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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DFC, DFOL Questions

1. When two parties enter into a futures contract, and after the clearinghouse receives the margin deposit and matches the trades, the clearinghouse becomes the guarantor of the contract. What is correct about this process ?

I. the clearinghouse becomes the buyer to the seller, and the seller to the buyer

II. the clearinghouse guarantees the buyer that the seller will deliver as promised

III. the guaranteeing process is called the principle of substitution

IV. the guaranteeing process is called the principal guarantee

 

a) I, II

b) I, III

c) I, II, III

d) II, IV

 

2. A manufacturing company requires 5,000 barrels of oil in 6 months time. Spot oil is trading at $90 and 6 month oil futures are trading at $94. The size of one oil futures contract is 1,000 barrels of oil. The manufacturer is concerned about the price of oil rising, so it takes the appropriate position in 6 month oil futures. After 6 months, when spot oil is $99, the manufacturer offsets its position. What original position did the manufacturer assume and what profit or loss did it make on the futures contract ?

a) Short 5 contracts ; $25,000

b) Long 5 contracts ; $25,000

c) Long 10 contracts ; 10,000 loss

d) Long 5 contracts ; $5,000

Answers

1. b) I, III

For Statement II, the clearinghouse guarantees the buyer that the clearinghouse will deliver;

and not that the original seller will deliver.

2. b) Long 5 contracts ; $25,000

The manufacturer wants to hedge 5,000 barrels of oil. Each contract is 1,000 barrels. The manufacturer would purchase five contracts (5,000 / 1,000). If the price of oil rises the value of the long contracts will rise. The manufacturer can either take delivery of the 5,000 barrels of oil at $94, the delivery price, or liquidate the futures contracts at $99. When hedging the hedger typically liquidates the contracts. The profit on the futures contracts for the manufacturing company will help offset the higher cost of oil in the spot market.

Profit on Contracts = [Offset Price – Entry Price] × Size of Contract × Number of Contracts

= [$99 – $94] × 1,000 × 5

= $5 × 1,000 × 5

= $25,000

 

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DFC & DFOL Exam Prep

Questions

1. All derivatives would have which features?

I. contractual agreements between two parties
II. premium is paid
III. specific time to expiry
IV. zero sum game
V. facilitate the use of leverage

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

2. If the spot price is lower than the futures price on an underlying interest, the market is ?

a) normal
b) inverted
c) contango
d) normal or contango

Answers

1. c) I, III, IV, V
Statement II is incorrect. Not all derivatives require a premium payment. No premium is paid with forward agreements

 

2. d) normal or contango
Normal and contango are equivalent terms.

For more on Derivatives Fundamentals and DFOL, check out our Note Books and Sample Exams
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Derivatives Fundamentals (DFC, DFOL) Exam Prep Questions

Questions

 

1. The most common type of swap is a:

a) Currency swap

b) Interest rate swap

c) Commodity swap

d) Bond swap

 

2. Buying the underlying asset and selling the futures contract to take advantage of a situation where futures are priced higher than fair value is called:

a) the cost of carry

b) a long hedge

c) contango

d) cash and carry arbitrage

 

Answers

 

 

1. b) Interest rate swap

2. d) cash and carry arbitrage

 

 For more on Derivatives Fundamentals and DFOL check out our  Note Books and Sample Exams

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Breaking it Down – Derivatives & Options (DFC, OLC, DFOL, OPSC)

Derivatives and Options Exam Prep

Derivatives Fundamentals, Options Licensing, Options Supervisory

Foran offers support seminars for derivatives and options licensing exams. Our classes are flexible in order to accommodate people writing Option Licensing Exam (OLC), Derivatives Fundamentals Exam (DFC), and the whole shebang, Derivatives Fundamentals and Options Licensing Exam (DFOL).

The first steps to attaining these licenses are, as always: register with CSI, get your textbooks, read your textbooks. We do not administrate the DF/OL test or course materials; but we will be happy to help you pass.

Yes, you have to do some work ahead of time. Foran Financial seminars can dramatically reduce your study time, and we can give you the tools to pass the exam, but we cannot teach you all of the information in 2-5 days. These courses are designed to replicate a full 3 month semester in a university or college setting. No one can cram that hard. So please introduce yourself to the material before coming in.

The Classes

DF/OL and Options Supervisor (OPSC) seminars are instructed by our Securities expert, Ron Foran. Ron worked in the securities industry for many years and has taught securities licensing courses for over 25 years.

Looking at our seminars on the calendar, it may not be immediately clear how to choose your class. It appears that OLC , OPSC, and DFOL overlap, and that’s because they do. We run DFC and OLC consecutively. DFC is a 3 day class, OLC is a 2 day class, and someone writing the DFOL will simply take both sessions for a total of 5 days. Meaning that students writing the Derivatives Fundamentals exam will be in the same class as people writing the DFOL, they just get to go home a little earlier, and keep their weekend free.

Additionally, Options Supervisor runs in conjunction with the Options Licensing session. We recently started combining the two classes, and are very happy with how it has turned out.

The Options Licensing Exam contains about 80% of the same material as Options Licensing. We had lots of students who would come in for OLC, then go on to pass OPSC with little or no preparation. Now OPSC students join the same seminar are OPT, but they get a few additional handouts addressing their specific exam.

Even better for you, taking the OLC/OPSC seminar is a two for one.

The Tests

We highly recommend that students thinking about writing DFOL take the two tests separately. DFC and OLC are both manageable exams.  If you study and know your material, you should do very well on both. DFOL on the other hand is a tricky exam. Obviously it covers twice the material, and you have to retain all of those facts at once. More importantly, the time pressure is such that many people are unable to finish the exam.

Or other suggestion is that if you do decide to write the DFOL, you take the paper based. I completely understand the allure of getting your results immediately with the computer based exam, but this exam includes a lot of equations. That means transcribing a lot of information from the computer screen to your scrap paper, which is a big time suck on a time sensitive exam.

That’s just our two cents, and what we have heard from our students.

There are of course lots of people who write the DFOL on the computer and pass – but why make it any more difficult than it has to be?

If you have any questions about the DF/OL or OPSC seminars, please leave a comment below or give us a call.

If you are interested in registering for a course or purchasing one of our DFOL products, you can do so online or over the phone

Derivatives Fundamentals (DFC, DFOL) Exam Prep

Questions

 

1. Which strategies are on the bearish side of the market?

 

I.             Buying calls.

II.            Writing puts.

III.           Shorting stock.

IV.          Writing uncovered calls.

 

a)            I, II, and III only

b)            II and III only

c)            III and IV only

d)            II, III, and IV only

 

2. ABC currently trades at 42. The strike or exercise price is $35. The call option has a time value of $1.50 over intrinsic value. What is the option trading at?

 

a)            $8.50

b)            $7.00

c)            $4.50

d)            $5.50

 

Answers

 

 

1. c) III and IV only.

When you short you want the market to fall and when you write uncovered calls, you want the

same for the options to expire worthless.

 

2. a) $8.50

($7 intrinsic + $1.50 time value)

Derivatives Fundamentals Exam Prep (DFC & DFOL)

Questions

 

1. What is correct about a credit default swap (CDS)?

 

I. A CDS is the exchange of two cash flows: a fee payment and a conditional payment, which occurs only if certain circumstances are met.

II. The CDS will have value for the protection seller only if defined credit conditions are met

III. The protection seller will always receive the premiums.

IV. A CDS is a type of insurance in which default of an asset triggers payment

 

a) I, II

b) III, IV

c) I, III, IV

d) I, II, III, IV

 

2. What is correct about swap agreements used in the creation of an ETF ?

 

I. Leveraged and inverse ETFs typically use swap agreements to deliver the leveraged and/ or inverse return of an underlying asset.

II. In an unfunded swap structure, an ETF obtains the leveraged or inverse return from a swap provider in exchange of the return of a portfolio chosen by the swap provider.

III. In an unfunded structure, the portfolio is retained by the ETF and serves as collateral in case of default by the swap provider

IV. In a funded swap structure, an ETF also obtains the leveraged or inverse return from a swap provider but against a cash deposit that the swap provider utilizes to hedge its risk exposure. The swap provider has to post collateral that is pledged to the ETF.

a) I, II

b) I, II, III

c) III, IV

d) I, II, III, IV

 

 

Answers

 

1. c) I, III, IV

Statement II is incorrect. The CDS will have value for the protection buyer, not the protection seller, only if defined credit conditions are met.

 

2. d) I, II, III, IV