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HS 300: Market and Product Knowledge

HS 300 · Work through your exam, one topic at a time.

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Market and Product Knowledge

The Market and Product Knowledge domain tests whether you can explain what a client actually owns, how it is priced, what it costs, and where it can lose money. Questions rarely ask for definitions alone; they put a product into a scenario and ask which risk, cost or valuation feature drives the outcome.

Asset class essentials

  • Cash and money market instruments: price is stable, risk is inflation and counterparty.
  • Fixed income: the drivers are credit spread, duration and the shape of the yield curve. Duration measures price sensitivity to a parallel shift in yield, not time to maturity. A bond with duration 6.2 loses roughly 6.2% for a 1% (100bp) rise in yields; convexity makes the estimate asymmetric.
  • Equities: total return = price change + dividends. Valuation multiples (P/E, EV/EBITDA) are only comparable within similar sectors and accounting bases.
  • Funds and ETFs: an ETF's market price can diverge from NAV; authorised participants arbitrage the gap. Tracking difference is the annual gap between fund and index return; tracking error is the volatility of that gap.
  • Derivatives and structured products: futures are margined daily; options buyers pay premium and have limited loss, sellers do not. Capital protection is only as good as the issuer's credit.

Costs and liquidity

Total cost of ownership = ongoing charge + transaction costs + bid-offer spread + any entry/exit or performance fee. A product's OCF never includes the spread you pay to trade it. Valuation hierarchies (Level 1 quoted, Level 2 observable inputs, Level 3 unobservable) signal how much a price depends on judgement.

Worked example

An index returned 8.0% over a year; the tracking ETF returned 7.72%. The TER is 0.20%, and the fund held 0.08% in cash drag and withheld dividend taxes. Tracking difference = 7.72 − 8.00 = −0.28%. That is not tracking error: tracking error is the standard deviation of the monthly differences, which could be 0.15% even when the annual difference is small. A client comparing two ETFs should check both, plus the spread.

Traps

Duration versus maturity; yield versus total return; clean versus dirty price; assuming a protected note is safe because it is "protected"; comparing a fund to a mismatched benchmark; treating a headline yield as a promise.