Collective Investment Scheme II

CMFAS Module 8A Mock Exam Set A

1 Straddle involves the combination of a put and call option. In straddle,
a. Call and put option has the same exercise price and expiration period.
b. Call and put option has the same exercise price but different expiration period.
c. Call and put option has the different exercise price but similar expiration period
d. Call and put option has the different exercise price and expiration period

2 Investors of Reverse Convertible Bonds will receive _________________ when the price
of the underlying stock falls below a predetermined level of the issue price. This
predetermined level is known as ____________________
a. The par value of the note, “knock-out” level
b. A pre-determined number of shares of the underlying stock, “”knock-out” level
c. The par value of the note, “kick-in” level
d. A pre-determined number of shares of the underlying stock, “”kick-in” level

3 An Index fund aims to replicate the performance of a market index on equities, bonds or
other securities and it achieves the index replication through the following 3 methods:-
a. Direct Replication, Optimisation or Sampling and Synthetic Replication
b. Full Replication, Optimisation or Sampling and Synthetic Replication
c. Tactical Replication, Optimisation or Sampling and Full Replication
d. Full Replication, Optimisation or Sampling and Tactical Replication

4 The common types of Structured Funds are Index Funds, Fund of Funds (FoF), Hedge
Funds, Enhanced Index Fund and Formula Fund. The description of the Funds are correct
EXCEPT for
a. The returns for a complex Formula Funds are determined by the absolute
performance of 2 underlying indices
b. Enhanced Index Funds are designed to enhance the return potential of the index
funds and this include the technique of using customized indices, filters to
eliminate underperforming index component securities etc
c. The role of the manager in FoF is to select the sub-funds in which to invest and
monitor their performance
d. An index fund is a passive form of investment and the fund management fees
and transaction costs are lower than an actively managed fund

5 The following statement about Index Funds re correct EXCEPT

a. Index Funds is a passive portfolio management as there is no active stock-picking
involved
b. Actively managed fund has a lower fund management fees and transaction costs
are lower as compared to an Index Funds
c. An Index Fund is to track the performance of an index, not to beat the index
d. Index Funds achieves the index replication through Full Replication, Optimisation
or Sampling and Synthetic Replication
6 The principal reason that investors sell option is to
a. Earn the premium
b. Limit their risks
c. Fully hedge cash positions
d. All of the above

7 Trust deed is a legal document for setting up the trust. The operational parameters of
the trust includes
I. Investment Objective and Restrictions
II. Duties and Obligations of the Trustee and Managers
III. Remuneration of the Trustee and Managers
IV. Charges and the unit pricing formulas
a. I, II and III only
b. I, III and IV only
c. II, III and IV only
d. All of the Above

8 One of the following is NOT the reason for investing in Structured products:-
a. It is used as part of the asset allocation process to reduce risk exposure of a
portfolio
b. Structured products may suit investors’ particular investment needs
c. Structured products are used as an alternative to a direct investment in traditional
asset classes
d. Structured products offer no excess to exotic asset classes

9 Structured Note is
a. An intermediate term debt security whose interest payments are determined by a
formula tied to a movement of a stock, commodity or currency
b. A structured product that is linked to a certain market indices
c. An investment instrument that combines the characteristics of a zero-coupon
bond with a return component
d. Structured as a security with an embedded credit default swap

10 An option buyer’s risk is limited to

a. The margin
b. The premium
c. His total outlay
d. The exercise price

11 The Fund Manager is responsible for the day-to-day operation of the trust and they are
prohibited from certain activities. Identify the INCORRECT prohibited activities below:-
a. Fund manager can receive soft dollar commission if it assist the manager’s
provision of investment advice or related services to the fund
b. Charging costs of CPF trades to the fund
c. Paying marketing or promotion expenses out of the fund assets
d. Manager can receive soft dollar commission provided they do not enter into
unnecessary trades volume in order to qualify for it
12 Reinvestment risk refers to the risk that interest rates will:

a. rise resulting in a decline in bond price;

b. fall resulting in a lower bond return;
c. remain constant resulting in a lower yield to maturity;
d. none of the above

13 Investors are attracted by the high potential payout offered by Structured Products and
the potential return is delivered to investors only when
V. Good performance of the sector
VI. Strategy or structure to capture the market view is appropriate
VII. Competitive pricing on the structure
VIII. Anticipated market view is correct
e. I and II
f. II and III
g. II and IV
h. III and IV

14 Which of the following statement is TRUE?

a. Examples of general market risks include interest rate, inflation, exchange rate
and business risk
b. Market price of a security is the future value of the issuer’s present profit
c. Examples of issuer-specific risks include operational risk, commodity prices,
litigation and regulatory action
d. The main risk drivers for the bond are interest rate and credit worthiness of the
issuer

15 The initial margin in a futures trading account is

a. The minimum amount of margin that must be maintained at all times
b. The minimum amount of margin required to restore the margin level to initial
level
c. The margin required to be deposited when a futures position is established
d. The gains or losses on outstanding futures positions at the end of each day are
trading.

16 Which of the following is NOT true?

a. Option seller has unlimited gains and limited loss potentials
b. The owner of a put has the right to sell the underlying asset
c. The owner of a call has the right to buy the underlying asset
d. Owners and sellers of options face asymmetrical risk and returns possibilities

17 Determination of Fund’s Market Value is an important process. The following statement

are incorrect EXCEPT
a. The mark-to market is for the purpose of calculating daily margin calls
b. Market prices are readily available and the mark-to-market can be easily
determined for exchange contracts and OTC derivatives
c. Mark-to-market is the basis for determining NAV and bid and offers prices
d. Mark-to-market for OTC derivatives are done frequently
18 Which of the following statement is FALSE?
a. Participation products are the riskiest as there are no downside protection
b. Yield enhancement products offer a higher return potential relative to product
designed to protect capital
c. Products designed to preserve capital carries the lowest degree of risk as a part
of the investment goes to protect the downside
d. Yield enhancement products are riskier as a part of investment goes to protect
the downside

19 Most financial derivatives are unique OTC contracts and this makes mark-to-market
valuations more challenging. You are to identify the INCORRECT statement
a. The mark-to-market valuation for Derivative products with Straightforward cash
flow is based on the discounted cash flow basis
b. The mark-to-market valuation for Derivative products with Conditional cash flow
is based on mathematical models
c. The mark-to-market valuation for Derivative products with Straightforward cash
flow needs to take into account the probability of change in cash flow
d. The mark-to-market valuation for Derivative products with Illiquid cash flow
depends on the 3rd party credit data

20 There are 3 options. Call struck at 97.50, put struck at 98.00 and call struck at 98.25.
The underlying assets are traded at 97.50. These options are
a. In-the money, In-the money and Out-the money respectively
b. At-the money, At-the money and Out-the money respectively
c. At-the money, In-the money and Out-the money respectively
d. At-the money, Out-the money and Out-the money respectively

21 The term “financial futures” contracts refers to

a. Interest rates and currency futures
b. Interest rates, currency futures and commodity
c. Interest rates and Stock Index futures
d. Interest rates, Stock Index futures and precious metal contracts

22 The speculator uses the Futures market to

a. Earn trading profits
b. Earn interest
c. Add liquidity for hedgers to hedge
d. Maintain the crowd on the trading floor

23 Stock Index options

a. Are uncommon in Singapore
b. Enable investors to trade on individual stocks
c. Allow investors to trade on general stock market movements
d. Require the actual delivery of the stock upon exercise

24 Which of the following statement accurately describe “A Bold Investment”

a. The potential return is moderate but not certain and the principal may be at risk
b. The potential return is high but relatively certain and the principal may be at risk
 c. The potential return is low but relatively certain and the principal may be at risk
d. The potential return is high but not certain and the principal may be at risk

25 Which of the following are common wrappers?

a. Structured notes, Structured interest rate, Structured deposits
b. Structured notes, Structured funds, Structured deposits
c. Structured notes, Structured interest rate, Structured bonds
d. Structured notes, Structured ILPs, Structured deposits

26 If the investor is bullish on the price direction of a stock, he can

a. Sell a call option on the underlying stock
b. Buy a put option on the underlying stock
c. Sell a put option on the underlying stock
d. Try to corner the stock

27 Whenever a customer’s margins are depleted below the required____________ margin

level, the broker must call for additional margins to be topped up to the ___________
margin level
a. Minimum, level
b. Maintenance, final
c. Maintenance, initial
d. Minimum, final

28 Which of the statement is INCORRECT?

a. Liquidity shortfall may be due to a fundamental change in the company’s financial
position
b. Leverage multiplies gains as well as magnifies losses
c. Collateral risk refers to the risk that the value of collateral is sufficient when
collateral is exercised to cover the loss
d. Negatively correlated securities may enhance portfolio diversification

29 Which statement about Exchange Traded Fund (ETF) is CORRECT?

a. The creation and redemption mechanism reduce the liquidity of ETFs in the
secondary market
b. The Participating Dealer cancelled the redeemed units
c. The Participating Dealer keeps the market price of ETF units close to the fund’s
bid/offer price
d. The liquidity of ETF unit correlates directly to the liquidity of the underlying index
components stocks

30 Which of the following structured product offer upside potential with a capped downside
protection?
I. Reverse Convertible Bonds
II. Bonus Certificate
III. Tracker Certificate
IV. Airbag Certificate
a. I and II
b. II and III
 c. II and IV
d. III and IV

31 A customer bought 5 Dec Gold futures and deposited an initial margin of S$3,500. The
maintenance margin is S$2,800 per contract. The value of the contract must drops by
_______________ before a margin call will be triggered
a. S$690
b. S$700
c. S$710
d. S$720

32 The principal motivation of a hedger in using the futures market is to

a. Make profits
b. Transfer the price risk
c. Minimize loss
d. Deliver or take delivery of the underlying asset in the future contract

33 Which of the following statement is TRUE?

a. Structured products are unsecured debt of the distributor
b. The payouts from structured products must be based on equity price movements
c. Structured products are hybrid products as it mirror other asset classes’ returns
using a bond structure.
d. Structured products allow the resulting products to achieve general risk-return
profiles to match the investors’ needs and expectations.

34 The December gold futures price is trading at US$388.50. The current gold cash price is
US$387.90. This is known as
a. Contango and the basis is “60 cents over December”
b. Backwardation and the basis is “60 cents over December”
c. Contango and the basis is “60 cents under December”
d. Backwardation and the basis is “60 cents under December”

35 Which of the following statement is FALSE?

a. A zero-coupon bond is used in structuring as it is cheaper
b. A bond has fixed maturity date while an option has no fixed maturity date
c. An equity linked note combine zero-coupon bond with an option
d. Structured products are normally issued in rolling tranches

36 Which of the following is NOT an example of Participation Products?

a. Bonus Certificate
b. Airbag Certificate
c. Discount Certificate
d. Tracker Certificate

37 One of the following in a method of mitigate the counterparty risk

a. Payment netting maximize the need for funds and securities to change hands
b. Counterparty is required to put collaterals to back the promises for publicly traded
derivative products
 c. For OTC derivatives products, it is uncommon for counterparty to put collaterals
d. The exchange provides the guarantee of fulfilling the contractual obligation for a
publicly traded derivative products

38 Jackie bought a call and a put option.

Initial Premium Exercise Price

Current Market Price $4.75 -- --

Put Option -- $1.70 $5.25

Call Option -- $1.90 $6.15

The call and put option contracts are said to be

a. Call – Out-of-Money Put – In-the-money

b. Call – In-the-Money Put – Out-of-money
c. Call – At-the-Money Put – Out-of-money
d. Call – Out-of-Money Put – At-the-money

39 Which of the following statement is FALSE?

a. The primary risk to the investment return component is market stability
b. Principal invested and the investment return generated are the 2 components in
every investment transaction
c. The risk to principal is the credit worthiness of the issuer of the bond.
d. The return component is subject to the credit risk of the counterparty to the
derivative contact.

40 The factors influencing the choice of wrappers are:-

a. Desired investment freedom, targeted level of return, volatility
b. Desired investment freedom, issuer’s credit rating, targeted level of return
c. Regulatory restriction, desired investment freedom, targeted level of return
d. Regulatory restriction, issuer’s credit rating, desired investment freedom

41 The value of an option is determined by

I. Volatility of the Underlying Stock

II. Inflation rate
III. Time to expiration
IV. Price of the Underlying Stock

a. I, II and III only

b. I, III and IV only
c. II, III and IV only
d. All of the above
42 Identify the CORRECT statement about the differences between ETFs and unlisted index
funds.
a. The buying and selling ETFs take place between investors and fund manger while
the buying and selling of unlisted index funds take place between investor and
stock broker
b. EFT managers deal with individual retail investors while unlisted index funds deal
with participating dealers in bulk units.
c. Subscription and redemption of unlisted index funds can be carried out on a daily
basis while subscription and redemption of ETFs are only possible on valuation
dates
d. Unit prices of unlisted index funds and ETFs are based on the NAV of fund assets

43 Which of the following statement is FALSE?

a. Returns for Structured Deposits are generally lower due to the cost of providing
return of capital
b. Design for Structured funds are affected by investment restrictions
c. Investors of Structured notes are secured creditors of the issuer in the event of
liquidation
d. There is a wide and ready distribution network for Structured ILPs

44 The statements about the Indicative NAV are correct EXCEPT

a. An indicative NAV is to facilitate trading
b. Indicative NAV is available at specified time of the day
c. Indicative NAV is also known as Optimised Portfolio Value
d. Indicative NAV is an estimate of total value of assets less liabilities of the fund
divided by the number of outstanding ETF units

45 An investor buys a put option on XYZ shares with an exercise price of $12.50. This
means that the investor
a. Has the right to buy XYZ shares at $12.50
b. Has the right to sell XYZ shares at $12.50
c. Grants the right to buy XYZ shares at $12.50
d. Grants the right to sell XYZ shares at $12.50
46 There are 2 methods to achieve synthetic replication for Structured ETFs. Choose the
CORRECT statement
I. Swap based ETFs invest in a basket of securities that may not be the
component stocks of the underlying index
II. Derivative-embedded ETFs invest in warrants and participatory
certificates that are linked to the index
III. Swap based ETFs invest in warrants and participatory certificates that
are linked to the index
IV. Derivative-embedded ETFs invest in a basket of securities that may
not be the component stocks of the underlying index
a. I and II only
b. I and IV only
c. III and II only
d. III and IV only
47 Convertible Bond Arbitrage investment style is defined as
a. Buying or selling baskets of convertible bonds that replicate the holdings of
closed-end mutual funds
b. Buying or selling baskets of convertible bonds and take counter positions in
related index futures contracts to capture differentials due to inefficiencies in the
market
c. Taking long and short positions in convertible bonds and other interest rate
sensitive securities
d. The pricing differences between convertible bonds and the underlying stocks

48 The statement bout Fund of Funds are correct EXCEPT

a. The manager of FoF decides how much to invest in each sub-fund for optimal
portfolio allocation and diversification
b. FoF achieves greater risk diversification as compared to investing in a single
manager fund
c. The expense ratio of a FoF is typically equal to that of a single manager fund
d. Investors of FoF have access to specialty managers that are generally not vailable
to retail investors.

49 Choose the CORRECT comparison of ETFs, shares and Unit Trusts from the following
statement

V. Transactions for ETFs and shares are done through securities brokers
VI. Investors typically buy and sell Unit Trusts through a distribution
channel while ETFs are bought and sold through securities brokers
VII. Unit Trust pricing is based on forward pricing while ETF pricing is
based on market quote
VIII. Investors in ETFs and Unit Trusts enjoy great liquidity
e. I, II and III only
f. I, III and IV only
g. II, III and IV only
h. All of the above

50 When the price of the underlying futures is above the strike price, a put is referred to as
a. In-the money
b. Out-of-money
c. At-the money
d. Any of the above