors and promoting fair and efficient markets. The Banking Act, Company Act, and Insurance Act do not specifically apply to the investment component of structured ILP funds.

The statement that a call seller pays the premium is false. In options trading, the call buyer pays the premium to the call seller. The call buyer has the right to buy the underlying asset at a specified price, while the call seller has the obligation to sell the asset if the buyer exercises the option. The buyer also determines the time to exercise the option, as they have the right but not the obligation to do so.

When structuring a structured product, a bank's least concern would be the marketing of the product. While marketing is important for attracting investors, the bank's main focus would be on reducing counterparty risk, adopting effective risk management, and providing liquidity. These factors are crucial for ensuring the safety and stability of the structured product, while marketing is more of a secondary consideration.

Reverse convertible bonds are a type of bond that give the investor full upside potential in terms of the bond's interest payments and principal repayment. However, they also come with limited downside protection. One of the key features of reverse convertible bonds is that they use a put option, which allows the investor to sell the bond back to the issuer at a predetermined price if certain conditions are met. This put option provides some level of protection to the investor in case the price of the underlying asset decreases. Therefore, the statement "Use a Put option" best describes reverse convertible bonds.

The main difference between portfolio bonds and unit trusts is the presence of a dealing account. Portfolio bonds do not have a dealing account, whereas unit trusts do. A dealing account allows investors to buy and sell units in the unit trust directly with the fund manager. This gives investors more control and flexibility over their investments. In contrast, portfolio bonds are typically managed by an insurance company, and investors do not have direct access to a dealing account.

The correct answer is "Leveraged". Leveraged investments involve borrowing money to increase the potential return of an investment. This borrowing amplifies both gains and losses, leading to higher price volatility compared to direct investments. Hedged investments involve strategies to reduce risk and protect against potential losses, which may result in lower price volatility. Unleveraged investments do not involve borrowing and therefore have lower price volatility. Pooled investments refer to investment funds where multiple investors pool their money together, and the price volatility can vary depending on the underlying assets within the fund.

The investor will receive $162,750 at the end of the 5 years under the BEST possible market performance scenario. This is calculated by adding the initial capital amount of $150,000 to the guaranteed 1% of the capital, which is $1,500. Additionally, the investor will receive an annual payout of 1.5% of the initial capital, which is $2,250, for a total of $11,250 over 5 years. Therefore, the total amount received is $150,000 + $1,500 + $11,250 = $162,750.

Callable securities are bonds or other financial instruments that give the issuer the right to redeem or "call" them before their maturity date. This means that the issuer can repay the principal to the investor and stop paying interest if they choose to do so. The statement that callable securities expose investors to high risks and should be avoided at all times is incorrect. While callable securities do have some risks, such as the potential for the investor to lose out on future interest payments if the security is called early, they also have benefits. For example, callable securities often pay higher coupons or interest rates compared to non-callable securities, which can be attractive to investors. Additionally, issuers are more likely to exercise their right to call the securities when interest rates have declined, as it allows them to refinance at a lower rate.

Future contracts will not standardize the prices. This means that the prices of the underlying assets in future contracts can vary and are not fixed or standardized. This allows for flexibility and negotiation in the pricing of the contract, based on market conditions and the specific needs of the parties involved.

A benefit illustration is a document provided by insurance companies that outlines the various benefits and features of an insurance policy. It typically includes information about insurance charges, distribution costs, and guaranteed and non-guaranteed benefits. However, it does not include the value of redemption of units, which refers to the amount of money that can be obtained by redeeming the units of a unit-linked insurance policy.

Portfolio rebalancing is not adopted in all portfolio bonds. It is a strategy used to maintain the original level of risk exposure and involves moving units from one fund to another. While performance may be adversely affected in the short run due to transaction costs and market timing, it is still an important practice for long-term investment success.

A dealing account is a type of investment account that allows investors to buy and sell securities such as stocks, bonds, and mutual funds. One of the characteristics of a dealing account is that it does not require a positive balance at all times. This means that investors can have a negative balance in their account if they have borrowed funds to invest or if they have incurred losses. Therefore, the need to maintain a positive balance is not a characteristic of a dealing account.

The bid-offer spread of 5% will result in the least amount of early withdrawal fee because it is the smallest percentage compared to the other options. The bid-offer spread is the difference between the buying price and the selling price of a unit, and in this case, it is 5%. This means that if the investor decides to withdraw their investment early, they will only incur a fee of 5% of the investment amount. In contrast, the other options involve higher percentages of redemption charges or deducting units at market value, which would result in higher early withdrawal fees.

The main benefit of the portfolio bond is regular withdrawals when financial needs change. This means that the investor can access their funds as needed, providing flexibility and liquidity. This feature is particularly useful in situations where the investor's financial circumstances may change over time, allowing them to adjust their withdrawals accordingly.

A protective put is an options strategy that involves buying a put option to protect against a potential decrease in the value of an underlying asset. By purchasing a protective put, an investor can enjoy the full upside potential of the asset while also having downside protection in case the asset's value decreases. This strategy allows the investor to benefit from any increase in the asset's value while limiting their potential losses.

Market risk refers to the risk of losses in an investment due to factors such as changes in interest rates, exchange rates, or market conditions. The given statement describes market risk by explaining that when the Singaporean dollar (SGD) appreciates against the US dollar (USD), a Singaporean investor in the USD stock market will earn less returns because the SGD is now stronger. This demonstrates the impact of currency exchange rates on investment returns, which is a form of market risk.

The advisor's advice that it is highly possible that fund managers invested in very risky derivatives in order to guarantee the 10% returns is the least appropriate. This is because the investment plan explicitly states that there is no investment portfolio or asset allocation, indicating that the fund managers are not investing in any derivatives or risky assets. Therefore, the advisor's suggestion is based on incorrect information and is not appropriate.

Investing in publicly traded derivative products can help mitigate counterparty risk of a portfolio bond because these products are typically traded on regulated exchanges, providing transparency and reducing the risk of default by the counterparty. Additionally, derivative products often have standardized contracts and clearinghouses that act as intermediaries between the buyer and seller, further reducing counterparty risk.

Using payment netting is not a false statement about mitigating the risk of a counterparty. Payment netting is a risk management technique that involves offsetting the payments between two parties to reduce the overall exposure to counterparty risk. It helps to minimize the potential loss in the event of default by the counterparty. Therefore, the given answer is incorrect.

When an investor expects the market to go down but does not wish to sell his stock, the most appropriate option is to enter into a Short Call position. In a Short Call, the investor sells a call option on the stock that he owns. If the market goes down, the call option will expire worthless, allowing the investor to keep the premium received from selling the option. This strategy allows the investor to profit from a declining market without selling his stock.