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CSC1 Exam Prep Questions

Questions

1. Which of the following are components of GDP using the income approach ?

I. salaries, wages and other compensation
II. consumer spending
III. government expenditures
IV. rents, interest and taxes

a) I and IV
b) II, III and IV
c) I, III and IV
d) II and III

2. The Bank of Canada carries out monetary policy primarily through changes in its target for the ?

a) Overnight Rate
b) Bank Rate
c) Prime Rate
d) LIBOR Rate

Answers

 

1. a) I and IV
Chapter 4: Economic Principles

2. a) Overnight Rate
Chapter 5: Economic Policy

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CSC1 Exam Prep Questions

Questions

1. What is correct about Canadian banks?

I. Banking has undergone tremendous change in the past decade. While traditional banking such as retail, commercial and corporate banking services still exist, banks today provide a variety of services through investment dealer, insurance, mortgage, trust, mutual fund and international subsidiaries.

II. Canadian banks offer consumer and commercial banking products and services, including mortgages and loans, bank accounts and investments.

III. Banks offer financial planning, cash management and wealth management services, either directly or through subsidiaries.

IV. Banks, through subsidiaries, offer a wide range of products that include segregated funds and life insurance products, trust services, leasing, mutual funds, credit card and investment dealer services.

a)         I, II
b)         III, IV
c)         I, II, III
d)         I, II, III, IV

2. Primary motives for buying put options include ?

I.          Receiving premiums
II.        Hedge against the price of the stock rising
III.       Hedge against the price of the stock falling
IV.       Substitute for a short sale
V.        Avoiding commissions

a)         I, IV
b)         II, IV, V
c)         III, IV
d)         I, III, V

Answers

1. d)     I, II, III, IV
Chapter 2: The Canadian Securities Industry

2. c)     III, IV
Chapter 10: Derivatives

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Canadian Securities Course volume 1

Questions

1. Under CIPF coverage, a general account includes the total of what accounts?

I. cash
II. margin
III. short sale
IV. options
V. futures
VI foreign currency

a) I, II
b) I, II, IV, V
c) I, II, III, IV, V
d) I to VI

 

2. What statements are correct about interest rates and the real rate of return?

I. Interest rates are the result of the interaction between parties who want to borrow funds and parties who want to lend funds.

II. The rate of return that a bond (or any investment) offers is made up of two components: the real rate of return and the inflation rate.

III. Because inflation reduces the value of a dollar, the return that is received, known as the nominal rate, must be reduced by the inflation rate to arrive at the actual or real rate of return.

IV. The real rate of return is determined by the supply of funds (supplied by investors) and the demand for loans (created by business). Businesses are more inclined to borrow to invest, when they believe that this investment will earn returns that are higher than the cost of borrowing. For example, when real interest rates are low, the demand for funds will rise.

V. The supply of funds tends to rise when real rates are high, as investors are more likely to lend funds. The nominal rate for loans will be made up of the real rate, as established by supply and demand, plus the expected inflation rate; and the Nominal Rate = Real Rate + Inflation Rate

VI. One factor that affects forecasts for the real rate of return is the business cycle. Real rates rise and fall throughout the business cycle, becoming higher during recessions as demand for funds falls, and lower during the expansion phase as demand for funds increase.

VII. Another factor that affects forecasts for the real rate of return is an unexpected change in the inflation rate. An investor lending money will demand an interest rate that includes his or her expectations for inflation, thereby assuring a satisfactory real rate. If the inflation rate is higher than expected, the investor’s real rate of return will be lower than expected.

a) I, II, III, IV
b) I, II, III, IV, V, VII
c) V, VI, VII
d) I, II, III, IV, V, VI, VII

Answers

 

1. d) I to VI
Chapter 3: The Canadian Regulatory Environment

2. b) I, II, III, IV, V, VII
VI should read: Real rates of return become lower (not higher) during a recession and rise (not fall) during expansion.
Chapter 7: Fixed-Income Securities: Pricing and Trading

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Options Licencing (OLC, OPSC, DFOL)

Questions

 

1. An investor expects the US dollar to rise relative to the Japanese yen. On the ISE the investor could?

i. buy calls

ii.  sell calls

iii.  buy puts

iv. sell puts

A.            I, II

B.            I, IV

C.            II, III

D.            I, III

2. CDCC and OCC follow similar rules regarding automatic exercise – the practice of automatically exercising options (unless otherwise instructed) that are in-the-money by a specified amount at expiration.

CDCC equity options that are  ________ or more in-the-money will automatically be exercised.

For index options, long positions will be automatically exercised if they are  ________  . Holders of equity and index options have the right to override the automatic exercise process by instructing CDCC to exercise none or fewer than all of the options held long.

A.            $0.01  ;  in-the-money

B.            $0.05  ;  $0.05 in the money

C.            $0.25  ;  in-the-money

D.            $0.50  ;  in-the-money

 

3. Barrick Gold stock has increased from $60 to $65. At the same time, Barrick 60 put options decreased by $3.00. What was the put option’s delta prior to the change in the stock price?

A.            –1

B.            – 0.60

C.            – 0.2

D.            0.20

Answers

1. B.       I, IV

On the ISE the US dollar is the base currency. The US dollar is expected to rise, so buy calls and sell puts

2. A.       $0.01  ;  in-the-money

3. B.  – 0.60

Delta = (change in option price) / (change in stock price)

= (-3.00) / (*5.00)

= -0.60

*65 – $60

Derivatives Fundamentals Exam Questions

Questions

 

1. What is correct about a NOB spread ?

i. Long the NOB is long ten year US treasury notes and short thirty year US treasury bonds

ii. This is an intermarket spread

iii. Short the NOB is long thirty year US treasury bonds, and short ten year US treasury notes.

iv. With the long NOB the trader anticipates that long term yields will rise relative to short term yields (a normal yield curve)

 

A.        I, II, III

B.        I, III, IV

C.        II, III, IV

D.        I, II, III, IV

 

2. Stock index arbitrage takes place frequently between index futures and the stocks in the underlying index. When arbitraging with stock futures, cash and carry arbitrage is referred to as a ________ program and reverse cash and carry arbitrage is referred to as a _______ program.

A.        long ; short

B.        short ; long

C.        buy ; sell

D.        sell ; buy

 

Answers

1. b) I, III, IV

Statement II is incorrect. This is an intercommodity spread.

In respect to #IV, the long NOB investor believes that short term US treasury notes will rise in price relative to long term US treasury bonds. Rising relative prices on short term US treasury notes means lower yields on short term investments, relative to long term investments. This will cause a wider spread in yields. Long term yields will rise relative to short term yields, which results in a normal yield curve

2. c) buy ; sell

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Derivatives Fundamentals Exam Prep

Questions

 

1. The benefit of owning the physical commodity is referred to as the:

A.        supply premium
B.        convenience yield
C.        on-hand benefit
D.        shortage return

 

2. The spot price of cocoa is $1,800 per tonne. The contract size is 10 tonne. The monthly carrying cost for cocoa is $15 per tonne/month. The 6 months futures price of cocoa is $1,880. What is correct?

i. There is an opportunity for cash and carry arbitrage
ii. There is an opportunity for reverse cash and carry arbitrage
iii. Reverse cash and carry arbitrage is more complicated than cash and carry arbitrage
iv. A lease cost will typically reduce the profit

A.        I, III
B.        I, III, IV
C.        II, III
D.        II, III, IV

 

3. A commodity futures price may trade at a lower price than its cash price for all of the following reasons, except?

A.        Arbitrage may be expensive or not possible. Therefore reverse cash and carry arbitrage (buying the futures and selling the asset short) may not be conducted and futures prices will remain under cash prices.
B.        The market may put a premium on holding the cash asset due to supply tightness.
C.        The market expects there will be increased demand in the future
D.        Market participants may feel prices will decline in the future.

 

Answers

1. B     convenience yield

 

2. D     II, III, IV

The spot price is $1,800 and the 6 month futures price should be $1,890. At the $1,880 futures price the 6 months futures is underpriced. An arbitrageur could:

• Short cocoa at                             $1,800
• buy futures at                             $1,880
• invest the funds and earn         $90
• cover short buying cocoa at     $1,880
• Total proceeds of                         $1,890

Risk free profit = $10

Complication: Shorting assumes there is an abundant supply of cocoa and that it is easy to borrow and sell (short).

Reverse cash and carry assumes the short seller will be able to earn the foregone carrying costs by investing the money; which is unlikely.

Also the lender; even if he/she will allow the short seller to use all the cash from the short sale, will want a fee for loaning the underlying asset (cocoa). This is called a lease fee.

 

3. C     If the market expects there will be increased demand in the future, then futures prices will

be higher, not lower

 

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CSC2 Exam Prep Questions

Questions

1. Calculate the offering price of a mutual fund with a $23.20 NAVPS and a front end sales commission of 4%.

a)         $22.30
b)         $23.67
c)         $24.12
d)         $24.17

 

2. Ricardo purchases a segregated fund for $75,000 with a 100% guarantee after the legal minimum maturity payment period. I f after 10 years the fund is worth $65,000, which statement is not correct?

a)         the maturity guarantee is $10,000
b)         there is a zero capital gain overall
c)         there is a zero taxable capital gain overall
d)         there is a $10,000 capital loss overall

Answers

 

1. d) $24.17

Offering Price    = NAVPS / (100% – Sales Commission)

= $23.20 / (100% – 4%)
= $23.20/ 0.96
= $24.17

Chapter 18: Mutual Funds, Structure and Regulations

 

2. d) There is not a $10,000 capital loss overall.

There is zero capital loss overall. The segregated fund is redeemed for $65,000, which is a $10,000 capital loss. However the maturity guarantee is $10,000 which is a capital gain. Overall the capital loss is zero.

Chapter 20: Segregated Funds and Other Insurance Products

 

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Investment Management Techniques (IMT) Exam Prep

Questions

 

1. Which statements are correct about laddering?

I. Laddering involves building a portfolio of debt securities with staggered maturities, so that a portion of the portfolio matures at regular intervals.

II. A laddering portfolio is normally structured so that an equal dollar portion of the portfolio is placed in each maturity interval.

III. To maintain the ladder, as debt securities mature, the maturity amount is reinvested at the long-term end of the ladder. Over time, the portfolio comes to include only debt instruments that were originally purchased at the longest allowable maturity date.

IV. Purchases are made in all interest rate cycles, regardless of expectations, with the idea that over time this will even out overall returns.

a)            I, II
b)            I, III, IV
c)            I, II, IV
d)            I, II, III, IV

2. This risk relates to the hedge fund as a business entity and results from the fact that many hedge funds are small, newly created businesses that depend on one or more “star” managers for their success. Such organizations are highly focused on promoting and supporting the skills of the manager(s) and may lack the organizational depth, managerial talent and strategic planning capabilities necessary to ensure growth or even survival. For most hedge funds, this risk results from potential system failures as well as faulty settlement, reporting and accounting procedures. This risk is significant in single-strategy funds and needs to be addressed through due diligence. This is?

a)            first-order risk
b)            second-order risk
c)            third-order risk
d)            operational risk

Answers

1. d) I, II, III, IV
Chapter 10: Analysis of Debt Securities II: Price Volatility and Investment Strategies

2. d) operational risk
Chapter 12: Analysis of Non-Conventional Asset Classes and their Structures

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CSC2 Exam Prep Questions

Questions

Chapter 15: Introduction to the Portfolio Approach
12. What is not correct about correlation in respect to two stocks in a portfolio?

a)         If two stocks move perfectly in tandem the correlation is +1.00; and the stocks move perfectly together

b)         If the correlation between two stocks is -1.0, and if the standard deviations are equal, the two stocks move perfectly in the opposite direction. When one stock is falling below its average return, the other stock is rising above its average return; and the investor locks in the average return.

c)         If the movement between two stocks is random, the correlation will approximate zero.

d)         The best correlation to reduce the risk of owning two stocks is zero.

Chapter 13: Fundamental and Technical Analysis
25. Technical analysis is based on three assumptions which include ?

I.          history repeats itself
II.        stock prices are random
III.       when a trend exists, it tends to persist for relatively long periods of time
IV.       all public information is built into the price of a stock
V.        valuation models like the DDM will result in superior stock selection.

a)         I, II, III
b)         III, IV, V
c)         I, III, V
d)         I, III, IV

Answers

12. d)   The best correlation to reduce the risk of owning two stocks is -1.0; not zero.

25. d)   I, III, IV

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