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 distinguishes a forward contract from a futures contract?
A Forwards are always cash-settled while futures are always physically settled
B Forwards are exchange-traded with standardised terms
C Forwards are customisable OTC contracts, while futures have standardised, exchange-traded terms
D Forwards carry no counterparty risk
2 What is meant by the term 'gearing' in relation to a derivative instrument?
A A small initial outlay can control a much larger exposure to the underlying asset
B The contract must be settled by physical delivery
C The instrument is traded exclusively over-the-counter
D The price of the derivative moves independently of the underlying asset
3 Which of the following is a key advantage of exchange-traded derivatives over OTC derivatives?
A Contracts can be tailored precisely to the counterparties' requirements
B There is no requirement to post margin
C Terms such as delivery date are freely negotiable
D Counterparty risk is substantially reduced through central clearing
4 Which of the following market participants primarily uses derivatives to profit from short-term price movements,
without an underlying exposure to hedge?
A A hedger
B A speculator
C An arbitrageur
D A market maker acting purely as principal
5 Which of the following is classified as a 'hard' commodity?
A Cocoa
B Copper
C Coffee
D Cotton
6 A company's ordinary shareholders typically have which of the following rights that preference shareholders do
not?
A Voting rights at general meetings
B A fixed rate of dividend
C Priority over ordinary shareholders on winding up
D Guaranteed repayment of capital
7 What is the main characteristic that distinguishes a 'normal' upward-sloping yield curve from an inverted yield
curve?
A Inverted curves reflect that short-term rates are expected to fall relative to long-term rates
B Normal curves only occur during periods of recession
C Inverted curves indicate that investors demand a liquidity premium for longer maturities
D Normal curves reflect a liquidity preference, whereby investors require a higher yield to compensate for
holding longer-dated, less liquid debt
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 distinguishes a forward contract from a futures contract?
A Forwards are always cash-settled while futures are always physically settled
B Forwards are exchange-traded with standardised terms
C Forwards are customisable OTC contracts, while futures have standardised, exchange-traded terms
D Forwards carry no counterparty risk
2 What is meant by the term 'gearing' in relation to a derivative instrument?
A A small initial outlay can control a much larger exposure to the underlying asset
B The contract must be settled by physical delivery
C The instrument is traded exclusively over-the-counter
D The price of the derivative moves independently of the underlying asset
3 Which of the following is a key advantage of exchange-traded derivatives over OTC derivatives?
A Contracts can be tailored precisely to the counterparties' requirements
B There is no requirement to post margin
C Terms such as delivery date are freely negotiable
D Counterparty risk is substantially reduced through central clearing
4 Which of the following market participants primarily uses derivatives to profit from short-term price movements,
without an underlying exposure to hedge?
A A hedger
B A speculator
C An arbitrageur
D A market maker acting purely as principal
5 Which of the following is classified as a 'hard' commodity?
A Cocoa
B Copper
C Coffee
D Cotton
6 A company's ordinary shareholders typically have which of the following rights that preference shareholders do
not?
A Voting rights at general meetings
B A fixed rate of dividend
C Priority over ordinary shareholders on winding up
D Guaranteed repayment of capital
7 What is the main characteristic that distinguishes a 'normal' upward-sloping yield curve from an inverted yield
curve?
A Inverted curves reflect that short-term rates are expected to fall relative to long-term rates
B Normal curves only occur during periods of recession
C Inverted curves indicate that investors demand a liquidity premium for longer maturities
D Normal curves reflect a liquidity preference, whereby investors require a higher yield to compensate for
holding longer-dated, less liquid debt
