Question 1

If a dealer has interest on one side, and the other side is dealt away, the broker should:

Accepted Answer

If one side of the trade is dealt away and the dealer has an interest in the other side, the broker should immediately put the price "under reference" and check with the dealer to ascertain their original intention. This ensures that the dealer's intention is clear and avoids any potential misunderstandings or problems with the trade. Canceling the order or continuing with the order without clarification could lead to errors and potential losses. Therefore, option A is the best choice.

Question 2

Bank XYZ calls you for a quote in EUR/USD for EURO 20 million. If you decide to quote to Bank XYZ:

Accepted Answer

When quoting a price for a specific amount, you must be prepared to deal up to that amount if the counterparty accepts the quote.

Question 3

Banks have a fiduciary responsibility to ensure that clients have all necessary information to understand the transaction because this:

Accepted Answer

Banks have a fiduciary responsibility to act in their clients' best interests and provide all necessary information to help prevent potential litigation. While providing sufficient information may encourage clients to do more business, it is primarily to fulfill their fiduciary duty and prevent legal issues. While regulators may require certain disclosures, this alone is not the main reason behind a bank's fiduciary responsibility. Providing information to sell risk management solutions is also not the primary reason for a bank's fiduciary duty.

Question 4

When a broker calls "off" at the very instant a dealer "hits" the broker's price:

Accepted Answer

In this scenario, the broker has called "off" which means they have decided not to proceed with the transaction. Therefore, the transaction should not be concluded.

Question 5

What is the risk of dealing through an agent with an unknown principal?

Accepted Answer

Dealing through an agent with an unknown principal carries multiple risks, including potential regulatory and legal issues related to trading on non-public information, difficulty in netting exposures in case of insolvency or for capital adequacy purposes. Therefore, all of the above options (A, B, and C) are best choices.

Question 6

An option premium is a positive function of:

Accepted Answer

All three factors - time to expiry, volatility of the price of the underlying commodity, and the moneyness of the option, have a significant impact on the option premium. The longer the time to expiry, the higher the premium as there is more time for the underlying price to move in favor of the option holder. Higher volatility also leads to higher premiums, as there is a greater likelihood of the price moving in favor of the option. The moneyness of the option, i.e. the strike price in relation to the current market price of the underlying commodity, also affects the premium, with the prices for in-the-money and at-the-money options being higher compared to out-of-the-money options.

Question 7

Where repos or securities lending transactions are entered into, the Model Code recommends:

Accepted Answer

The Model Code recommends that documentation should be in place beforehand to ensure clarity and legal certainty in repos or securities lending transactions.

Question 8

Where the Committee for Professionalism of the ACI has been notified of a breach of the letter or spirit of the Model Code, it

Accepted Answer

The Committee for Professionalism of the ACI will examine the complaint if it has been notified of a breach of the letter or spirit of the Model Code.

Question 9

Management policy on the use of mobile devices by trading sales and settlement staff should:

Accepted Answer

Completely banning mobile devices from the dealing room or back office may not be practical or feasible, as they can be useful tools for communication and staying in touch with clients. However, a clear policy should be in place stating whether they are allowed and under what circumstances they can be used. This can help ensure that mobile device use does not interfere with work or compromise security.

Question 10

The Chairman and members of the ACls Committee for Professionalism are ready to assist in resolving disputes through the ACIs Expert Determination Service in situations where:

Accepted Answer

The option that best fits the situation when the ACls Committee for Professionalism can assist in resolving disputes through the ACIs Expert Determination Service is when one of the counterparties requests their assistance. The other options (A, B, and C) are not necessary criteria for the ACIs Expert Determination Service to be used.

Question 11

Which of the following currencies is quoted on an actual/360 basis?

Accepted Answer

All of the above currencies are quoted on an actual/360 basis.

Question 12

The delta of an option is:

Accepted Answer

Delta is the sensitivity of the option value to changes in the price of the underlying asset. It measures the amount of price change in the option for every $1 change in the underlying asset. Therefore, the correct answer is D. Choices A, B, and C are incorrect because they refer to other measures such as gamma, vega, and theta respectively.

Question 13

You and a dealer at another bank have an informal bilateral reciprocal arrangement to quote each other two-way prices. During periods of high volatility, the other dealer refuses to quote to you. The Model Code states that

Accepted Answer

The answer of You and a dealer at another bank...

Question 14

Cable is quoted at 1.6075-80 and you say "5 yours!" to the broker. What have you done?

Accepted Answer

Saying "5 yours" to the broker means you are selling 5 million of the quoted currency, which in this case is GBP, at the bid price of 1.6075. Therefore, the correct answer is B - Sold GBP 5 million at 1.6075.

Question 15

What is the purpose of a long strangle option strategy?

Accepted Answer

The purpose of a long strangle option strategy is to anticipate very high volatility in the price of the underlying commodity. This strategy involves buying a call option and a put option at the same time, with both options having the same expiration date but different strike prices. The hope is that the price of the underlying asset will fluctuate significantly, causing one of the options to be profitable while the other expires worthless. This strategy is often used by traders who believe that there will be a large price movement in the near future but are uncertain about the direction of the movement.

Question 16

The Model Code recommends that when banks accept a stop-loss order

Accepted Answer

The Model Code recommends that when banks accept a stop-loss order, management must ensure ongoing lines of communication are in place between the parties to avoid any confusion or miscommunication. This ensures that any changes in market conditions or the client's objectives can be addressed promptly.

Question 17

The two-week repo rate br the 5.25% bund 2007 is quoted to you at 3.33-38%. You agree to reverse in bonds worth EUR 266,125,000 with no initial margin. You would earn repo interest ot

Accepted Answer

To calculate the repo interest earned, we need to first calculate the interest rate for the two-week repo.

We can do this by taking the midpoint of the quoted rate:

(3.33% + 3.38%) / 2 = 3.355%

Next, we need to calculate the interest earned:

EUR 266,125,000 * (3.355% / 360 * 14) = EUR 344,632

Therefore, the answer is B, EUR 344,632.

Question 18

When dealing with a fund manager, who will allocate shares in a transaction to his unknown clients after the transaction has been executed with you, you should:

Accepted Answer

While insisting on the allocation being made and confirmed before the transaction is executed would be preferred, it may not always be possible or practical in dealing with a fund manager who has unknown clients. Therefore, agreeing in writing with the fund manager that the allocation will be confirmed as soon as practicable after the transaction is executed provides a degree of assurance and transparency in the process. However, it is not necessary to request a guarantee of the transaction.

Question 19

If you buy GBP 2,000,000 against USD at 1.6020; GSP 1,000,000 at 1.6035 and GBP 3,000,000 at 1.6028, what is the average rate of your position?

Accepted Answer

We need to calculate the weighted average rate for the position:

(2,000,000 x 1.6020) + (1,000,000 x 1.6035) + (3,000,000 x 1.6028) = 10,814,600

Total amount = 2,000,000 + 1,000,000 + 3,000,000 = 6,000,000

Weighted average rate = 10,814,600/6,000,000 = 1.8024333

Rounding off to 4 decimal places, we get:

Weighted average rate = 1.6027

Therefore, the best choice is B.

Question 20

Dealers should not conduct dealing activities outside the bank unless:

Accepted Answer

Conducting dealing activities outside the bank can increase the potential for errors, fraud, and other risks. Therefore, clear written guidelines issued by management are necessary to ensure that proper procedures are followed and risks are mitigated. The other choices, being in an approved broker's office or on holiday, do not necessarily provide sufficient protection against potential risks.

Exam 2: ACI Dealing Certificate-Part B