Question 1

A forward-forward lender has an exposure to the risk of:
A) Higher interest rates
B) Lower interest rates
C) Flattening yield curve
D) Parallel shift downwards in the yield curve

Accepted Answer

A forward-forward lender is exposed to the risk of higher interest rates because they have committed to lending at a future date at a predetermined rate. If interest rates rise, they will receive less interest than the market rate.

Question 2

Selling a FRA has the same interest rate exposure as:
A) Opening a positive gap
B) Going over-borrowed
C) Making a forward-forward loan
D) Taking a forward-forward deposit

Accepted Answer

Selling a FRA involves entering into a forward contract to deliver a fixed interest rate. Making a forward-forward loan also involves entering into a forward contract to receive a fixed interest rate in the future, making it the most similar in terms of interest rate exposure. Choices A and B refer to balance sheet management strategies, while choice D involves taking a fixed interest rate deposit in the future, rather than delivering one.

Question 3

If you sell USD 3-month forward to a client against EUR, what should you do to hedge your position?
A) Buy a 3-month EUR/USD outright forward
B) Buy USD spot, and sell and buy a 3-month EUR/USD FX swap
C) Sell EUR/USD in the spot market, lend EUR for 3 months and borrow USD for 3 months
D) Sell EUR/USD in the spot market, borrow EUR for 3 months and lend USD for 3 months

Accepted Answer

The answer of If you sell USD 3-month forward to...

Question 4

An option premium is normally a positive function of:
A) the traded volume
B) the historical volatility of the price of the underlying commodity
C) the style (European or American) of the option
D) the implied volatility of the price of the underlying

Accepted Answer

Option premium is normally a positive function of the implied volatility of the price of the underlying. Implied volatility is the expected future volatility of the underlying asset, which is derived from the market prices of options on that asset. Higher implied volatility implies higher uncertainty about the future price of the underlying asset, which increases the probability that the option will be exercised and hence increases the option premium.

Question 5

What is the purpose of an initial margin on a futures exchange?
A) To cover losses incurred between variation margin payments
B) To exclude retail investors
C) To pay reserve requirements
D) To cover fees due to the clearing house

Accepted Answer

The purpose of an initial margin on a futures exchange is to cover any potential losses that may occur between the time the trade is made and the first variation margin payment is due. This is necessary to ensure that the trading parties are able to meet their obligations and to protect the integrity of the market.

Question 6

What is an FX swap from spot?
A) An exchange of two streams of interest payments in different currencies and an exchange of the principal amounts of those currencies at maturity
B) A spot sale (purchase) and a forward purchase (sale) of two currencies agreed simultaneously between two parties
C) An exchange of currencies on a date beyond spot and at a price fixed today
D) An agreement to buy (sell) an amount of base currency value spot and simultaneously resell (buy back) the same amount to the same counterpart value today

Accepted Answer

An FX swap from spot involves a simultaneous spot sale or purchase of a currency and a forward purchase or sale of the same currency. This allows for the exchange of currencies at two different points in time, with the forward element being agreed upon at the time of the trade. Choice A describes an interest rate swap, choice C describes a forward contract, and choice D describes a same-day spot transaction.

Question 7

You are quoted the following rates: Spot GBP/USD      1.5295-00 Spot USD/CHF       0.9320-23 6M GBP/USD swap     16/12 6M USD/CHF swap      22/18 Where can you buy GBP against CHF 6-month outright?
A) 1.4206
B) 1.4215
C) 1.4217
D) 1.4225

Accepted Answer

The answer of You are quoted the following rates: Spot...

Question 8

The seller of a call option has:
A) Substantial opportunity for gain and limited risk of loss
B) Substantial risk of loss and substantial opportunity for gain
C) Limited risk of loss and limited opportunity for gain
D) Substantial risk of loss and limited opportunity for gain

Accepted Answer

The seller of a call option has limited opportunity for gain as their profit potential is limited to the premium received from the buyer of the option. However, they have substantial risk of loss as they are obligated to sell the underlying asset at the strike price, which may result in significant losses if the market price of the asset rises above the strike price.

Question 9

Which of the following currency risks could only be hedged by a non deliverable forward (NDF)?
A) an exposure in Latvian Lats (LVL)
B) an exposure in Russian Rouble (RUB)
C) an exposure in Romanian Leu (RON)
D) an exposure in Bulgarian Lev (BGN)

Accepted Answer

A non deliverable forward (NDF) is used to hedge against currency risks in currencies that are not freely tradable or convertible, such as the Russian ruble. The Latvian lats, Romanian leu, and Bulgarian lev are all freely convertible currencies and can be hedged using traditional forward contracts or other hedging instruments.

Question 10

You are quoted the following rates: Spot GBP/CHF       1.4535-45 3M GBP/CHF swap     22/19 At what rate can you sell GBP against CHF outright 3-month?
A) 1.4523
B) 1.4526
C) 1.4513
D) 1.4516

Accepted Answer

To calculate the outright rate of selling GBP against CHF 3 months forward, we need to add the forward points to the spot rate. As the 3M GBP/CHF swap points are quoted as 22/19, we need to take the difference between the bid and ask forward points, which is 3 points in the bid direction (i.e., we subtract 3 from the spot rate to get the outright rate). Therefore, the outright rate of selling GBP against CHF 3 months forward is 1.4535 - 0.003 = 1.4505. As the question asks for the nearest quote, the answer is 1.4513 (the closest quote below 1.4505).

Question 11

A 6-month SEK/NOK Swap is quoted 40/50. Spot is 1.1145. Which of the following statements is correct?
A) SEK interest rates are higher than NOK interest rates
B) NOK interest rates are higher than SEK interest rates
C) NOK interest rates are higher than USD interest rates
D) SEK interest rates and NOK interest rates are converging

Accepted Answer

The swap quote tells us that SEK interest rates are lower than NOK interest rates since the NOK receives the larger premium. This means that NOK interest rates are higher than SEK interest rates. The quote does not provide any information about USD interest rates or convergence between SEK and NOK interest rates.

Question 12

An important reason for trading a futures contract rather than an FRA is:
A) The expense of settling an FRA
B) The reduced counterparty risk on a futures exchange
C) The reduced basis risk on futures
D) The superior interest rate risk on FRAs

Accepted Answer

Trading a futures contract reduces counterparty risk because it is cleared through a central exchange, whereas an FRA involves a bilateral agreement and therefore carries the risk of default by the other party.

Question 13

An interest rate swap (IRS) is:
A) A contract to exchange one stream of interest payments for another
B) A temporary exchange of one deposit for another of a longer maturity in the same currency
C) A forward-forward contract
D) A contract to exchange an interest rate stream in one currency for another one in a different currency

Accepted Answer

An interest rate swap is a contract between two parties to exchange one stream of interest payments for another, based on a specified notional amount. One party agrees to pay a fixed rate of interest while the other agrees to pay a floating (variable) rate of interest. The purpose of such a swap can be to manage interest rate risk or to take advantage of comparative advantages in debt markets. B, C, and D refer to different types of financial contracts, but do not describe an interest rate swap.

Question 14

What is the Overnight Index for GBP?
A) SONIA
B) STINA
C) STONIA
D) EONIA

Accepted Answer

The Overnight Index for GBP is SONIA (Sterling Overnight Index Average). It is the effective overnight interest rate paid by banks for unsecured transactions in the London interbank market. It is considered the benchmark for overnight indexed swaps in GBP.

Question 15

Which of the following statements is correct?
A) An adjusted settlement amount is paid at the end of the FRA contract period that includes reinvestment interest for late payment
B) An unadjusted settlement amount is paid at the end of the FRA contract period
C) An adjusted settlement amount is paid at the start of the FRA contract period that is discounted for early payment
D) An unadjusted settlement amount is paid at the start of the FRA contract period

Accepted Answer

In a Forward Rate Agreement (FRA), the settlement amount is typically paid at the start of the contract period and is adjusted by discounting it to present value for early payment.

Question 16

How would you delta hedge an 'at-the-money' long call option?
A) Go short of the underlying commodity equal to 50% of the size of the option contract
B) Go long of the underlying commodity equal to 50% of the size of the option contract
C) Go long of the underlying commodity equal to the full size of the option contract
D) Go short of the underlying commodity equal to the full size of the option contract

Accepted Answer

Delta hedging involves taking a position in the underlying asset that offsets the delta of the option. An 'at-the-money' call option typically has a delta of 0.5, so you would short 50% of the underlying to hedge.

Question 17

What is the Overnight Index for USD?
A) H-15 Index
B) Prime Rate
C) Overnight Fed funds
D) Fed funds effective rate

Accepted Answer

The answer of What is the Overnight Index for USD?
A)...

Question 18

You are quoted spot USD/NOK 5.7220-28 and USD/SEK 6.3850-58, at what price can you buy NOK against SEK?
A) 0.8963
B) 1.1157
C) 1.1159
D) 1.1160

Accepted Answer

The answer of You are quoted spot USD/NOK 5.7220-28 and...

Question 19

You are quoted the following market rates: Spot AUD/CAD   1.0600 12M (360-day)   AUD 3.40% 12M (360-day)   CAD 1.55% What are the 12-month AUD/CAD forward points?
A) +190
B) -193
C) -192
D) -190

Accepted Answer

The answer of You are quoted the following market rates:...

Question 20

The gamma of an option is:
A) The sensitivity of the option value to changes in volatility
B) The sensitivity of the option value to changes in the time to expiry
C) The sensitivity of the delta to changes in the value of the underlying
D) The sensitivity of the option value to changes in the price of the underlying

Accepted Answer

Gamma is the second derivative of the option value with respect to the underlying price. It measures the rate of change in the delta of an option for a given change in the price of the underlying asset. Therefore, it represents the sensitivity of the delta to changes in the value of the underlying.

Exam 2: ACI Dealing Certificate-Part B

A forward-forward lender has an exposure to the risk of:

Selling a FRA has the same interest rate exposure as:

If you sell USD 3-month forward to a client against EUR, what should you do to hedge your position?

An option premium is normally a positive function of:

What is the purpose of an initial margin on a futures exchange?

What is an FX swap from spot?

You are quoted the following rates: Spot GBP/USD 1.5295-00 Spot USD/CHF 0.9320-23 6M GBP/USD swap 16/12 6M USD/CHF swap 22/18 Where can you buy GBP against CHF 6-month outright?

The seller of a call option has:

Which of the following currency risks could only be hedged by a non deliverable forward (NDF) ?

You are quoted the following rates: Spot GBP/CHF 1.4535-45 3M GBP/CHF swap 22/19 At what rate can you sell GBP against CHF outright 3-month?

A 6-month SEK/NOK Swap is quoted 40/50. Spot is 1.1145. Which of the following statements is correct?

An important reason for trading a futures contract rather than an FRA is:

An interest rate swap (IRS) is:

What is the Overnight Index for GBP?

Which of the following statements is correct?

How would you delta hedge an 'at-the-money' long call option?

What is the Overnight Index for USD?

You are quoted spot USD/NOK 5.7220-28 and USD/SEK 6.3850-58, at what price can you buy NOK against SEK?

You are quoted the following market rates: Spot AUD/CAD 1.0600 12M (360-day) AUD 3.40% 12M (360-day) CAD 1.55% What are the 12-month AUD/CAD forward points?

The gamma of an option is: