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 is one of the three common threads associated with problems arising from the misuse of
derivatives?
A Low liquidity of the underlying asset
B Excessive leverage
C Standardisation of contract terms
D Central clearing
2 An investor pays a premium to acquire the right, but not the obligation, to sell an asset at a fixed price in the
future. In derivatives terminology, the investor is:
A Short a put option
B Long a call option
C Short a call option
D Long a put option
3 Which of the following is generally considered a disadvantage of OTC derivatives when compared with
exchange-traded derivatives?
A Inability to customise contract terms
B Mandatory daily margining
C Guaranteed performance by a central counterparty
D Lower liquidity and less standardised pricing transparency
4 Which of the following market participants seeks to profit from temporary price discrepancies between related
instruments, with minimal net market risk?
A A hedger
B A speculator
C An arbitrageur
D A long-only fund manager
5 Which of the following best describes 'backwardation' in a futures market?
A The futures price is higher than the spot price
B The near-month future is priced below the far-month future
C The spot price is higher than the futures price
D Storage costs exceed the cost of carry
6 EUR/USD is quoted at 1.10 and EUR/JPY is quoted at 160.00. What is the approximate USD/JPY cross rate?
A 130.91
B 176.00
C 154.55
D 145.45
7 All else being equal, the price of a fixed-rate bond will be MOST sensitive to a change in interest rates when the
bond has:
A A long maturity and a low coupon
B A short maturity and a high coupon
C A long maturity and a high coupon
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 is one of the three common threads associated with problems arising from the misuse of
derivatives?
A Low liquidity of the underlying asset
B Excessive leverage
C Standardisation of contract terms
D Central clearing
2 An investor pays a premium to acquire the right, but not the obligation, to sell an asset at a fixed price in the
future. In derivatives terminology, the investor is:
A Short a put option
B Long a call option
C Short a call option
D Long a put option
3 Which of the following is generally considered a disadvantage of OTC derivatives when compared with
exchange-traded derivatives?
A Inability to customise contract terms
B Mandatory daily margining
C Guaranteed performance by a central counterparty
D Lower liquidity and less standardised pricing transparency
4 Which of the following market participants seeks to profit from temporary price discrepancies between related
instruments, with minimal net market risk?
A A hedger
B A speculator
C An arbitrageur
D A long-only fund manager
5 Which of the following best describes 'backwardation' in a futures market?
A The futures price is higher than the spot price
B The near-month future is priced below the far-month future
C The spot price is higher than the futures price
D Storage costs exceed the cost of carry
6 EUR/USD is quoted at 1.10 and EUR/JPY is quoted at 160.00. What is the approximate USD/JPY cross rate?
A 130.91
B 176.00
C 154.55
D 145.45
7 All else being equal, the price of a fixed-rate bond will be MOST sensitive to a change in interest rates when the
bond has:
A A long maturity and a low coupon
B A short maturity and a high coupon
C A long maturity and a high coupon
