Question 1

What is the policy of the Model Code on drugs, alcohol and other substance abuse in the dealing room?

Accepted Answer

A)  Management is to proximately inform the local regulator of any suspected drug abuse in either the front office or operations department. 
B)  The chief dealer must inform the ACI's Committee for Professionalism as soon as he suspects any drug or alcohol abuse in his dealing room. 
C)  Policies should be developed and clearly announced, including penalties for individuals who are found to be substance abusers. 
D)  Management should take all reasonable steps to stop the abuse of drugs, including alcohol and other substances.

Question 2

You have borrowed at 3-month LIBOR+50. LIBOR for the loan will be re-fixed in exactly one month. The market is quoting: 1x3 USD FRA            0.42-45% 1x4 USD FRA            0.54-58% 1x5 USD FRA            0.57-62% To hedge the next LIBOR fixing, you should:

Accepted Answer

A)  Sell a 1x3 FRA at 0.42% 
B)  Buy a 1x3 FRA at 0.45% 
C)  Buy a 1x4 FRA at 0.58% 
D)  Sell a 1x4 FRA at 0.54%

Question 3

What happens when the issuer of a bond being used as collateral in a classic repo fails to pay a coupon on the bond during the term of the repo?

Accepted Answer

A)  The transaction is terminated and the collateral is returned to the seller 
B)  The transaction is rolled over until the coupon is paid or the issuer becomes insolvent, at which point the seller becomes an unsecured creditor of the issuer 
C)  The buyer is obliged to make a manufactured payment to the seller and becomes an unsecured creditor of the issuer 
D)  The buyer is not obliged to make a manufactured payment to the seller but the buyer is likely to ask for margin

Question 4

You and a dealer at another bank have a verbal bilateral reciprocal arrangement to quote each other two-way prices. During periods of high volatility, the other dealer refuses to quote to you. What does the Model Code say about this situation?

Accepted Answer

A)  The other dealer is bound to reciprocate. 
B)  This is not in any way an enforceable or binding commitment. 
C)  The Model Code does not comment on dealing reciprocity. 
D)  It is common market practice to suspend reciprocity in periods of high volatility.

Question 5

What is the ISO code for the currency of China?

Accepted Answer

A)  CHY 
B)  CNR 
C)  CHR 
D)  CNY

Question 6

How are Overnight Indexed Swaps settled?

Accepted Answer

A)  periodic exchange of fixed and floating payments up to and including maturity 
B)  at maturity by net payment 
C)  after maturity by exchange of fixed and floating payments 
D)  after maturity by net payment

Question 7

What should be done when a voice broker calls "off" at the very instant the dealer hits the broker's price as "mine" or "yours"?

Accepted Answer

A)  The transaction should be concluded and the broker should inform both counterparties accordingly. 
B)  The dealer who hits the broker's price may decide whether the deal is done or not; the broker should inform both counterparties accordingly. 
C)  The deal should not be concluded and the broker should inform both counterparties accordingly. 
D)  The broker should immediately inform both counterparties that the deal will have to berenegotiated.

Question 8

Which of the following scenarios offer an example of wrong way risk?

Accepted Answer

A)  A bank purchases credit protection on highly-rated tranches of US mortgage-backed securities from a US mortgage bank 
B)  A bank sells protection on the iTraxx main index at a level of 25 bps and shortly afterwards the index crosses the 200 bps level 
C)  A bank sells EUR put I USD call ATM options with an expiry date of 6 months and afterwards volatility moves up to substantially higher levels 
D)  A bank enters into a receiver's swap while interest rates are increasing

Question 9

With reference to dealing periods, what does the term "short dates" refer to?

Accepted Answer

A)  overnight, tom-next and spot-next 
B)  maturities up to one week 
C)  maturity dates of less than one month 
D)  maturity dates of less than 10 days

Question 10

If 6-month EUR/AUD is quoted at 29/32, which of the following statements is correct?

Accepted Answer

A)  EUR rates are higher than AUD rates in the 6-month 
B)  AUD rates are higher than EUR rates in the 6-month 
C)  There is a positive EUR yield curie 
D)  There is not enough information to decide

Question 11

What steps will the CFP of the ACI probably not undertake after having been formally notified by one of the parties of a breach of the letter or spirit of the Model Code?

Accepted Answer

A)  consult the local ACI national association 
B)  bring the matter to the appropriate court of justice 
C)  examine the complaint 
D)  bring the matter to the attention of the appropriate regulatory body

Question 12

The intrinsic value of a long call option:

Accepted Answer

A)  Falls and rises with the price of the underlying commodity, but is always positive 
B)  Rises if the price of the underlying commodity falls and vice versa 
C)  Depends solely on the volatility of the price of the underlying commodity 
D)  Becomes negative if the market price of the underlying commodity falls below the strike price of the option

Question 13

The risk associated with a stock or a bond that is not correlated with events in the market is known as:

Accepted Answer

A)  interest rate risk 
B)  model risk 
C)  currency risk 
D)  specific risk

Question 14

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

A)  1.6035 
B)  1.6027 
C)  1.6030 
D)  1.6023

Question 15

Which of the following is not in the Model Code?

Accepted Answer

A)  Banks and brokers should record, by tapes or other such means, conversations between dealing counterparties. 
B)  There is no need to inform new counterparties and clients that conversations will be recorded. 
C)  On completion of recordings, tapes should be kept for a period sufficient to enable the details of any transaction contained therein to be confirmed. 
D)  The storage of recorded tapes should be strictly managed to prevent their contents from being tampered with.

Question 16

Dealers should not conduct dealing activities outside the bank unless:

Accepted Answer

A)  Clear written guidelines issued by management are in place. 
B)  They are in an approved brokers office. 
C)  There are on holiday. 
D)  None of the above.

Question 17

You are quoted the following market rates: Spot EUR/USD         1.3097-00 0/N EUR/USD swap         0.08/0.11 TIN EUR/USD swap         0.29/0.34 S/N EUR/USD swap         0.10/0.13 Where can you buy EUR against USD for value tomorrow?

Accepted Answer

A)  1.299971 
B)  1.309966 
C)  1.309971 
D)  1.310029

Question 18

How long does the Model Code recommend that tapes and other records of dealers/brokers be kept?

Accepted Answer

A)  at least two months 
B)  one year 
C)  up to one month 
D)  at least three months

Question 19

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

Accepted Answer

A)  Management must ensure ongoing lines of communication are in place between the parties. 
B)  Management must report to the central bank. 
C)  Management allows only experienced dealers to take such orders. 
D)  Bank staff must secure the approval of the counterpartqs management to accept such orders.

Question 20

Does the slope of the interest yield curve typically have a substantial impact on a bank's net interest margin?

Accepted Answer

A)  No, it doesn't, since the slope of the yield cure is unrelated to the spread between short-term and long-term interest rates. 
B)  No, it doesn't. There isn't any link at all between the slope of the interest yield curve and a bank's net interest margin. 
C)  Yes it does. In banking, long-term rates usually apply to bank deposits and money market borrowings whereas short-term interest rates are attached to loans and securities. 
D)  Yes it does. Long-term rates usually apply to a bank's assets (loans, securities, etc.) and the short term interest rates are generally attached to liabilities (deposits, money market borrowings, etc.).

Exam 2: ACI Dealing Certificate-Part B