2. An equity-linked note that is designed to return at least the principal typically combines an option on an underlying equity asset with a.

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1 1. Structured products: A. are only exposed to market risk B. are also referred to as hybrid products C. entitle holders to a share in the issuer s profits D. always provide higher returns compared to traditional investments 2. An equity-linked note that is designed to return at least the principal typically combines an option on an underlying equity asset with a. A. futures contract B. forward contract C. zero-coupon bond D. reverse convertible bond 3. Which of the following statements is/are TRUE of structured deposits? A. They are considered as investment products. B. They can be issued by insurance companies. C. They are covered under the Deposit Insurance Scheme. 4. Under the Risk and Return Trade-off matrix, investment opportunities that involve low risk and high return would be classified as: A. Rare Gems B. Safe Investments C. Bold Investments D. Unworthy Investments 5. Simon is interested in a structured product that provides full upside potential with no downside protection. Which one of the following products would be MOST suitable for him? A. Tracker certificate. B. Discount certificate. C. Capital guaranteed fund. D. Reverse convertible bond. Singapore College of Insurance Page 1 of 13

2 6. John has just invested S$10,000 in a 5-year capital guaranteed fund. XYZ Bank, the bond-issuer of this product, is also providing the downside protection. One year later, XYZ Bank is put into liquidation by creditors. In the WORST case scenario, how much can John expect to get back from XYZ Bank? A. S$0 B. S$1,000 C. S$5,000 D. S$10, What should the adviser know about the client in order to determine if structured products are appropriate investments for the client? A. His risk appetite. B. The investment time horizon. C. His investment objectives. D. All the above information. 8. What are the factor(s) that can affect the market price of a security? A. Inflation. B. Interest rates. C. Exchange rate. 9. X agreed to buy one ounce of gold from Y at a price of SGD 2,000 on a future date of 15 th Jan Which of the following scenarios represent the counterparty risk to X? A. X does not pay SGD 2,000 to Y on 15 th Jan B. Y delivers the gold to X on 15 th Jan 2015 instead. C. Y does not deliver the gold to X on 15 th Jan D. X offers to pay SGD 5,000 to Y for early delivery of the gold on 15 th Jan 2015 instead. 10. An investor with liquidity concerns should NOT invest in products with: A. a ready market B. exposure to foreign currencies C. positive and stable credit ratings D. a long lock-up period of ten years Singapore College of Insurance Page 2 of 13

3 11. In 2011, Jonathan invested SGD 50,000 in a Foreign Currency Fixed Deposit Account denominated in Australian Dollars. The account offers 5% interest rate per annum. One year later, SGD depreciated against AUD and Jonathan liquidated his account. How much should Jonathan receive in 2012? (In 2011, 1 SGD = 1 AUD; In 2012, 1 SGD = 0.8 AUD) A. SGD 42,000 B. SGD 50,000 C. SGD 52,500 D. SGD 65, Which of the following is TRUE regarding the concept of leverage? A. It is also called gearing. B. It decreases the potential rate of return. C. It provides full downside protection on the investment. D. Leveraged products experience smaller price volatility than direct investments. 13. Which technique should be used to mitigate concentration risk in an investment portfolio? A. Leverage. B. Speculation. C. Diversification. D. Market Making. 14. John observed that the movement in the prices of securities A & B are completely random. He would expect the two securities to have a correlation coefficient of: A. + 1 B C. 0 D What can be used as the underlying assets of a derivative contract? A. Gold. B. Soy bean. C. Oil and gas. Singapore College of Insurance Page 3 of 13

4 16. Futures contracts: A. can only be traded on commodities B. are not subject to margin requirements C. can only be settled through physical delivery D. are standardised contracts traded on exchanges 17. When the futures price of a commodity is lower than its spot price, this situation is known as: A. basis B. margin C. contango D. backwardation 18. Which of the following descriptions about options is TRUE? A. Options and warrants have no value after the expiry date. B. A European style option is a contract that can be exercised anytime. C. An American style option is a contract that may only be exercised on expiration. D. The holder of a call option has an obligation to exercise the option upon expiration. 19. Which one of the following is a typical forward contract? A. Annette enters into a contract to sell USD 100,000 at a rate of USD/SGD to Brigette when Annette visits Singapore within the next six months. B. Chloe enters into a contract to buy AUD 200,000 at a rate of AUD/USD from Danielle on 30 June C. Erika enters into a contract on 1 Mar 2013 to sell her house to Felicia at the bank valuation price at least two months before Erika migrates to Australia. D. Gisele enters into a contract with the local money changer to change her SGD into USD at the prevailing market rate today. Singapore College of Insurance Page 4 of 13

5 20. Lynette opens an account to trade gold futures on an exchange. She puts up an initial margin of S$3,000 and the exchange stipulates a maintenance margin of S$2,000 to be kept at all times. On the first day of trading, the value of her contract falls by S$1,300. Which of the following scenarios will most likely occur? A. Nothing happens, as Lynette plans to continue trading and her account balance is still positive. B. A margin call is issued and Lynette is required to top up S$300 C. A margin call is issued and Lynette is required to top up S$1,300 D. A margin call is issued and Lynette is required to top up S$2, Assuming the current market price of Apple Inc. is USD465, which of the following investors is holding an option with a positive intrinsic value? A. Greg who owns a call option on Apple Inc. with a strike price of USD 500. B. Edwin who owns a put option on Apple Inc. with a strike price of USD 470. C. Matt who owns a call option on Apple Inc. with a strike price of USD 465. D. Tim who owns a put option on Apple Inc. with a strike price of USD Kylie currently does not own any SIA shares and feels that its current trading price of S$11 per share is too high. She is only willing to pay not more than S$10 per share. Which of the following option strategies may enable her to buy SIA shares for not more than S$10? A. Buy a call option with an exercise price of S$8 for a premium of S$1. B. Sell a naked put option with an exercise price of S$12 for a premium of S$1. C. Buy a protective put option with an exercise price of S$10 for a premium of S$1. Singapore College of Insurance Page 5 of 13

6 23. Nicholas holds many shares in Fast Forward Corp and believes that, given the global economic crisis, there is a good chance that the share price will fall. However, he wishes to keep these shares as he believes in their long term performance. Which one of the following option strategies will enable him to generate additional income by taking on a low risk in the short term? A. Bull straddles. B. Bear straddles. C. Writing covered calls. D. Buying protective puts. 24. The 3-month forward price for 1kg of coffee is S$50 and the cost of carry is S$5. The spot price for 1kg of coffee is: A. S$45 B. S$50 C. S$55 D. S$ The December futures price for 1 ounce of silver is S$60 and the spot price is S$45. In market lingo, the basis is: A. 20 dollars over December B. 15 dollars over December C. 20 dollars under December D. 15 dollars under December 26. The share price of American Express Co. is currently trading at US$60. Sharon believes that the share price will rise and decides to take a long CFD position. The CFD provider quotes her US$58 bid and US$62 offer. Subsequently, the share price of American Express Co. rises to US$80. The CFD provider then quotes her US$78 bid and US$82 offer. Assuming there are no financing and commission charges, calculate Sharon s profit per share when she closes her position in this transaction. A. US$16 B. US$18 C. US$20 D. US$22 Singapore College of Insurance Page 6 of 13

7 27. Samuel shorts a futures contract on the Kuala Lumpur Composite Index (KLCI) with the following features: KLCI futures contract = 2,000 Multiplier = MYR100 per index point Calculate the payoff when KLCI is at 2,500. A. Loss of MYR 50,000 B. Loss of MYR 55,000 C. Gain of MYR 50,000 D. Gain of MYR 55, Chris owns 100 shares of Apple purchased at US$500 per share. He subsequently sells a call option on these shares for US$30 per share with an exercise price of US$500. Calculate Chris s gain/loss when Apple s share price drops to US$450 and the call option expires worthless. A. Loss of US$5,000 B. Loss of US$2,000 C. Gain of US$2,000 D. Gain of US$5, Claire purchased a call and put option on 100 shares of Cisco for US$1 per share at a strike price of US$20. Before Cisco announced its full-year earnings results, Cisco was trading at a price of US$20 per share. Calculate Claire s NET gain/loss when Cisco s earnings beat market expectations and its stock price rose to USD$25 per share. A. Gain of US$500 B. Gain of US$300 C. Loss of US$200 D. Loss of US$ Which one of the following statements regarding an investment fund is TRUE? A. It can only be open-ended. B. It must be listed on the stock exchange. C. Some funds use derivatives to hedge investment risks. D. It is also known as an Individual Investment Scheme. Singapore College of Insurance Page 7 of 13

8 31. Which of the following factors will NOT cause an index fund to have tracking error? A. Size of the funds invested. B. Complexity of the underlying index. C. Expenses incurred in managing the fund. D. Accessibility of the underlying market to achieve replication. 32. Janelle wants to invest in an investment fund that invests in other investment funds. She should invest in a/an. A. index fund B. formula fund C. fund of funds D. special situations fund 33. Which of the following is an advantage of investing in a Collective Investment Scheme (CIS)? A. Low expense ratio. B. Economies of scale. C. Full downside protection. D. Unit-holders make all the investment decisions. 34. In a unit trust, the person who performs the duties of day-to-day operation of the trust is also known as the. A. unit-holder B. fund manager C. fund distributor D. Chief Financial Officer 35. What can an investor do to mitigate the risks of investing in unit trusts? A. Use derivatives like options and futures. B. Invest in negatively correlated asset classes. C. Diversify investments across asset classes and geographic locations. Singapore College of Insurance Page 8 of 13

9 36. How can the financial adviser ensure that marketing collaterals of investment products present a fair and balanced view to prospective clients? A. Product risks should be highlighted in fine print. B. Materials should show only the potential upside of the investment. C. Information is clear and easily understood by the prospective clients. D. Information that is not easily understood by the investor will be placed in the footnote. 37. In which document should the fund issuer disclose to investors where they can obtain pricing information and the frequency of price updates? A. Prospectus. B. Annual report. C. Fund Factsheet. D. Product Highlights Sheet. 38. Which of the following statements about an Exchange-Traded Fund (ETF) is TRUE? A. ETF is an investment fund that is not listed and traded over the counter. B. Buyers and sellers keep the market price of ETF units close to the fund s NAV. C. The liquidity of the ETF units and the underlying index components are independent. D. ETFs can be replicated either through direct investments or synthetic financial instruments. 39. What is the advantage of investing in Exchange-Traded Funds (ETFs) over Unit Trusts (UTs)? A. ETFs are generally more liquid than UTs. B. ETFs provide full downside protection for investors. C. Investors of ETFs do not incur any fees and charges. D. There is perfect price certainty because ETFs will always trade at a price that is equal to its Net Asset Value. Singapore College of Insurance Page 9 of 13

10 40. What is the main difference between Exchange-Traded Funds (ETFs) and shares? A. ETFs are not listed while shares are listed on the stock exchange. B. ETFs are traded over-the-counter while shares are traded through securities brokers. C. ETFs can invest in a number of companies while a purchase of shares is an investment in a single company. D. The price of ETFs are determined by their Net Asset Value (NAV) while share prices are determined by market quotes. 41. What is the formula used to determine the Net Asset Value (NAV) per Exchange-Traded Fund (ETF) unit? A. (Assets Liabilities) / Outstanding ETF units B. (Liabilities Assets) / Outstanding ETF units C. Outstanding ETF units / (Assets Liabilities) D. Outstanding ETF units / (Liabilities Assets) 42. The S&P 500 Double Long (2x) Fund seeks to deliver twice the daily percentage change in the level of the S&P 500 Index. If the S&P 500 Index gains 10% of its value in one day, what should be the expected change in the value for this fund? A. 5% B. 10% C. 15% D. 20% 43. Which type(s) of investors will be suitable for investment in Exchange-Traded Funds (ETFs)? A. Investors who do not understand how ETFs work. B. Investors who prefer passive management in a fund. C. Investors who are looking for superior returns in the market. Singapore College of Insurance Page 10 of 13

11 44. As part of his asset allocation strategy for his investment portfolio, David wants to be invested into fixed income instruments. Which of the following ETFs should he invest in? A. SPDR Gold Shares. B. SPDR Straits Times Index ETF. C. ABF Singapore Bond Index Fund. D. Lyxor ETF MSCIAC Asia Ex Japan Consumer Staples TR. 45. Ivan has invested US$100,000 in Apple Stock. He is worried that the falling US dollar will affect his returns when he liquidates and converts his investment back into SGD. Since gold generally has a negative correlation with the US dollar, he also invested S$25,000 in a Gold Exchange-Traded Fund (ETF). What is Ivan s main purpose of investing in this ETF? A. Hedging. B. Tactical Trading. C. Cash Management. D. Core-satellite investments. 46. Jimmy has made the following statements on hedge funds. Which of the following statement(s) should be considered as FALSE? A. Hedge funds are just as liquid as Exchange-Traded Funds. B. Hedge funds generally aim for absolute instead of relative returns. C. Hedge fund managers have flexibility in their investment strategy. 47. Fund ABC has the following features: Issuer = Bank X Underlying Asset = Straits Times Index (STI) Tenure = 5 years Maturity value = Initial capital amount + 80% of STI performance Based on the above information, what type of fund is it MOST likely be? A. Hedge Fund. B. Formula Fund. C. Fund of Funds. D. Exchange-Traded Fund. Singapore College of Insurance Page 11 of 13

12 48. A structured product has the following features: Issuer = Bank Y Underlying Asset = SPDR S&P 500 ETF Tenure = 5 years Maturity value = Initial capital amount + Guaranteed 1% of the initial capital Bonus payout = 9% of initial capital if the S&P 500 index is above 1,500 points upon maturity of the structured product Early redemption penalty = 5% of initial capital Assume that S&P 500 is above 1,500 points at the end of 5 years and the investor has held the investment to maturity. How much would the investor receive if he has invested S$100,000 in the structured product? A. S$95,000 B. S$101,000 C. S$104,000 D. S$110, A hedge fund s investment strategy consists of purchasing call and put options at the same strike price on a company before it announces its quarterly earnings results. This strategy works MOST effectively when the stock price is after its quarterly earnings announcement. A. bullish B. bearish C. stagnant D. volatile resulting in huge upside or downside 50. A currency hedge fund speculates in global events that will affect the relative value of currencies. Which of the following is an example of a strategy that such a fund will employ? A. Long USD/JPY. B. Long S&P 500 Index. C. Short crude oil futures. D. Buying a put option on Apple Stock. Singapore College of Insurance Page 12 of 13

13 Answers to Mock Paper 1 B 26 A 2 C 27 A 3 A 28 B 4 A 29 B 5 A 30 C 6 A 31 A 7 D 32 C 8 D 33 B 9 C 34 B 10 D 35 D 11 D 36 C 12 A 37 A 13 C 38 D 14 C 39 A 15 D 40 C 16 D 41 A 17 D 42 D 18 A 43 B 19 B 44 C 20 C 45 A 21 B 46 A 22 A 47 B 23 C 48 D 24 A 49 D 25 D 50 A Singapore College of Insurance Page 13 of 13