CMFAS RES6A Quiz 62

The provided text clearly outlines the roles and obligations of the warrant issuer. For a call warrant, the issuer’s obligation is to deliver the underlying instrument and receive the exercise price if the holder chooses to exercise. However, the text explicitly states that ‘Most, if not all, structured warrants on SGX-ST settle in cash instead of delivery of the underlying.’ In such cases, the cash settlement for a call warrant is calculated as (Market Price of Underlying – Exercise Price) / Conversion Ratio. Therefore, the issuer’s primary obligation upon exercise is to either deliver the underlying or, more commonly in Singapore, provide a cash settlement based on the specified formula. The other options describe responsibilities related to market-making (which is handled by a Designated Market-Maker appointed by the issuer, not the issuer’s direct obligation upon exercise), or incorrect roles such as acting as an intermediary or providing financial advice, which are not functions of a warrant issuer.

To determine the outcome, we must first assess if a Knock-Out Event has occurred. According to the product terms, a Knock-Out Event is triggered if any index level falls below 75% of its initial level. 1. Calculate the 75% threshold for each index: Index Alpha: 75% of 2000 = 1500 Index Beta: 75% of 1500 = 1125 Index Gamma: 75% of 1000 = 750 2. Compare the current observation levels with these thresholds: Index Alpha: Current level is 1650. Since 1650 is greater than 1500, Index Alpha has not triggered a knock-out. Index Beta: Current level is 1100. Since 1100 is less than 1125, Index Beta has triggered a knock-out. Index Gamma: Current level is 1080. Since 1080 is greater than 750, Index Gamma has not triggered a knock-out. As Index Beta’s level (1100) has fallen below its 75% threshold (1125), a Knock-Out Event has occurred. This means the fund will undergo early redemption, and the conditions for a maturity payout (including the Hurdle Rate and Participation Rate) become irrelevant.

A ‘worst of’ Equity Linked Note (ELN) is designed such that its return and potential downside exposure are linked to the performance of the single worst-performing underlying asset within a basket of multiple assets. This means that even if some underlying assets perform well and are above their strike prices, the investor’s payoff will be determined by the asset that has fallen the most in percentage terms relative to its initial price. This structure inherently increases the risk for the investor compared to a standard ELN linked to a single asset, as the probability of at least one asset performing poorly is higher than a single asset performing poorly. Consequently, ‘worst of’ ELNs typically offer a higher potential yield (or deeper discount) to compensate investors for this elevated risk. The other options are incorrect because a ‘worst of’ ELN does not offer lower risk or enhanced downside protection; it increases it. Its payoff is not based on an average, nor does it provide the investor with a choice of which asset’s performance to follow for settlement.

Credit Linked Notes (CLNs) are structured products that expose investors to the credit risk of a reference entity. In the event of a credit default by the reference entity, the outcome for the CLN investor depends on the specified mode of settlement. If the CLN specifies physical settlement, the issuing bank, which acts as the seller of a Credit Default Swap (CDS) linked to the reference entity, will exchange cash for the defaulted debt obligation of the reference entity. Consequently, the CLN investor will receive these defaulted bonds. As defaulted bonds typically trade at a substantial discount to their par value, the investor is likely to suffer a significant loss on their principal investment. This contrasts with cash settlement, where the investor would receive a cash payment representing the loss in value of the defaulted debt. CLNs are generally yield enhancement products and do not guarantee principal preservation in the event of a credit default by the reference entity. They also do not typically convert into equity shares upon a credit event.

Reverse Convertibles and Discount Certificates are both structured products designed to offer enhanced yields with capped upside and significant downside exposure. While their payoff diagrams appear similar, their underlying derivative components differ significantly. A Reverse Convertible is typically constructed by combining a long position in a zero-coupon bond with a short put option. The short put option generates premium income, contributing to the enhanced yield, but also exposes the investor to downside risk if the underlying asset’s price falls below the strike price. In contrast, a Discount Certificate is typically constructed using a long zero-strike call option and a short call option at a higher strike price. The short call option generates premium income, similar to the short put in a reverse convertible, and also caps the upside potential. Understanding these distinct constructions is crucial for comprehending the risk-return profiles and the mechanisms by which these products achieve their investment objectives.

To determine the number of bond futures contracts to sell, two main steps are required: first, calculate the hedge ratio, and second, use this ratio to find the total number of contracts. The hedge ratio is calculated by dividing the Price Value of a Basis Point (PVBP) of the bond to be hedged by the product of the PVBP of the cheapest-to-deliver (CTD) bond and its conversion factor. Hedge Ratio = PVBP of hedge security / (PVBP of most deliverable bond x Conversion factor for most deliverable bond) Hedge Ratio = 0.7250 / (0.0780 x 0.95) Hedge Ratio = 0.7250 / 0.0741 Hedge Ratio ≈ 9.78407557 Next, the number of contracts is found by multiplying the hedge ratio by the total value of the portfolio to be hedged, divided by the par value of one futures contract. Since the manager is hedging a long bond position, futures contracts should be sold (short hedge). Number of Contracts = Hedge Ratio x (Total value to be hedged / Par value of futures contract) Number of Contracts = 9.78407557 x (SGD 35,000,000 / SGD 100,000) Number of Contracts = 9.78407557 x 350 Number of Contracts ≈ 3424.42645 Rounding to the nearest whole contract, the manager should sell 3424 bond futures contracts.

The structured product’s yield calculation is dependent on the HSI spot price relative to its defined barriers. The yield formula provided is 0.50% + [4.00% x n/N], where ‘n’ represents the number of days the HSI fixes within the accrual barrier (22,200) and the knock-out barrier (22,400), and ‘N’ is the total number of trading days (250). A critical condition is that the coupon accumulation ceases when the HSI trades above the knock-out barrier. In this specific scenario, the HSI spot price fixed within the specified range for the first 150 trading days. After this period, it traded above the knock-out barrier, meaning no further coupon accumulation occurred. Therefore, the effective ‘n’ for the yield calculation is 150 days. Applying these values to the yield formula: Accrual coupon rate = 0.50% + [4.00% x 150 / 250] Accrual coupon rate = 0.50% + [4.00% x 0.6] Accrual coupon rate = 0.50% + 2.40% Accrual coupon rate = 2.90% The investment principal is SGD 1 million. The accrual coupon amount is calculated based on this principal: Accrual coupon amount = 2.90% of SGD 1,000,000 = SGD 29,000. At maturity, the investor receives the principal back plus the accumulated coupon: Total redemption proceeds = Principal + Accrual coupon amount Total redemption proceeds = SGD 1,000,000 + SGD 29,000 = SGD 1,029,000. Let’s consider why the other options are incorrect: – SGD 1,045,000 would be the outcome if the HSI had fixed within the barriers for the entire 250 trading days (i.e., ‘n’ = 250), resulting in a 4.50% coupon. This ignores the knock-out event that occurred after 150 days. – SGD 1,024,000 would be the outcome if only the variable portion of the yield (4.00% x n/N) was considered, ignoring the fixed 0.50% base yield. In that case, 2.40% of SGD 1,000,000 is SGD 24,000, leading to SGD 1,024,000. – SGD 1,021,000 would be the outcome if ‘n’ was 100 days (0.50% + [4.00% x 100 / 250] = 2.10% coupon), which does not match the scenario described.

An accumulator agreement is structured with a knock-out barrier. According to the CMFAS Module 6A syllabus, if the daily closing price of the underlying shares is at or above this barrier, the derivative agreement will be terminated. This means the investor will no longer accumulate shares at the pre-determined strike price, effectively limiting their potential gains from the discounted purchase. The strike price is fixed at the outset and does not automatically adjust based on market movements or barrier events. Furthermore, accumulators are known for not having a capital preservation feature, and they do not transition into principal-protected notes upon hitting a knock-out barrier.

The trust deed is a foundational legal document for a Collective Investment Scheme (CIS), outlining the terms and conditions that govern the relationship between investors, the fund manager, and the trustee. A core responsibility of the trustee, as stipulated in the trust deed, is to act as an independent custodian of the fund’s assets. Crucially, the trustee is tasked with ensuring that the fund manager adheres strictly to the investment objectives, policies, and other terms and conditions laid out in the trust deed. This role is vital in safeguarding investor interests by minimizing the risk of mismanagement or deviation from the fund’s mandate. While a trustee might engage in discussions or seek clarification, their primary legal duty is to enforce the terms of the trust deed, not to provide investment advice, directly manage the portfolio, or merely mediate disputes without upholding the deed’s provisions.

Eurodollar futures contracts have a notional value of USD 1,000,000. The price of a Eurodollar futures contract is quoted in points, where one full point represents a 1% change in the interest rate. Since the contract is based on a 3-month (quarterly) interest rate, the value of one full point (1%) is calculated as: USD 1,000,000 0.01 (90/360) = USD 2,500. Therefore, a price increase of 0.0150 points translates to a financial gain of 0.0150 USD 2,500 = USD 37.50. The minimum price fluctuation for non-spot months is 0.0050 points, which is equivalent to USD 12.50, but the question asks for the impact of a 0.0150 point change, not the minimum fluctuation itself. Similarly, USD 6.25 is the minimum fluctuation for the spot month.

The investor’s objective is to profit from a moderate upward movement in the stock price, generate an immediate cash inflow (credit), and limit potential downside exposure. A bull put spread is constructed by selling a higher-strike in-the-money put option and buying a lower-strike out-of-the-money put option on the same underlying asset with the same expiration date. This strategy results in a net credit received upfront and has a limited maximum loss. It is employed when the trader anticipates a moderately bullish market view. Option 2, a bear call spread, also generates a net credit and has limited risk, but it is used when an investor expects a moderate downward movement in the underlying asset’s price, which contradicts the scenario. Option 3, a long straddle, involves buying both a call and a put option, resulting in a net debit and is typically used when an investor expects significant volatility in either direction, not a moderate upward movement with limited downside. Option 4, a covered call, involves selling a call option against shares already owned, which generates income but is primarily a strategy for neutral to moderately bullish views on a stock already held, and its risk profile and construction differ from the credit spread requirement for a new position.

To determine the new exercise price of a call warrant following a dividend announcement, the CMFAS 6A guidelines require the application of an adjustment factor. This factor accounts for both normal and special dividends declared by the underlying company. The formula for the adjustment factor is (P – SD – ND) / (P – ND), where P is the last cum-date closing price of the underlying share, SD is the Special Dividend per Share, and ND is the Normal Dividend per Share. Once the adjustment factor is calculated, it is multiplied by the old exercise price to derive the new exercise price. Given the details: Old Exercise Price = $5.00 Last cum-date closing price (P) = $10.00 Special Dividend per Share (SD) = $0.50 Normal Dividend per Share (ND) = $0.20 First, calculate the Adjustment Factor: Adjustment Factor = ($10.00 – $0.50 – $0.20) / ($10.00 – $0.20) Adjustment Factor = ($9.30) / ($9.80) Adjustment Factor ≈ 0.94897959 Next, calculate the New Exercise Price: New Exercise Price = Old Exercise Price x Adjustment Factor New Exercise Price = $5.00 x 0.94897959 New Exercise Price ≈ $4.74489795 Rounding to two decimal places, the new exercise price of the call warrant is $4.74.

In situations where underlying markets have significant foreign ownership restrictions or are otherwise difficult to access directly, synthetic replication methods for Exchange-Traded Funds (ETFs) are often the most practical solution. Synthetic ETFs use derivative instruments, such as swaps, to replicate the performance of an index without directly holding the underlying securities. This allows the fund to gain exposure to markets that cannot be accessed through direct investment. Full physical replication and representative sampling are both forms of direct replication, which involve purchasing the actual underlying securities. These methods would face significant challenges or be impossible to implement in markets with strict foreign investment restrictions. Cash-based replication is another term for physically replicated ETFs, which would also encounter the same direct investment hurdles.

The question tests the understanding of how different structured products, despite having distinct underlying components, can achieve similar risk-return profiles. The provided syllabus material explicitly states that the illustration of reverse convertibles and discount certificates highlights the application of the put-call parity theory [c + PV(X) = p + S], demonstrating that there are many ways to attain a desired risk-return profile. Put-call parity is a fundamental principle in options pricing that establishes a relationship between the price of a European call option, a European put option, the underlying asset price, and the present value of the strike price. It shows how a portfolio of a call option and a zero-coupon bond can replicate the payoff of a put option and the underlying asset, or vice versa, thus explaining how different combinations of options and bonds can result in equivalent payoff structures. The other options, while related to financial markets or option pricing, do not specifically explain the equivalence of different compositions leading to similar risk-return profiles as directly as put-call parity does in this context. Risk-neutral valuation is a method for pricing derivatives, arbitrage-free pricing is a general principle for market efficiency, and the Black-Scholes-Merton model is a specific model for option valuation, but none of these directly address the structural equivalence of two different product compositions in the way put-call parity does.

The question focuses on the specific role of an independent trustee within a structured product arrangement, as outlined in the CMFAS Module 6A syllabus, Chapter 6, Section 6.7.3 ‘Issuer Oversight’. An independent trustee is primarily appointed to hold the assets and underlying financial instruments of the structured product, providing an assurance of due care to investors. Other functions mentioned in the syllabus are distinct: financial auditors are engaged to ascertain the truth and fairness of financial statements and ensure fair valuation; qualified representatives provide advice to investors on product suitability; and exchanges provide oversight for exchange-traded products by requiring issuers to comply with their rules.

The scenario describes a specific characteristic of a Market to Limit Order. When a Market to Limit Order is placed, it attempts to buy or sell at the market price. If the order is partially filled, any remaining unfilled portion will stay open in the market at the price at which the previous part of the order was filled. This distinguishes it from a Limit Order, where the unfilled portion would remain at the specified limit price or better. A Market Order aims for immediate execution at the best available price and typically doesn’t leave an unfilled part in the queue at a specific price in this manner. A Stop-Loss Order is a contingent order designed to close a losing position or protect profits once a stop price is reached, not for initial market entry with partial fill characteristics as described.

For a put option, it is considered ‘in-the-money’ (ITM) when the strike price is greater than the current market price of the underlying asset. In this scenario, the strike price is $50 and the current market price is $48, meaning the strike price is indeed higher than the market price. The intrinsic value of a put option is calculated as the difference between the strike price and the current market price, but only if this difference is positive; otherwise, the intrinsic value is zero. Here, the intrinsic value is $50 (strike price) – $48 (current market price) = $2. Therefore, the option is in-the-money with an intrinsic value of $2.

Auto-callable structured products provide the issuer with the discretion to redeem the product early if certain conditions are met. While this can offer investors a higher yield and potentially earlier access to their capital, it introduces ‘call risk’ (the uncertainty of the holding period) and, more importantly, ‘reinvestment risk’. Reinvestment risk occurs when the product is called early, and the investor receives their capital back at a time when prevailing interest rates or market conditions for similar investments are less favourable. This makes it challenging to reinvest the proceeds to achieve the same or comparable returns as the original product, especially for the remainder of the investor’s intended investment horizon. The other options describe different types of risks: counterparty risk relates to the issuer’s ability to meet its obligations, market risk pertains to the underlying asset’s performance (which is no longer directly relevant to the investor’s capital in the called product), and liquidity risk concerns the ability to sell the product in the secondary market.

The investor’s profile describes a moderately optimistic outlook on an equity, coupled with a desire for upside participation and a protective feature that provides a minimum return even if the equity performs flat or slightly negatively, provided a specific barrier is not breached. The willingness to forgo dividend payments is also a key detail. These characteristics precisely match those of a Bonus Certificate. Bonus Certificates are structured for investors who are generally bullish but seek yield enhancement and a minimum return if the market is stable or experiences a slight downturn, as long as the underlying asset remains above a predetermined barrier. Investors in Bonus Certificates typically forgo dividend payments. A Barrier Reverse Convertible, on the other hand, is generally suitable for investors with a neutral market view who are looking for income and believe the underlying will not breach a barrier. Callable Bull/Bear Contracts (CBBCs) provide leveraged exposure to a direct bullish or bearish view on the underlying asset but do not offer a guaranteed minimum return or bonus in flat or slightly negative market conditions.

The Interest Rate Parity (IRP) theory states that the forward exchange rate should reflect the interest rate differential between two currencies. The formula for the forward rate (F) is S [1 + Rc(n/360)] / [1 + Rb(n/360)], where S is the spot rate, Rc is the interest rate of the quote currency (SGD), Rb is the interest rate of the base currency (USD), and n is the number of days. Given: S = 1.3500, Rb = 0.0200, Rc = 0.0050, n = 90. Calculate the theoretical forward rate (F_IRP): F_IRP = 1.3500 [1 + 0.0050 (90/360)] / [1 + 0.0200 (90/360)] F_IRP = 1.3500 [1 + 0.00125] / [1 + 0.0050] F_IRP = 1.3500 1.00125 / 1.0050 F_IRP ≈ 1.34496 SGD/USD The question states that the actual 90-day USD/SGD forward rate observed in the market is significantly higher than this calculated theoretical rate (e.g., if the actual rate was 1.3550, which is higher than 1.34496). This means the USD is overvalued in the forward market relative to the IRP. To profit from this discrepancy through covered interest arbitrage, an arbitrageur would: 1. Borrow the currency with the lower interest rate (SGD at 0.50%). 2. Convert the borrowed SGD to the other currency (USD) at the spot rate (1.3500). 3. Lend the USD at its higher interest rate (2.00%). 4. Simultaneously sell the USD forward at the observed (overvalued) market forward rate to lock in the exchange rate for converting the USD principal and interest back to SGD at maturity. By selling USD forward, arbitrageurs increase the supply of USD in the forward market, which puts downward pressure on the forward rate, driving it back towards the IRP-implied rate. Therefore, the correct action is to sell the USD forward, while simultaneously borrowing SGD and lending USD.

To determine the adjusted exercise price of the call warrant, we must first calculate the Adjustment Factor using the provided formula for dividends. The formula for the Adjustment Factor is (P – SD – ND) / (P – ND), where P is the last cum-date closing price of the underlying, SD is the Special Dividend per Share, and ND is the Normal Dividend per Share. Given: Old Exercise Price = $5.00 P (last cum-date closing price) = $10.00 SD (Special Dividend) = $0.30 ND (Normal Dividend) = $0.20 Step 1: Calculate the Adjustment Factor. Adjustment Factor = (10.00 – 0.30 – 0.20) / (10.00 – 0.20) Adjustment Factor = (9.50) / (9.80) Adjustment Factor ≈ 0.969387755 Step 2: Calculate the New Exercise Price. New Exercise Price = Old Exercise Price x Adjustment Factor New Exercise Price = $5.00 x 0.969387755 New Exercise Price ≈ $4.846938775 Rounding to two decimal places, the adjusted exercise price is $4.85.

The question describes a structured fund that aims to provide returns linked to an underlying asset (a global equity index) without directly holding all the components of that asset. This mechanism is characteristic of ‘Indirect Investment Policy Funds’, also known as ‘Swap-based Funds’, as outlined in the CMFAS Module 6A syllabus. These funds achieve their exposure by investing a portion or all of their net proceeds into one or more derivative transactions, such as swaps, which are designed to replicate the performance of the underlying asset. This allows the fund to gain synthetic exposure without direct ownership of the underlying securities. Other options describe different investment strategies or product types that do not align with the described indirect investment approach for a fund seeking index exposure.

A Range Accrual Note (RAN) is specifically designed such that interest accrues only when a designated reference index (e.g., an interest rate benchmark or stock index) remains within a pre-defined range. The total interest payout is directly proportional to the number of days or observation periods during which this condition is met. The more frequently the reference index closes within the stipulated range, the higher the cumulative interest earned by the investor. While the creditworthiness of the issuer is crucial for the safety of the principal and overall investment, it does not determine the calculation or accrual of the interest itself for a RAN. The initial coupon rate is a component of the payout, but it is conditional; the actual payout depends on how often the condition (index within range) is satisfied. Similarly, the average value of the reference index over the term is not the determinant; rather, it is the daily or periodic observation of whether the index falls within the specified boundaries.

The ‘Optimal Yield’ rolling mechanism, as described in the context of a formula fund with a commodity index, specifically aims to adapt its rolling strategy based on market conditions. In a contango market, where forward prices are higher than spot prices, rolling over expiring futures contracts typically results in losses. Therefore, the primary objective of the Optimal Yield methodology in such a market is to minimize these rolling losses. Conversely, in a backwardation market, where forward prices are lower than spot prices, the methodology seeks to maximize rolling profits. The option about maximizing rolling profits is incorrect for a contango market, as that applies to backwardation. The option about a fixed roll schedule contradicts the adaptive nature of the Optimal Yield approach. The option regarding reinvestment of income and capital gains describes a ‘capitalized’ or ‘accumulating’ fund feature, which is unrelated to the futures rolling mechanism.

For an investor anticipating a moderate upward price movement in an underlying stock, the objective is to select a call warrant that offers substantial leverage for this specific type of move. Warrants that are at-the-money or slightly in-the-money are generally recommended for investors expecting small to moderate movements in the underlying asset. These warrants typically exhibit a delta around 0.5. Delta represents the rate at which the warrant’s price changes relative to the underlying asset’s price. When delta is around 0.5, it means that for every 1-cent change in the underlying, the warrant price changes by approximately 0.5 cents. This delta, when combined with the warrant’s nominal gearing, results in an ‘effective gearing’ (Delta x Gearing) that provides significant magnification of returns for the anticipated moderate move. Conversely, a call warrant with a delta approaching 1 is typically deeply in-the-money. While it moves almost one-for-one with the underlying, the delta component of magnification is reduced, making its effective gearing closer to its nominal gearing, which might not be optimal for leveraging a moderate move for magnified returns in the same way a delta of 0.5 would. A delta close to 0 indicates a deeply out-of-the-money warrant, which is highly insensitive to small or moderate changes in the underlying price, making its effective gearing very low despite potentially high nominal gearing. Such warrants are typically chosen for expectations of very large price movements. Lastly, call warrants inherently have positive deltas, meaning their price moves in the same direction as the underlying asset. A negative delta is characteristic of put warrants, not call warrants.

Contracts for Differences (CFDs) and equity futures contracts have distinct characteristics regarding dividend entitlement and financing costs. For CFDs, investors holding a long position are generally entitled to receive declared dividends, and the financing costs associated with holding the position are explicitly computed and added for the duration of the holding period. In contrast, investors in equity futures contracts are typically not entitled to declared dividends, and any financing costs are not explicitly stated but are instead implicitly embedded within the quoted price of the futures contract. Therefore, an investor prioritizing dividend benefits and transparent financing charges would find the CFD structure more aligned with these preferences compared to equity futures.

The question focuses on the specific strategies employed in structured products to ensure a minimum return of principal at maturity, particularly when options are not involved. According to the CMFAS Module 6A syllabus, a structured product designed to provide a minimum return of principal at maturity, and which does not involve options, typically employs a Constant Proportion Portfolio Insurance (CPPI) strategy. While a minimum return of principal can also be achieved using a zero-coupon bond combined with a long-call strategy, this approach explicitly involves options. Conversely, products that do not offer a minimum return of principal often utilise short options strategies. Investing solely in high-yield debt instruments is generally associated with the return component of a structured product to achieve higher fixed returns, but it does not inherently guarantee the principal component’s preservation.

Constant Proportion Portfolio Insurance (CPPI) is a dynamic investment strategy designed to provide a minimum portfolio value, known as the ‘floor’, while still allowing participation in the potential upside of a risky asset. When the total portfolio value declines, the ‘cushion’ – which is the difference between the current portfolio value and the floor value – consequently shrinks. According to the mechanics of CPPI, the allocation to the risky asset is determined as a multiple of this cushion. Therefore, a reduction in the cushion necessitates a corresponding decrease in the allocation to the risky asset. This adjustment is typically achieved by selling a portion of the risky assets and reallocating the proceeds to the risk-free asset. The fundamental and immediate objective of this re-allocation, in response to a portfolio value decline, is to safeguard the capital by ensuring that the portfolio’s value does not fall below the predefined floor. Increasing exposure to the risky asset, fully divesting from risk-free assets for aggressive growth, or suspending the strategy are actions contrary to the core principles of CPPI when the portfolio is experiencing a decline and capital protection is the priority.

When an investor shorts an interest rate put swaption, they are essentially selling protection against an increase in interest rates. If market interest rates rise significantly, the swaption buyer will exercise the option, obligating the investor (swaption seller) to pay out a floating rate while receiving a fixed rate. As described in the CMFAS Module 6A syllabus (Section 9.4.7, Figure 9.4.7(b)), the losses to the swaption seller in this situation are unlimited and directly dependent on how high the floating rate is when the option is exercised. The other options describe either a limited loss scenario (which applies to shorting a call swaption in normal conditions), a cap on losses (which is incorrect for a short put swaption), or risks related to early termination or reinvestment, which are distinct from the structure risk of unlimited loss in this specific swaption strategy.

The scenario describes a fund manager needing to shift asset allocation from illiquid equities to bonds, while also wanting to lock in attractive bond yields immediately. The provided text, under ‘3.5.1 Examples of Portfolio Management Applications – Example – Asset Allocation of Bonds & Stocks’, directly addresses this situation. It states that the fund manager ‘could solve the problem by buying bonds futures now since futures only require margin payments. Subsequently, when the stocks are liquidated and the cash is received, he can then sell off the futures and buy the securities at the same time.’ This strategy allows the manager to gain immediate synthetic exposure to the bond market and capture current yields without waiting for the slow and potentially disruptive liquidation of illiquid equity holdings. The other options are less efficient or do not align with the advantages of futures highlighted in the text. Directly selling illiquid stocks at a discount (Option 2) contradicts the goal of efficiency and avoiding adverse market impact. Using forward contracts (Option 3) might lack the liquidity and standardization benefits of futures, which are emphasized in the text. While options can be used for hedging (Option 4), the primary objective here is an asset allocation shift and locking in yields, for which futures are presented as a more direct and efficient tool for asset allocation.