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CISI Chapter 6 Derivatives Exam with correct Answers
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CISI Chapter 6 Derivatives Exam with correct Answers
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CISI Chapter 6: Derivatives Exam withcorrect Answers
What is a derivative? - Answer -A financial product that derives its value from the value
of underlying assets such as stocks, bonds, or mortgages
What is ICE? - Answer -An exchange trading facility
What is hedging? - Answer -A technique employed by portfolio managers to reduce the
impact of adverse price movements on a portfolio's value
What is anticipating future cash flows? - Answer -If a portfolio manager expects to
receive a large inflow of cash to be invested in a particular asset then futures can be
used to fix the price at which it will be bought and offset the risk that prices will have
risen by the time the cash flow is received
What are asset allocation changes? - Answer -Changes to the asset allocation of a
fund, whether to take advantage of anticipated short-term directional markets movement
or to implement a change in strategy, can be made more swiftly and less expensively
using derivatives
What is arbitrage? - Answer -The process of deriving a risk free profit from
simultaneously buying and selling the same asset in 2 different markets when a price
difference exists
What is a futures contract? - Answer -An agreement traded on an organised exchange
to buy or sell assets, especially commodities or shares, at a fixed price but to be
delivered and paid for later
What are the 2 distinct features of a futures contract? - Answer -- Exchange traded
- Dealt on standardised terms (only price is up for negotiation)
What does open mean with regards to futures? - Answer -The initial trade when a
market participant first enters into a future (buying or selling)
What does close mean with regards to futures? - Answer -Physical underlying assets
are usually not delivered so the position is closed out instead
, What does covered mean? - Answer -When the seller of the future has the underlying
asset that will be needed if physical delivery takes place
What does naked mean? - Answer -When the seller of the future does not have the
asset that will be needed if physical delivery of the underlying asset is required
What is an option? - Answer -Gives a buyer the right but not the obligation to buy or sell
a specified quantity of an underlying asset as a pre-agreed exercise price, on or before
a pre-specified future date
What is a call option? - Answer -When the buyer has the right to buy the asset at the
exercise price
What is a put option? - Answer -When the buyer has the right to sell the underlying
asset at the exercise price
What are the sellers of options called? - Answer -Writers
What is a swap? - Answer -An agreement to exchange one set of cash flows for another
What is an IRS? - Answer -An exchange of interest payments that are usually
constructed whereby one leg of the swap is a payment of a fixed rate of interest and the
other is a payment of a floating rate
What are credit derivatives? - Answer -Instruments whose value depends on agreed
credit events relating to a third party company
What are credit events? - Answer -A material default, bankruptcy, a significant fall in an
asset's value or debt restructuring
What is the purpose of a credit derivative? - Answer -To enable an organisation to
protect itself against unwanted credit exposure by passing that exposure to someone
else
How does a CDS work? - Answer -The party buying credit protection makes a periodic
payment to a second party and in return the buyer receives an agreed compensation if
there is a credit event relating to some third party. If such a credit event occurs, the
seller makes a predetermined payment to the buyer and the CDS terminates
What is ICE Futures Europe? - Answer -The main exchange for trading derivative
products in the UK
What is Eurex? - Answer -The world's leading international derivatives exchange based
in Frankfurt
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