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MCQ SET 2

Question 1 0 of 1 points
A stock is selling at $5 and you expect the price to drop to $2 in the next 3 months.
What would you do
Selected C. Take up a share financing facility. Sell the share at $5 now, buy
Answer: the share in 3 months time at $2 and make a profit of $3.
Correct D. Take up a share borrowing facility. Sell the share at $5 now,
Answer: buy the share in 3 months time at $2.
Feedback: Wrong.

Remember the concept of "Buy low and sell high" inorder to make
profit.

1. When share price is expected to INCREASE: an investor should


take up a share financing facility. Buy at current price and sell
at expected price.

2. When share price is expected to DECREASE: an investor


should take up a share borrowing facility. Sell at current price
and buy at expected price.
Question
0 of 1 points
2
Which of the following statement is FALSE about the concept of "present value" or
"time value of money"?
Selected B. None of the above.
Answer:
Correct C. A dollar paid to you today is worth the same amount paid to
Answer: you in the future.
Feedback: Wrong.

"Time value of money" concept refers a dollar available in future is


less valuable than the same amount today, due to its potential earning
capacity.
Question
1 of 1 points
3
Which of the following limit determines the maximum amount of loss a bank can
tolerate?
Selected Answer: C. Stop-loss limits
Correct Answer: C. Stop-loss limits
Feedback: Correct

There are five (5) types of trading limits:

Position Limits
Description: The maximum value of deals a trader can make on a
particular day.
Rationale for Existence: Position limits restrict the amount of risk that
a particular trader can be exposed to. It helps the bank control its
outstanding trades as well as losses on trades made by the trader.

Stop-Loss Limits
Description: The maximum amount of loss that the bank can tolerate.

Rationale for Existence: Stop-loss limits are used to 'cut' the amount
of losses the bank has for any given type of investment instrument.

Counterparty Limits
Description: The maximum amount of trade exposure the bank is
willing to undertake with a particular counterparty. eg bank,
corporation, individual.
Rationale for Existence: To limit the counterparty risk that the bank
faces. Counterparty Risk is the risk that the counterparties the bank
trades with may not be able to repay their debts.

Settlement Limits
Description: The maximum amount of outstanding trades which the
bank must settle on a trading day.
Rationale for Existence: To limit settlement risk that bank is exposed
to. Settlement Risk is the risk that arises from a non-simultaneous
exchange of payments.

Country Limits
Description: The maximum amount of trade exposure the bank is
willing to undertake with a particular country and or its currency.
Rationale for Existence: To limit the country risk that the bank is
exposed to. Country Risk arises when counterparty is unable or
unwilling to settle outstanding transactions because of domestic
country crisis or restrictions.

Question
0 of 1 points
4
Which of the following are benefits of investing in mutual funds?

1. Lower transaction cost


2. Allow diversification
3. Achieve higher returns
4. Highly liquid
5. Process access to expensive stocks
6. Managed by a professional
Selected Answer: A. All except 5
Correct Answer: B. All except 3
Feedback: Wrong.

Benefits of mutual funds / unit trusts are:

1. Liquidity intermediation: Can convert investments to cash


quickly at any time in any amount.
2. Denomination intermediation: Provide access to securities
which small investors may not have been able to afford.
3. Diversification: Allow investment in multiple securities with
limited investment funds.
4. Cost advantages: Enjoy lower transaction fees compared to
individual investors.

5. Managerial expertise: Fund managers to select and monitor


securities. However, this does not necessary means or
gurantees higher returns.
Question
0 of 1 points
5
Which of the following is NOT a description of share financing?

1. Loans granted to investors by brokerage house to buy securities (borrow


stock)
2. Investors borrow stocks from brokerage house and sell them. (short sell)
3. Initial collateral is required, can be in cash or securities.
4. Investors must trade within maintenance margin else margin call will be
triggered.
5. To meet margin call, investors need to top-up in cash or securities.
6. Interest is payable for amount borrowed.

Selected Answer: A. All except 5 and 2


Correct Answer: C. All except 2
Feedback: Wrong.
Share financing:

1. Loans granted to investors by brokerage house to buy


securities
2. Initial collateral is required, can be in cash or securities
3. Investors must trade within maintenance margin else margin
call will be triggered
4. To meet margin call, investors need to top-up in cash or
securities.
5. Interest is payable for amount borrowed.

Share borrowing:

1. Investors borrow stocks from brokerage house and sell them.


(short sell)
2. Initial collateral is required, can be in cash or securities
3. Investors must trade within maintenance margin else margin
call will be triggered
4. To meet margin call, investors need to top-up in cash or
securities.
5. Interest is payable for amount borrowed.

Note: 2 to 5 also apply to Share Borrowing AND Share Financing


Question
1 of 1 points
6
From the following table, determine the exchange rate for CHF/AUD?

Domestic Currency: Singapore Dollars (SGD)


Code Foreign Currency Unit Rates
AUD Australian Dollar 1 1.0618
CHF SWISS FRANC 100 135.5390
Selected Answer: C. 1.2765
Correct Answer: C. 1.2765
Feedback: Correct.

From the table:

SGD/AUD = 1.0618 ie SGD 1 = AUD 1.0618

SGD/CHF = 135.5390/100 ie SGD 1 = CHF 1.35539


CHF/AUD = 1.35539 / 1.0618 = 1.2765

ie CHF 1 = AUD 1.2765

Question
1 of 1 points
7
From the following table, determine the exchange rate for EUR/AUD?

Domestic Currency: Singapore Dollars (SGD)


Code Foreign Currency Rates
AUD Australian Dollar 1.0618
EUR EURO 2.0428
Selected Answer: A. 1.9239
Correct Answer: A. 1.9239
Feedback: Correct.

From the table:

SGD/AUD = 1.0618 ie SGD 1 = AUD 1.0618

SGD/EUR = 2.0428 ie SGD 1 = EUR 2.0428

EUR/AUD = 2.0428 / 1.0618 = 1.9239

ie EUR 1 = AUD 1.9239


Question
1 of 1 points
8
Which of the following is NOT a characteristic of a money market?
Selected Answer: B. High default rate
Correct Answer: B. High default rate
Feedback: Correct.

Characteristics of a money market:

1. Sold in large denominations


2. Low default risk
3. Mature in one year or less
4. Highly liquid
Question
1 of 1 points
9
Which of the following successfully eliminate foreign exchange settlement risk?
Selected Answer: B. Continuous linked settlement (CLS)
Correct Answer: B. Continuous linked settlement (CLS)
Feedback: Correct.

Straight through processing (STP):

• A set of workflows and systems that enable trade transactions


to move seamlessly through the processing cycle, without
manual intervention.

Standard Settlement Instruction (SSI):

• Provides details to all parties involved on how the trade will be


settled.
• SSI should be received from an authentic source and its
validity should be verified.

Continuous linked settlement (CLS):

• Market-standard for foreign exchange settlement.


• Settles matched FX trades on a payment versus payment (PvP)
basis.
• Bi-laterally and multi-laterally nets all obligations per value
date.
• Eliminates FX settlement risk.

Question
0 of 1 points
10
Which type of order will an investor place to instruct his broker to buy a security at
a SPECIFIC price?
Selected Answer: B. Market order
Correct Answer: C. Limit order
Feedback: Wrong.
There are three (3) types of securities orders:

1. Market order: Instructs broker to buy or sell at CURRENT


market price.
2. Limit order: Instructs broker to buy or sell at a SPECIFIC
price
3. Stop loss order: Only applicable to stocks / shares already
own. Instructs broker to sell at CERTAIN market price
(below purchase price).

Question
1 of 1 points
11
Your parents promised to give you $5,000 if you graduate with a GPA score of at
least 3 in two years time. How much is the amount worth today if current interest
is 5%?

PVIF 5%,2 = 0.9070


Selected Answer: B. $4,535
Correct Answer: B. $4,535
Feedback: Correct.

PV = FV * PVIF i,n = 5,000 * 0.9070 = $4,535

Take note of the difference in :

Pmon = (Loan amount / PVIFAi,n ) /12

Question
1 of 1 points
12
Audrey places USD 5 million in the money market. At the end of 180 days, she
will receive USD 5.06 million. Calculate the annualized yield.
Selected Answer: C.
2.43%
Correct Answer: C.
2.43%
Feedback: Correct.
Annualized yield = (Future Value - Principal) x 365

Principal n

= (5.06 - 5) /5 x 365 /180

= 2.43%

Question
1 of 1 points
13
Which of the following does NOT describe the foreign exchange market?
Selected Answer: A. It operates 24 hours, 5 days a week
Correct Answer: A. It operates 24 hours, 5 days a week
Feedback: Correct.

Characteristics of a foreign exchange market are:

1. It operates 24 hours, 7 days a week


2. It is global
3. Transactions are traded in over-the-counter
(OTC) markets NOT organized exchanges

4. Involves at least one currency pair