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NZX Derivatives Adviser study materials
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NZX Derivatives Adviser practice questions

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Question 1Regulatory framework and market conduct

Under the Financial Markets Conduct Act 2013, which activity requires a market services licence as a derivatives issuer in New Zealand?

  1. Entering into derivatives with retail clients as part of a business of providing derivatives Correct answer.
  2. Publishing general commentary about commodity price trends
  3. Hedging the issuer's own foreign exchange exposure with a registered bank
  4. Arranging insurance cover for a client's export receivables

Explanation

The Financial Markets Conduct Act 2013 requires a person in the business of entering into derivatives with retail clients to hold a derivatives issuer licence. Dealing with wholesale counterparties or hedging the firm's own book is not the licensed retail activity. Publishing commentary and arranging insurance fall outside the derivatives issuer definition.

Question 2Regulatory framework and market conduct

A derivatives issuer holds a market services licence covering derivatives. Which document must accompany any offer of derivatives to a retail investor?

  1. A company constitution extract
  2. A statement of investment policy and objectives
  3. A credit rating certificate
  4. A product disclosure statement Correct answer.

Explanation

Offers of financial products to retail investors under the Financial Markets Conduct Act 2013 must be accompanied by a product disclosure statement disclosing key product and issuer information. A statement of investment policy and objectives belongs to managed investment schemes, not derivatives issuers. Constitutions and credit ratings are not the mandated offer document.

Question 3Regulatory framework and market conduct

What is the primary purpose of the Financial Markets Authority's conduct guidance for derivatives issuers?

  1. To set out how issuers should meet fair dealing and client-care expectations Correct answer.
  2. To replace the issuer's own compliance arrangements
  3. To prescribe the exact pricing model each issuer must use
  4. To guarantee a minimum return to retail derivatives clients

Explanation

FMA conduct guidance describes how licensed derivatives issuers are expected to satisfy fair dealing, disclosure and client-care obligations. It does not set returns, mandate a single pricing methodology, or substitute for an issuer's own compliance framework. Issuers must still design and operate their own arrangements.

Question 4Regulatory framework and market conduct

Which obligation applies to a derivatives issuer when dealing with a retail client under the fair dealing provisions?

  1. The issuer must obtain a solicitor's certificate before each trade
  2. The issuer must disclose its internal profit margin on every trade
  3. The issuer must not engage in misleading or deceptive conduct in connection with the financial product Correct answer.
  4. The issuer must offer the client a cooling-off period of ten working days

Explanation

The fair dealing provisions prohibit misleading or deceptive conduct in connection with financial products and services. Profit margin disclosure, solicitor certification and a ten-day cooling-off period are not general statutory requirements for derivatives trades. The core duty is honest, non-misleading conduct.

Question 5Regulatory framework and market conduct

A derivatives issuer's client agreement must be provided to a retail client in what manner?

  1. In writing before the client enters into the derivatives Correct answer.
  2. Only after the client's first loss
  3. At the issuer's discretion upon request
  4. Orally during the first trading call

Explanation

The client agreement must be provided in writing before the client enters into the derivatives, so the client understands the terms in advance. Oral disclosure during a call does not satisfy the written requirement. Deferring the agreement until a loss or providing it only on request is inconsistent with the pre-contractual obligation.

Question 6Regulatory framework and market conduct

Which statement best describes the standard of care a derivatives issuer owes a retail client when giving personalised advice?

  1. The advice must be limited to the issuer's own products only
  2. The advice must be suitable for the client's stated objectives and financial situation Correct answer.
  3. The advice must maximise the client's potential return
  4. The advice must be accompanied by a guarantee of performance

Explanation

Personalised advice must be suitable, taking account of the client's objectives, financial situation and risk tolerance. The duty is suitability, not return maximisation or performance guarantees. An issuer may recommend its own products, but suitability still governs the recommendation.

Question 7Regulatory framework and market conduct

A retail client asks a derivatives issuer to execute a trade that appears inconsistent with the client's recorded risk profile. What should the adviser do first?

  1. Execute the trade immediately because the client gave the instruction
  2. Report the client to the Financial Markets Authority
  3. Refuse all future business with the client
  4. Clarify the client's objectives and circumstances and assess suitability before proceeding Correct answer.

Explanation

Where an instruction appears inconsistent with the recorded profile, the adviser should re-confirm objectives and circumstances and assess suitability before acting. Client instruction alone does not displace the suitability obligation. Refusing all future business or reporting the client are disproportionate and not the first step.

Question 8Regulatory framework and market conduct

Which practice is most consistent with managing conflicts of interest for a derivatives issuer?

  1. Disclosing how the issuer's hedging or spread revenue is generated and prioritising the client's interests Correct answer.
  2. Routing all client orders through an affiliate without disclosure
  3. Withholding spread information to avoid confusing clients
  4. Paying advisers bonuses based solely on volume of client trades

Explanation

Conflicts are managed by disclosing how the issuer earns revenue, including spreads and hedging, and by prioritising client interests. Undisclosed affiliate routing and volume-only bonuses create or conceal conflicts. Withholding spread information undermines informed decision-making.

Question 9Regulatory framework and market conduct

What does the client money and property regime require of a licensed derivatives issuer holding client funds?

  1. Client money must be converted to the issuer's base currency
  2. Client money may be used for the issuer's working capital if repaid within a month
  3. Client money must be pooled with the issuer's proprietary trading account
  4. Client money must be held in trust or otherwise segregated from the issuer's own money Correct answer.

Explanation

Client money and property must be held on trust or segregated so it is protected if the issuer fails. Using client money for working capital, converting it, or pooling it with proprietary funds breaches the segregation principle. Segregation supports client asset recovery on insolvency.

Question 10Regulatory framework and market conduct

Which record-keeping expectation applies to a derivatives issuer's client communications?

  1. Only written letters need to be retained, not call recordings
  2. Records of client instructions and advice should be retained to evidence compliance Correct answer.
  3. Records may be discarded once the trade settles
  4. Records need only be kept for clients who complain

Explanation

Issuers should retain records of client instructions, advice and communications to evidence compliance with their obligations. Discarding records at settlement, excluding call recordings, or keeping records only for complainants undermines the audit trail. Retention supports supervision and dispute resolution.

Question 11Regulatory framework and market conduct

A derivatives issuer wants to use a third party to market its products to retail clients. What is the issuer's responsibility?

  1. The issuer remains responsible for the conduct of the distribution and must ensure compliance Correct answer.
  2. Responsibility transfers entirely to the third party
  3. The issuer need only check the third party's advertising budget
  4. The issuer may rely on the third party's own licence without further checks

Explanation

A licensed issuer remains accountable for how its products are distributed, including by third parties, and must ensure the arrangements comply with its obligations. Responsibility does not transfer wholly to the marketer. Checking budgets or relying on another licence without due diligence is insufficient.

Question 12Regulatory framework and market conduct

Which statement about advertising derivatives to retail clients is correct?

  1. Advertisements need only be approved by the sales team
  2. Promotional material must be fair, clear and not misleading, including about risk Correct answer.
  3. Advertisements may omit risk warnings if returns are shown
  4. Advertisements may promise fixed returns if hedged

Explanation

Promotional material for derivatives must be fair, clear and not misleading, and must convey the risk of the product, not just potential returns. Omitting risk warnings or promising fixed returns is misleading. Internal sales approval alone does not satisfy the standard.

Question 13Regulatory framework and market conduct

What is the role of the Financial Dispute Resolution Service for a retail derivatives client?

  1. It licenses derivatives issuers on behalf of the FMA
  2. It provides an independent dispute resolution scheme for complaints about the issuer Correct answer.
  3. It guarantees client funds if the issuer becomes insolvent
  4. It sets the prices at which derivatives must trade

Explanation

Approved dispute resolution schemes give retail clients an independent route to resolve complaints against financial service providers. They do not set prices, issue licences, or guarantee client funds. Licensing rests with the FMA and client fund protection relies on segregation.

Question 14Regulatory framework and market conduct

Which behaviour by a derivatives adviser is most likely to breach the prohibition on misleading conduct?

  1. Explaining the margin call process in writing
  2. Providing a risk disclosure statement before trading
  3. Confirming the client's understanding of leverage
  4. Describing a high-risk leveraged product as a safe way to protect savings Correct answer.

Explanation

Describing a leveraged, high-risk product as safe misrepresents its nature and breaches the prohibition on misleading conduct. Explaining margin calls, providing risk disclosure and confirming understanding are appropriate and honest practices. The prohibition targets statements that create a false impression.

Question 15Regulatory framework and market conduct

Under the anti-money laundering regime, what must a derivatives issuer do before establishing a business relationship with a new client?

  1. Obtain a bank guarantee for the client's account
  2. Require the client to trade a minimum volume
  3. Conduct customer due diligence, including identity verification Correct answer.
  4. Obtain the client's tax return for the prior year

Explanation

The anti-money laundering and countering financing of terrorism regime requires customer due diligence, including verifying identity, before establishing a business relationship. Tax returns, minimum trading volumes and bank guarantees are not prescribed identity verification steps. Due diligence also supports ongoing monitoring.

Question 16Regulatory framework and market conduct

A client's trading pattern shows frequent large deposits followed by immediate withdrawal requests with little trading. What should the derivatives issuer do?

  1. Increase the client's leverage limit as a reward
  2. Escalate the activity for enhanced monitoring and consider a suspicious activity report Correct answer.
  3. Close the account without any record
  4. Ignore the pattern because the deposits cleared

Explanation

Unusual deposit and withdrawal patterns with minimal trading may indicate money laundering and warrant enhanced monitoring and, where appropriate, a suspicious activity report to the relevant authority. Ignoring cleared funds, closing silently, or rewarding the client with more leverage is inappropriate. Ongoing monitoring is a core obligation.

Question 17Regulatory framework and market conduct

Which outcome best reflects the fair dealing principle of not making false or misleading representations about a financial service?

  1. An adviser accurately describes the fees, margin requirements and risks of a product Correct answer.
  2. An adviser implies regulatory approval guarantees safety
  3. An adviser omits the possibility of margin calls
  4. An adviser emphasises only winning trades from past performance

Explanation

Accurately describing fees, margin requirements and risks satisfies the fair dealing requirement of honest representation. Selective performance emphasis, implying regulatory approval guarantees safety, and omitting margin calls all create misleading impressions. Fair dealing requires balanced, accurate communication.

Question 18Regulatory framework and market conduct

A derivatives issuer changes its fee structure. What is the most appropriate action regarding existing retail clients?

  1. Backdate the change to the start of the financial year
  2. Apply the change silently and update the website later
  3. Apply the change only to new clients and never to existing ones
  4. Notify affected clients in accordance with the client agreement and disclosure obligations before the change applies Correct answer.

Explanation

Fee changes affecting clients should be communicated in line with the client agreement and disclosure obligations before taking effect. Silent application, permanent grandfathering or backdating would be inconsistent with fair and transparent dealing. Clear notice allows clients to make informed decisions.

Question 19Regulatory framework and market conduct

Which statement about the issuer's product disclosure statement is accurate?

  1. It must be updated when a material change affects the information disclosed Correct answer.
  2. It is only required for wholesale investors
  3. It may be issued once and never revised
  4. It replaces the need for a client agreement

Explanation

A product disclosure statement must be kept current and updated when material changes affect the disclosed information. It is not a one-off document, is required for retail offers, and does not replace the client agreement. Accurate, current disclosure underpins informed investment decisions.

Question 20Regulatory framework and market conduct

A retail client disputes a margin call calculation. What is the most appropriate first step for the derivatives issuer?

  1. Deduct the disputed amount twice to be safe
  2. Investigate the calculation against the client agreement and respond through the internal complaints process Correct answer.
  3. Suspend the client's account permanently without explanation
  4. Immediately refer the matter to the dispute resolution scheme

Explanation

The issuer should first investigate the disputed calculation against the client agreement and respond through its internal complaints process. Direct referral to an external scheme, double-deducting, or permanent suspension without explanation skips the required internal step and may be unfair. Clients retain access to external dispute resolution if unresolved.

Question 21Regulatory framework and market conduct

Which of the following best describes the FMA's power in relation to a licensed derivatives issuer that breaches its obligations?

  1. The FMA may impose conditions on the licence or seek remedies such as cancellation Correct answer.
  2. The FMA may override the issuer's board decisions on staffing
  3. The FMA may set the issuer's product prices directly
  4. The FMA may guarantee the issuer's client obligations

Explanation

The FMA supervises licensed issuers and can impose licence conditions or pursue remedies including cancellation where obligations are breached. It does not set product prices, guarantee client obligations, or manage internal staffing decisions. Its role is regulatory supervision and enforcement.

Question 22Regulatory framework and market conduct

An adviser recommends a complex structured derivative to a retiree seeking stable income. Which factor is most important in assessing suitability?

  1. Whether the product is the most recently launched
  2. Whether the product's risk and liquidity profile match the client's income needs and tolerance Correct answer.
  3. Whether the product has the highest historical return
  4. Whether the adviser receives the largest commission

Explanation

Suitability turns on whether the product's risk, liquidity and payoff profile match the client's objectives and tolerance, not on headline returns, commissions or novelty. A complex structured product may be unsuitable for a retiree needing stable income. The adviser must prioritise the client's interests.

Question 23Regulatory framework and market conduct

Which practice best supports the fair treatment of retail clients when a derivatives issuer uses aggressive sales targets?

  1. Pressuring clients to trade during volatile markets
  2. Setting higher volume targets to increase revenue
  3. Removing volume-based incentives that encourage inappropriate trading and monitoring advice quality Correct answer.
  4. Rewarding advisers solely on the number of trades executed

Explanation

Fair treatment is supported by removing volume-based incentives that encourage churning and by monitoring the quality of advice. Raising volume targets, rewarding trade counts, and pressuring clients in volatile markets increase the risk of unsuitable advice. Incentive design is a key conduct control.

Question 24Regulatory framework and market conduct

What is the effect of a derivatives issuer failing to provide a client with the required risk disclosure before trading?

  1. The trade becomes automatically void and profits are returned
  2. The omission may breach disclosure obligations and expose the issuer to regulatory and civil consequences Correct answer.
  3. The client forfeits all rights to complain
  4. The issuer's licence is automatically cancelled

Explanation

Failing to provide required risk disclosure breaches disclosure obligations and may lead to regulatory action and civil liability. The trade is not automatically void, the client does not forfeit complaint rights, and licence cancellation is not automatic. Consequences depend on the circumstances and regulator's response.

Question 25Regulatory framework and market conduct

A derivatives issuer outsources its trade settlement to a technology vendor. Which statement reflects the issuer's regulatory position?

  1. The issuer remains accountable for compliance and must manage the outsourcing risk Correct answer.
  2. The vendor must hold the issuer's derivatives licence
  3. The issuer's obligations transfer to the vendor
  4. The issuer need not monitor the vendor after go-live

Explanation

Outsourcing does not transfer regulatory accountability; the issuer remains responsible and must manage vendor risk, including ongoing monitoring. The vendor does not hold the issuer's licence, and obligations do not shift to it. Effective oversight of service providers is part of good conduct.

Question 26Regulatory framework and market conduct

Under the New Zealand regulatory framework for derivatives, which legislation is the primary statute governing the licensing and conduct of derivatives issuers?

  1. The Financial Markets Conduct Act 2013 Correct answer.
  2. The Consumer Guarantees Act 1993
  3. The Reserve Bank of New Zealand Act 2021
  4. The Companies Act 1993

Explanation

The Financial Markets Conduct Act 2013 (FMCA) is the core statute that establishes the licensing regime for derivatives issuers, market services licensees, and the fair dealing and disclosure obligations that apply to them. The other statutes address company law, consumer guarantees and monetary policy respectively, and do not create the derivatives licensing framework.

Question 27Regulatory framework and market conduct

Which regulator is responsible for licensing and supervising derivatives issuers in New Zealand and enforcing market conduct obligations under the financial markets legislation?

  1. The Financial Markets Authority Correct answer.
  2. The Ministry of Business, Innovation and Employment
  3. The Commerce Commission
  4. The Office of the Privacy Commissioner

Explanation

The Financial Markets Authority (FMA) is the conduct regulator that licenses derivatives issuers, monitors compliance with market conduct obligations, and can take enforcement action for breaches. The Commerce Commission focuses on competition and fair trading, MBIE on broader business policy, and the Privacy Commissioner on privacy matters.

Question 28Regulatory framework and market conduct

A derivatives issuer's advertising to retail clients states that a product offers "guaranteed returns with no risk." Which regulatory obligation is most directly engaged by this statement?

  1. The requirement to obtain client consent before sending marketing material
  2. The fair dealing prohibition on false or misleading representations in relation to financial products Correct answer.
  3. The obligation to publish the advertisement in both English and te reo Maori
  4. The obligation to register the advertisement with the FMA before publication

Explanation

The fair dealing provisions of the FMCA prohibit making false or misleading representations about financial products, and describing a derivatives product as offering guaranteed returns with no risk is misleading because derivatives carry market and leverage risk. There is no general requirement to pre-register advertisements, obtain consent before sending marketing, or publish bilingually.

Question 29Regulatory framework and market conduct

A derivatives adviser holds a personal shareholding in a company whose stock the adviser is recommending to clients as an underlying exposure. Which action best manages this conflict of interest under market conduct expectations?

  1. Sell the holding only after the clients have completed their trades
  2. Avoid mentioning the holding because the recommendation is based on independent research
  3. Rely on the compliance team to monitor the trades without notifying clients
  4. Disclose the personal holding to affected clients and manage the conflict in line with the issuer's conflicts policy Correct answer.

Explanation

Market conduct expectations require conflicts of interest to be identified, disclosed and managed so that clients are not disadvantaged; disclosing the personal holding and applying the firm's conflicts policy achieves this. Concealing the holding, sequencing trades to avoid disclosure, or relying solely on monitoring without disclosure does not adequately address the conflict.

Question 30Regulatory framework and market conduct

A derivatives issuer is designing its client onboarding process for retail clients. Which combination of steps best reflects the conduct obligations that apply before a client can trade a leveraged derivatives product?

  1. Collect identity verification, assess suitability against the client's objectives and risk tolerance, and provide clear disclosure of the product's risks before trading begins Correct answer.
  2. Provide risk disclosure and accept the client's self-certification of experience without further assessment
  3. Complete identity verification only, because suitability obligations apply only to personalised advice
  4. Collect identity verification and provide a product brochure, leaving suitability assessment to the client's own judgement

Explanation

Before a retail client trades a leveraged derivative, the issuer must complete identity verification under the AML/CFT regime, assess whether the product is suitable for the client's objectives and risk tolerance, and give clear risk disclosure so the client understands the potential for loss. Identity checks alone, brochure provision, or unverified self-certification do not satisfy these combined conduct obligations.

Question 31Derivatives fundamentals and product types

Under an NZX-listed S&P/NZX 20 index futures contract, what does the buyer of the futures contract commit to?

  1. Selling the underlying shares at the agreed futures price on the settlement date
  2. Settling gains or losses in cash on a long position in the S&P/NZX 20 index Correct answer.
  3. Lending the underlying shares to the clearing participant until expiry
  4. Receiving a fixed dividend stream from the underlying company until expiry

Explanation

The NZX S&P/NZX 20 index future is cash settled. Its buyer takes a long position, gaining when the futures price rises and losing when it falls, with gains and losses settled in cash through clearing arrangements. The contract does not require purchase or delivery of the constituent shares.

Question 32Derivatives fundamentals and product types

Which feature distinguishes an exchange-traded option from an exchange-traded futures contract?

  1. The option is settled only by physical delivery of shares
  2. The option holder has a right, while the futures holder has an obligation Correct answer.
  3. The futures contract can be closed out before expiry but the option cannot
  4. The option premium is paid at expiry rather than at trade date

Explanation

An option confers a right on the buyer, exercised at the buyer's discretion, whereas a futures position carries a two-way obligation for both parties. Both products can generally be closed out before expiry. Option premiums are paid upfront by the buyer, and cash settlement is common for both.

Question 33Derivatives fundamentals and product types

A client buys a put option over an NZX-listed equity. What is the client's maximum loss on the position?

  1. The difference between the spot price and the strike price
  2. Unlimited, because share prices can fall to zero
  3. The strike price multiplied by the contract multiplier
  4. The premium paid plus any brokerage Correct answer.

Explanation

The long put holder pays a premium and acquires a right, not an obligation, so the loss is capped at the premium plus transaction costs. Losses on the underlying are borne by the put writer, whose risk is substantial. The strike price and spot-strike difference describe payoffs, not the maximum loss.

Question 34Derivatives fundamentals and product types

What is the role of the clearing house in NZX derivatives trading?

  1. It guarantees the creditworthiness of each individual client
  2. It acts as central counterparty to every matched trade Correct answer.
  3. It provides investment advice to clearing participants
  4. It sets the daily settlement price for each underlying security

Explanation

The clearing house novates matched trades and becomes the buyer to every seller and the seller to every buyer, managing counterparty risk through margin. It does not assess individual clients' creditworthiness directly, that is the participant's role. Price setting and advice are outside its function.

Question 35Derivatives fundamentals and product types

An investor holds a long futures position that is marked to market daily. What happens when the price of the underlying rises?

  1. The investor must deliver the underlying shares immediately
  2. The initial margin requirement is returned in full to the investor
  3. The investor's margin account is debited by the variation margin
  4. The investor's margin account is credited with variation margin Correct answer.

Explanation

Daily mark-to-market means gains and losses on open futures positions are settled in cash each day through variation margin. A long position gains when the underlying price rises, so the account is credited. Delivery obligations arise only at expiry if the position remains open, and initial margin is not returned while the position is held.

Question 36Derivatives fundamentals and product types

Which statement best describes the difference between a call option and a put option?

  1. A call gives the right to buy; a put gives the right to sell Correct answer.
  2. A call is settled only in cash; a put is settled only physically
  3. A call gives the right to sell; a put gives the right to buy
  4. A call obliges the holder to buy; a put obliges the holder to sell

Explanation

A call option confers the right to buy the underlying at the strike price, and a put confers the right to sell. Both are rights for the holder rather than obligations. Settlement method is a contract specification, not a distinction between calls and puts.

Question 37Derivatives fundamentals and product types

What does the term 'notional value' refer to in a derivatives contract?

  1. The commission charged by the broker on the trade
  2. The cash amount held in the margin account
  3. The premium paid by the option buyer at trade date
  4. The contract size multiplied by the reference price of the underlying Correct answer.

Explanation

Notional value expresses the economic exposure of a derivative, calculated as contract size times the reference price of the underlying. It is not a cash flow exchanged at trade date. Premiums, margin balances and commissions are separate cash amounts and not measures of notional exposure.

Question 38Derivatives fundamentals and product types

An NZX derivatives participant holds a client's money in trust. Which principle applies to that client money?

  1. It may be lent to other clients of the participant
  2. It becomes the participant's property once received
  3. It must be kept separate from the participant's own money Correct answer.
  4. It may be used to fund the participant's own proprietary trading

Explanation

Client money must be held on trust and segregated from the participant's own funds, so that it is protected if the participant fails. Using client money for proprietary purposes or lending it to other clients would breach that trust. Receipt of client money does not transfer ownership to the participant.

Question 39Derivatives fundamentals and product types

A share is trading at NZD 10.00. A one-month call with a strike of NZD 9.00 is priced at NZD 1.20. What is the intrinsic value of the call per share?

  1. NZD 1.00 Correct answer.
  2. NZD 0.00
  3. NZD 0.20
  4. NZD 1.20

Explanation

Intrinsic value for a call is the excess of the spot price over the strike price, floored at zero: 10.00 - 9.00 = 1.00. The remaining 0.20 of the premium is time value. A premium of 1.20 or a residual of 0.20 describe the option price and time value, not intrinsic value.

Question 40Derivatives fundamentals and product types

An investor expects the price of an NZX-listed stock to fall but does not own the shares. Which single-leg option strategy expresses that view with defined risk?

  1. Sell a put option
  2. Write a call option
  3. Buy a put option Correct answer.
  4. Buy a call option

Explanation

A long put profits when the underlying falls and caps the buyer's loss at the premium, so risk is defined. Selling a put also profits from a rising or static market, not a falling one, and carries substantial downside risk. Writing a call is bearish but exposes the writer to potentially unlimited loss.

Question 41Derivatives fundamentals and product types

A futures contract on an equity index has a multiplier of NZD 25 per index point. The index is at 6,000 and the investor holds two long contracts. What is the notional value of the position?

  1. NZD 300,000 Correct answer.
  2. NZD 150,000
  3. NZD 12,000
  4. NZD 600,000

Explanation

Notional value equals index level times multiplier times number of contracts: 6,000 x 25 x 2 = 300,000. The multiplier converts index points into a dollar exposure per contract. Multiplying by only one contract, or omitting the multiplier, produces the other figures.

Question 42Derivatives fundamentals and product types

An investor buys a call with a strike of NZD 5.00 for a premium of NZD 0.40. At expiry the share price is NZD 5.80. What is the investor's net profit per share?

  1. NZD 0.60
  2. NZD 0.40 Correct answer.
  3. NZD 0.80
  4. NZD 0.20

Explanation

At expiry the call is worth its intrinsic value of 5.80 - 5.00 = 0.80. Net profit is that payoff less the 0.40 premium, giving 0.40 per share. Reporting 0.80 ignores the premium, and 0.20 or 0.60 reflect arithmetic errors.

Question 43Derivatives fundamentals and product types

Which statement correctly describes the payoff profile of a short futures position as the underlying price rises?

  1. Losses increase one-for-one with the underlying price Correct answer.
  2. Profits increase one-for-one with the underlying price
  3. Losses are capped at the initial margin posted
  4. Profits are capped at the initial margin posted

Explanation

A short futures position has a linear payoff that moves opposite to the underlying, so losses grow one-for-one as the price rises. Futures positions are not capped in profit or loss by the margin posted; margin is collateral, not a limit on exposure. The long position is the one that profits as prices rise.

Question 44Derivatives fundamentals and product types

A client wants exposure to a diversified basket of NZX-listed shares without buying each stock. Which derivative product most directly provides that exposure?

  1. A single-stock futures contract over one company
  2. An equity index futures contract Correct answer.
  3. A put option over a single stock
  4. A fixed-rate bond futures contract

Explanation

An equity index futures contract tracks a basket of constituent shares, giving diversified market exposure in a single instrument. Single-stock futures and single-stock options provide exposure to one company only. Bond futures relate to interest rates rather than equity market exposure.

Question 45Derivatives fundamentals and product types

What is the primary purpose of posting initial margin on a futures position?

  1. To provide collateral against potential future losses on the position Correct answer.
  2. To prepay the purchase price of the underlying asset
  3. To pay the exchange's trading fees in advance
  4. To guarantee a profit on the position at expiry

Explanation

Initial margin is collateral deposited when a futures position is opened to cover potential adverse price moves before the next mark-to-market. It is not a fee, a prepayment of the purchase price, or a guarantee of profit. Variation margin then settles actual daily gains and losses.

Question 46Derivatives fundamentals and product types

An investor writes a call option over shares they already own. What is the main effect of this covered call strategy?

  1. It obliges the investor to buy more shares if the price falls
  2. It generates premium income but caps upside above the strike Correct answer.
  3. It converts the shareholding into a fixed-interest investment
  4. It removes all downside risk on the shareholding

Explanation

Writing a covered call earns the premium, which provides a small buffer against losses, but the obligation to deliver shares at the strike caps gains above that level. Downside risk remains because the shares are still owned. The strategy does not convert equity into fixed interest or create an obligation to buy.

Question 47Derivatives fundamentals and product types

Which factor would increase the premium of a call option, all else held equal?

  1. A rise in the strike price
  2. A fall in the volatility of the underlying
  3. An increase in the volatility of the underlying Correct answer.
  4. A decrease in the time to expiry

Explanation

Higher volatility increases the chance of large favourable moves, which raises the value of an option's asymmetric payoff. Shorter time to expiry reduces time value, and a higher strike reduces the value of a call. Volatility is a key input in any option pricing model.

Question 48Derivatives fundamentals and product types

A trader expects the price of an NZX-listed stock to rise and wants leveraged exposure with a known maximum loss. Which position best fits?

  1. Write a put option
  2. Buy a call option Correct answer.
  3. Buy a futures contract
  4. Write a call option

Explanation

A long call provides leveraged upside for a fixed premium and caps the loss at that premium, so the maximum loss is known. A long futures position offers leverage but has no capped loss. Writing a put or call collects premium but exposes the writer to substantial losses.

Question 49Derivatives fundamentals and product types

What is the settlement obligation of a cash-settled index futures contract at expiry?

  1. A cash payment equal to the difference between the final settlement price and the contract price Correct answer.
  2. A cash payment of the full notional value of the contract
  3. Delivery of a basket of bonds matching the index
  4. Delivery of the constituent shares in the index

Explanation

Cash-settled index futures are settled by a single cash payment representing the gain or loss on the position, measured from the contract price to the final settlement price. No shares or bonds change hands. The full notional value is not paid, only the difference.

Question 50Derivatives fundamentals and product types

Which statement about the relationship between futures price and spot price at expiry is correct for a cash-settled contract?

  1. The futures price converges to the spot price as expiry approaches Correct answer.
  2. The futures price always trades at a fixed premium to spot
  3. The futures price diverges from spot as expiry approaches
  4. The futures price becomes zero at expiry

Explanation

As expiry approaches, the futures price converges to the spot or final settlement price because the remaining time value of carrying the position diminishes. A persistent fixed premium would create an arbitrage opportunity. The futures price does not fall to zero at expiry; it settles at the underlying reference price.