Question 1

The use of off-market rates is discouraged and should be permitted only:

Accepted Answer

Off-market rates should only be used when there are written procedures and policies in place to ensure transparency and consistency. This helps to mitigate the risk of creating unfair advantages for certain customers and ensures that the bank's lending practices are consistent with regulations and industry norms. Choices A, B, and C do not provide sufficient justification for using off-market rates.

Question 2

If a 6-month AUD/NZD swap is quoted 173/165, which of the following statements would you consider to be correct?

Accepted Answer

The higher number (173) represents the AUD rate, indicating that 6-month AUD rates are higher than 6-month NZD rates. The swap points (the difference between 173 and 165) do not provide any indication of the spot rate, so C is incorrect. The information given does not provide any indication of the shape of the yield curve, so D is also incorrect.

Question 3

Dealers are allowed to trade for their own account if:

Accepted Answer

Having a clearly laid down policy ensures that dealers understand the guidelines and limitations of trading for their own account, which can help prevent conflicts of interest from arising. A good track record or lack of previous conflicts of interest are helpful factors, but do not guarantee that trading for their own account will not create conflicts of interest in the future. Similarly, a dealer's perception of whether there is a conflict of interest may not be accurate or may not align with the interests of clients. Therefore, a clearly laid down policy is the best option to ensure ethical and fair practices.

Question 4

You are quoting forward FX prices to a broker subject to finding a counterparty for a matching transaction. The Model Code says:

Accepted Answer

According to the Model Code, when quoting forward FX prices to a broker subject to finding a counterparty for a matching transaction, you must tell the broker, who must qualify your quote. This helps ensure that the broker is aware of any assumptions or limitations you may have made in arriving at the quote and can communicate this information to potential counterparties.

Question 5

What is the value date of a 6-month outright forward FX transaction dealt today, if todays spot date is Monday, 30 th June? Assume there are no bank holidays.

Accepted Answer

The value date for a 6-month forward FX transaction is typically the same day of the month, six months later. Since the spot date is 30th June, the value date would be 31st December, as June has 30 days and December has 31 days.

Question 6

What are IMM dates?

Accepted Answer

IMM dates stand for International Money Market dates and refer to the third Wednesdays of March, June, September, and December, on which futures contracts on currencies, interest rates, and other financial products expire or settle.

Question 7

How are Overnight Indexed Swaps settled?

Accepted Answer

Overnight Indexed Swaps are settled after maturity by net payment, which means the party owing the greater amount pays the difference to the other party.

Question 8

A dealer has been asked by a broker to go to an exclusive club for the third time in a week. He should:

Accepted Answer

The entertainment being offered is excessive in value and can be seen as a potential bribe. It's important to maintain ethical standards and avoid any appearance of impropriety. Refusing this third invitation is the best choice.

Question 9

You have done the following deals in spot USD/JPY: Sold USD 5.0 million at 130.60 Bought USD 3.5 million at 130.20 Bought USD 2.0 million at 130.50 Sold USD 2.0 million at 130.55 What is your net position and average rate?

Accepted Answer

The answer of You have done the following deals in...

Question 10

3-month USD/CHF is quoted at 112/110. Interest rates in Switzerland are reduced but USD rates (which are higher) are unchanged. What would you expect the 3-month forward USD/CHF rate to be?

Accepted Answer

A reduction in Swiss interest rates would make the CHF less attractive, leading to a depreciation of the CHF against the USD. This would result in a higher forward rate for USD/CHF, hence the forward rate would increase to 118/116.

Question 11

A customer asks for a price in 3- month CHF/JPY. You quote 56/54. The customer deals at 54. What have you done?

Accepted Answer

The customer dealt at the lower end of the quote (54), meaning you sold CHF against JPY spot and bought CHF against JPY 3-month forward.

Question 12

How could your firm avoid the risks of dealing through an agent with an unknown principal?

Accepted Answer

By having the intermediary identify the principal to the firm, the risk of dealing with an unknown principal can be mitigated. It allows the firm to conduct due diligence on the principal before entering into any business transactions. Insisting on a guarantee by the intermediary may not be sufficient protection, as the intermediary might not have the financial capability to honor the guarantee. Option C is not a viable solution since it is not practical to avoid all business risks. Option D is an incorrect statement since dealing with an unknown principal poses significant risks that should not be underestimated.

Question 13

A 1-month (30-day) USCP with a face value of USD 5 million is quoted at a rate of discount of 2.31%. How much is the paper worth?

Accepted Answer

The value of the paper is calculated using the formula: Face Value - (Face Value * Discount Rate * (Days to Maturity/360)). Substituting the given values: 5,000,000 - (5,000,000 * 0.0231 * (30/360)) = 4,990,375.00.

Question 14

You have done the following deals in spot USD/JPY: Sold USD 5.0 million at 111.60 Bought USD 3.5 million at 111.20 Bought USD 2.0 million at 111.50 Sold USD 2.0 million at 111.55 What position do you now have?

Accepted Answer

The answer of You have done the following deals in...

Question 15

Which of the following is issued by auction?

Accepted Answer

Treasury bills are issued through an auction process where investors submit bids for the desired yield. The federal government then accepts the lowest bids until the amount offered for sale is filled. CDs (certificate of deposit) are issued by banks, BAs (banker's acceptance) are a type of short-term credit instrument often used in trade finance, and USCP (U.S. commercial paper) is typically issued by corporations.

Question 16

When using legal documentation, proposed modifications:

Accepted Answer

Proposed modifications should be clearly stated before a deal in legal documentation to ensure that all parties are aware of and agree to any changes made. It is important to have a clear understanding and agreement on all terms before finalizing any legal documents.

Question 17

A broker can consider a deal as done if:

Accepted Answer

The answer of A broker can consider a deal as...

Question 18

What is Model Codes recommendation on the settlement of differences by "points"?

Accepted Answer

The Model Code does not favor the settlement of differences by "points" as it may lead to disputes and is not considered a best practice.

Question 19

At the end of the day you are short EUR 10 million against GBP at 0.6712. You are asked to revalue your position at a EUR/GBP rate of 0.6729. What is the resulting profit or loss?

Accepted Answer

To calculate the profit or loss, we need to find the difference between the initial rate and the revalued rate and multiply it by the amount of EUR in the position. 
Initial rate: EUR/GBP 0.6712
Revalued rate: EUR/GBP 0.6729
Difference: 0.6729 - 0.6712 = 0.0017
Amount of EUR in position: 10,000,000 EUR
Profit/Loss = Difference x Amount of EUR in position
Profit/Loss = 0.0017 x 10,000,000 EUR = 17,000 EUR
Since we are short EUR against GBP, the profit or loss is in GBP. To convert to GBP, we need to multiply the profit/loss in EUR by the revalued rate:
Profit/Loss in GBP = 17,000 EUR x 0.6729 = GBP 11,447. Therefore, the correct answer is A) Loss of GBP 17,000.

Question 20

A 7-day piece of USCP is quoted at a rate of discount of 1.75%. What is its true yield?

Accepted Answer

The answer of A 7-day piece of USCP is quoted...

Exam 1: ACI Dealing Certificate-Part A