CHARTERED INSTITUTE FOR
SECURITIES & INVESTMENT
LEVEL 4
INVESTMENT ADVICE DIPLOMA
DERIVATIVES — PRACTICE EXAM
TIME ALLOWED: 2 HOURS
This paper contains 80 multiple choice questions.
Answers are provided on the final page.
,How to use this practice paper
These 80 questions should be answered in two hours, in line with the real exam, so time yourself accurately.
Record your answer for each question by circling or noting your selected option.
When you have finished, check your answers against the Answer Sheet on the final page.
The exam is scored as follows:
56–80 Pass
0–55 Fail
, 1 Which of the following best describes the primary economic function of the derivatives market?
A To guarantee profits for all market participants
B To allow risk to be transferred from those who wish to reduce it to those willing to accept it
C To eliminate the need for underlying cash markets
D To fix the price of the underlying asset permanently
2 A derivative contract is best defined as a financial instrument whose value is:
A Derived from the performance of an underlying asset, rate or index
B Set independently by the exchange on which it is listed
C Fixed for the life of the contract regardless of market conditions
D Determined solely by the credit rating of the counterparty
3 An investor who writes (sells) a call option receives a premium in exchange for:
A The right to buy the underlying at a fixed price
B The obligation to buy the underlying at a fixed price if exercised against them
C A guaranteed return of the premium at expiry
D The obligation to sell the underlying at a fixed price if exercised against them
4 Which of the following best explains why a hedger might use derivatives rather than simply adjusting their
holding of the underlying asset?
A Derivatives always cost more than trading the underlying
B Derivatives eliminate the need for any risk management policy
C Derivatives cannot be used by corporate treasurers
D Derivatives can provide efficient, lower-cost protection without disturbing an existing underlying position
5 Which of the following is generally classified as a 'soft' commodity?
A Aluminium
B Nickel
C Zinc
D Sugar
6 A steepening yield curve, where long-term yields rise relative to short-term yields, most commonly reflects
market expectations of:
A Falling inflation and slowing economic growth
B An imminent recession
C Rising inflation and/or stronger future economic growth
D No change in future monetary policy
7 Convertible preference shares give the holder the right to:
A Exchange their preference shares for a fixed number of ordinary shares on specified terms
B Receive an unlimited dividend based on company profits
C Vote twice at general meetings
D Demand immediate redemption at any time
8 A 'non-deliverable forward' (NDF) is typically used for currencies that:
SECURITIES & INVESTMENT
LEVEL 4
INVESTMENT ADVICE DIPLOMA
DERIVATIVES — PRACTICE EXAM
TIME ALLOWED: 2 HOURS
This paper contains 80 multiple choice questions.
Answers are provided on the final page.
,How to use this practice paper
These 80 questions should be answered in two hours, in line with the real exam, so time yourself accurately.
Record your answer for each question by circling or noting your selected option.
When you have finished, check your answers against the Answer Sheet on the final page.
The exam is scored as follows:
56–80 Pass
0–55 Fail
, 1 Which of the following best describes the primary economic function of the derivatives market?
A To guarantee profits for all market participants
B To allow risk to be transferred from those who wish to reduce it to those willing to accept it
C To eliminate the need for underlying cash markets
D To fix the price of the underlying asset permanently
2 A derivative contract is best defined as a financial instrument whose value is:
A Derived from the performance of an underlying asset, rate or index
B Set independently by the exchange on which it is listed
C Fixed for the life of the contract regardless of market conditions
D Determined solely by the credit rating of the counterparty
3 An investor who writes (sells) a call option receives a premium in exchange for:
A The right to buy the underlying at a fixed price
B The obligation to buy the underlying at a fixed price if exercised against them
C A guaranteed return of the premium at expiry
D The obligation to sell the underlying at a fixed price if exercised against them
4 Which of the following best explains why a hedger might use derivatives rather than simply adjusting their
holding of the underlying asset?
A Derivatives always cost more than trading the underlying
B Derivatives eliminate the need for any risk management policy
C Derivatives cannot be used by corporate treasurers
D Derivatives can provide efficient, lower-cost protection without disturbing an existing underlying position
5 Which of the following is generally classified as a 'soft' commodity?
A Aluminium
B Nickel
C Zinc
D Sugar
6 A steepening yield curve, where long-term yields rise relative to short-term yields, most commonly reflects
market expectations of:
A Falling inflation and slowing economic growth
B An imminent recession
C Rising inflation and/or stronger future economic growth
D No change in future monetary policy
7 Convertible preference shares give the holder the right to:
A Exchange their preference shares for a fixed number of ordinary shares on specified terms
B Receive an unlimited dividend based on company profits
C Vote twice at general meetings
D Demand immediate redemption at any time
8 A 'non-deliverable forward' (NDF) is typically used for currencies that:
