CMFAS RES6A Quiz 01

A bull put spread is a credit spread strategy employed when an investor anticipates a moderate upward movement in the underlying asset’s price. It is constructed by selling an in-the-money (ITM) put option and simultaneously buying an out-of-the-money (OTM) put option on the same underlying asset with the same expiration date. Selling the higher strike put (ITM) and buying the lower strike put (OTM) results in a net credit received at the initiation of the trade, and limits both potential profit and potential loss. The other options describe different vertical spread strategies: selling a lower strike call and buying a higher strike call forms a bear call spread (credit, bearish view); buying a lower strike call and selling a higher strike call forms a bull call spread (debit, bullish view); and buying a higher strike put and selling a lower strike put forms a bear put spread (debit, bearish view).

The trustee’s primary role, as outlined in the trust deed, is to act as an independent custodian of the fund’s assets. Their responsibility is to ensure that the fund manager operates strictly in accordance with the terms and conditions set out in the trust deed. This oversight is crucial for safeguarding investors’ interests by minimising the risk of mismanagement by the fund manager. The other options describe responsibilities typically held by the fund manager (determining investment strategy, making trading decisions, establishing subscription amounts and dividend policies) or the fund manager/distributor (preparing and distributing product information), rather than the independent oversight function of the trustee.

When an Exchange Traded Fund (ETF) trades at a premium to its Net Asset Value (NAV), it means the market price of the ETF shares is higher than the value of its underlying assets. Arbitrageurs, often referred to as Authorized Participants (APs) or market-makers, play a crucial role in correcting this discrepancy. They observe the premium and can profit by simultaneously buying the underlying basket of securities that the ETF tracks. They then deliver these securities to the ETF issuer in exchange for new ETF shares (a process known as ‘creation’). Finally, they sell these newly created ETF shares on the secondary market. This action increases the supply of ETF shares, which puts downward pressure on the ETF’s market price, helping to bring it back in line with its NAV. This mechanism is fundamental to the open-ended structure of ETFs, ensuring their market price generally stays close to their intrinsic value.

To determine the new exercise price of the warrant after a dividend adjustment, the formula for the Adjustment Factor must be applied. The Adjustment Factor is calculated as (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. Once the Adjustment Factor is found, it is multiplied by the Old Exercise Price to get the New Exercise Price. Given: Old Exercise Price = $5.00 Last cum-date closing price (P) = $10.00 Special Dividend (SD) = $0.50 Normal Dividend (ND) = $0.20 Step 1: Calculate the Adjustment Factor. Adjustment Factor = (P – SD – ND) / (P – ND) Adjustment Factor = ($10.00 – $0.50 – $0.20) / ($10.00 – $0.20) Adjustment Factor = ($9.30) / ($9.80) Adjustment Factor ≈ 0.94897959 Step 2: 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 is $4.74.

A Range Accrual Note (RAN) pays interest only for the days its reference index falls within a predefined range. The coupon calculation is based on the agreed annual rate, applied proportionally to the number of days the condition is met, using the specified day count convention. In this scenario, the annual coupon rate is 4% and the calculation basis is ACT/360. The nominal investment is SGD 200,000, and the index closed within the range for 270 days out of the 365-day observation period. The coupon payment is calculated as: Nominal Investment × Annual Coupon Rate × (Number of days within range / Day count basis). Therefore, SGD 200,000 × 0.04 × (270 / 360) = SGD 8,000 × 0.75 = SGD 6,000. The first option correctly reflects this calculation. The second option incorrectly uses 365 as the denominator for the day count basis instead of 360. The third option represents the full annual coupon as if the index had stayed within the range for the entire year, ignoring the actual number of days the condition was met. The fourth option incorrectly calculates the coupon based on the number of days the index closed outside the range.

The Monetary Authority of Singapore (MAS) mandates that financial institutions and fund distributors establish formal policies and procedures. These procedures are crucial for evaluating the nature of any new investment product and determining its suitability for specific customer segments before it is distributed. This ensures that products are appropriately matched with investors’ risk profiles and financial objectives. Other options, while potentially related to good practice or other regulatory aspects, do not represent the primary, mandated action by MAS for internal product assessment prior to distribution. For instance, performance guarantees are not a regulatory prerequisite, comprehensive surveys are not the primary mandated internal policy, and prospectus requirements vary based on the investor type (retail, accredited, institutional) and are distinct from the internal suitability assessment framework.

Credit Linked Notes (CLNs) and Bond Linked Notes (BLNs) are both structured products designed for yield enhancement, but they achieve this through distinct underlying mechanisms and risk exposures. A CLN embeds a Credit Default Swap (CDS), where the investor effectively sells credit protection on a ‘reference entity’. The investor receives higher-than-market rates for taking on the risk that the reference entity might experience a credit event, such as failing to pay interest or repay principal. Therefore, the payout of a CLN is directly contingent on the occurrence of a credit event related to the reference entity. The investor is exposed to the credit risk of both the note issuer and the reference entity. In contrast, a BLN embeds a short-put option on a specific bond. The investor receives premium for selling this put option. The payout of a BLN is primarily dependent on the price movement of the underlying bond. If the bond’s price falls below the strike price of the put option, the investor may end up owning the bond. Bond prices can be influenced by various factors beyond just a credit default, including credit downgrades, widening credit spreads, and changes in interest rates. Thus, the fundamental distinction lies in the type of derivative embedded (CDS for CLN, put option for BLN) and the specific event or market movement that triggers the investor’s primary exposure and affects the payout (credit event of a reference entity for CLN, bond price movement for BLN).

The investor’s primary objective is to profit from significant price volatility in either direction, without a specific directional view, while simultaneously aiming to minimize the initial capital outlay. This implies a strategy that is ‘bullish on volatility’ but also cost-efficient, even if it requires a larger price movement to become profitable. A long strangle involves simultaneously buying a slightly out-of-the-money call and a slightly out-of-the-money put with the same expiration date. Because these options are out-of-the-money, their premiums are generally lower than those of at-the-money options, thus reducing the initial capital outlay. However, this also means the underlying asset’s price must move further (beyond both strike prices plus the total premium paid) for the strategy to become profitable. A long straddle, while also a neutral strategy that profits from high volatility, involves buying at-the-money options. At-the-money options typically have higher premiums, leading to a greater initial capital outlay, though they require a smaller price movement to reach profitability compared to a strangle. Selling strategies, such as a short straddle, profit from low volatility and expose the trader to potentially unlimited risk, which contradicts the investor’s goal of limited downside risk and profiting from significant movement. Other combinations like buying a call and selling a put are typically directional or hedging strategies, not pure neutral volatility plays.

The daily mark-to-market process in futures trading is a critical risk management mechanism. Its primary purpose, as highlighted in the syllabus, is to ensure that all participants’ trading accounts maintain sufficient margin to cover potential losses from their open positions. At the end of each trading day, the exchange calculates a settlement price, and based on this, profits or losses are credited or debited to each account. This daily adjustment ensures that accounts are adequately collateralized, mitigating counterparty risk and maintaining the financial integrity of the futures market. While mark-to-market does provide a valuation and is foundational for calculating daily profits/losses, its fundamental objective as a ‘safety measure’ is tied to margin adequacy. It does not directly determine commission fees, facilitate physical delivery daily, or automatically close positions.

A bear put spread is established by buying a higher strike put option and selling a lower strike put option, both with the same expiration date and on the same underlying asset. This strategy results in a net debit. The maximum profit for a bear put spread occurs when the underlying asset’s price falls below the strike price of the short (lower strike) put option at expiration. In this scenario, both put options expire in-the-money. The profit from the long put option (higher strike) is the difference between its strike price and the underlying price. The loss from the short put option (lower strike) is the difference between its strike price and the underlying price. The net intrinsic value at expiration is the difference between the two strike prices. From this, the initial net debit paid to establish the spread must be subtracted to determine the total profit or loss. In the given situation: – Long Put Strike Price: $50 – Short Put Strike Price: $45 – Initial Net Debit: $2.00 – Stock Price at Expiration: $40 Since the stock price ($40) is below both strike prices, both options are in-the-money. – The long $50 put option has an intrinsic value of $50 – $40 = $10. – The short $45 put option has an intrinsic value of $45 – $40 = $5, which represents a loss on the short position. The net intrinsic value from the options at expiration is $10 (gain from long put) – $5 (loss from short put) = $5. To calculate the total profit, subtract the initial debit from the net intrinsic value: Total Profit = Net Intrinsic Value – Initial Debit = $5 – $2.00 = $3.00 per share. This outcome represents the maximum possible profit for this bear put spread, which is also calculated as (Higher Strike – Lower Strike) – Initial Debit = ($50 – $45) – $2.00 = $5 – $2.00 = $3.00. Other options are incorrect because: – A loss of $2.00 per share would be the maximum loss, occurring if the stock price rose above the higher strike price ($50) at expiration, causing both options to expire worthless. – Unlimited profit is not possible with a spread strategy, as the short put limits the upside potential. – A profit of $8.00 per share does not align with the calculation for a bear put spread under these conditions.

When a cross-hedge strategy, which involves hedging an asset with a futures contract on a different but related asset, does not perform as expected, the most common primary source of error is related to basis risk. Basis is the difference between the spot price of the underlying asset being hedged and the futures price of the hedging instrument. In a cross-hedge, this relationship can be less stable and more unpredictable than in a direct hedge. Unforeseen shifts in this basis during the life of the hedge can lead to a significant deviation between the expected and actual outcomes, as the correlation between the two assets may change. The other options, while potentially relevant to overall portfolio performance or strategy design, are not typically cited as the primary source of error specifically for the effectiveness of an implemented cross-hedge strategy in the context of its post-mortem analysis.

The investor’s objectives are a moderate upward movement in the stock’s price, limited potential losses, and an initial cash inflow. A bull put spread is designed for a moderately bullish market view. It is constructed by selling a higher striking in-the-money (ITM) put option and simultaneously buying a lower striking out-of-the-money (OTM) put option on the same underlying asset with the same expiration date. This strategy results in a net credit received upon initiation, aligning with the desire for an initial cash inflow, and has limited downside risk due to the purchased OTM put. A bear call spread, while also a credit spread, is employed when an options trader anticipates a moderate downward movement in the underlying asset’s price, making it unsuitable for a moderately bullish outlook. A bull call spread is indeed used for a bullish outlook, but it typically results in a net debit position, requiring an initial cash outlay, which contradicts the investor’s desire for an initial cash inflow. A long straddle involves buying both a call and a put with the same strike and expiration, resulting in a net debit and is used when anticipating significant price movement in either direction, not a moderate upward movement, and does not provide an initial cash inflow.

For a put option, it is considered ‘in-the-money’ (ITM) when the underlying asset’s current market price is below the option’s strike price. The intrinsic value of a put option is calculated as the maximum of zero or the difference between the strike price and the current market price (Strike Price – Current Market Price). In this scenario, the strike price is $50 and the underlying asset is trading at $48. Since $48 is less than $50, the put option is in-the-money. The intrinsic value is $50 – $48 = $2. Therefore, the option is in-the-money with an intrinsic value of $2. The other options incorrectly describe the moneyness or the intrinsic value calculation for a put option under these conditions.

The scenario describes an Exchange Traded Fund (ETF) tracking a commodity futures index that consistently underperforms its benchmark, particularly when the price of the next futures contract is higher than the expiring one. This specific situation is known as ‘contango’ in futures markets. The CMFAS Module 6A syllabus (8.2.5, point 4d) explicitly identifies ‘Types of investments’ as a source of tracking error, stating that ‘an ETF that buys into futures contracts will be required to roll them repeatedly (where the ETF must sell an expiring contract to buy the next contract at a different price). The ETF is exposed to rollover risk. If price of the next contract is higher, also known as a contango effect, a loss is recorded.’ This loss directly contributes to tracking error and explains the consistent underperformance. Therefore, the inherent rollover risk is the primary cause. Increased transaction costs from rebalancing (option 2) are a general source of tracking error but do not specifically address the futures pricing discrepancy described. Cash drag from dividends (option 3) is a factor for equity ETFs, not typically for commodity futures ETFs. An ETF trading at a premium or discount to NAV (option 4) is a market pricing issue, which can be a consequence of tracking error or inefficient arbitrage, but it is not the underlying cause of the tracking error related to futures contract rolling.

Reverse Convertibles are structured products designed to offer enhanced yields, typically constructed from a long position in a zero-coupon bond and a short put option. This combination provides a capped upside return (from the bond’s interest and the put premium) and exposes the investor to significant downside risk if the underlying asset’s price falls below the put’s strike price. Discount Certificates, while offering a similar payoff profile of enhanced yield with capped upside and downside exposure, are constructed differently. They typically involve a long zero-strike call option and a short call option with a higher strike price. Therefore, the structure combining a long zero-coupon bond and a short put option is a Reverse Convertible, and the structure using a long zero-strike call option and a short call option is a Discount Certificate. The other options represent different types of structured products with distinct compositions and risk-reward profiles.

The scenario describes a problem where futures contracts with distant expiry dates are difficult to unwind and exhibit high volatility, especially during adverse market conditions. This directly relates to the concept of ‘Maturity Limit’ as outlined in the CMFAS Module 6A syllabus (9.5.1 (c)). A maturity limit is specifically set to mitigate losses arising from poor liquidity, which is typically more pronounced in further-month contracts compared to near-month contracts. These less liquid, more volatile contracts can be challenging to close out, and a maturity limit helps reduce exposure to such an eventuality. An open contracts limit restricts the total number of outstanding contracts but does not specifically target the liquidity issue of long-dated contracts. A maximum loss limit sets a monetary ceiling on losses but is a reactive measure to incurred losses rather than a proactive control against the specific risk of illiquid, distant-month contracts. A stress test limit defines the portfolio’s tolerance for extreme market movements, which is a broader risk assessment tool, not a direct control for the illiquidity of specific contract maturities.

To determine the number of equity index futures contracts required to fully hedge a portfolio’s market risk, the standard formula is applied: Number of Contracts = (Portfolio Value × Portfolio Beta) / (Futures Price × Contract Multiplier). In this scenario, the portfolio value is SGD 8,500,000, the portfolio beta is 1.30, the current futures index level (futures price) is 2,800, and the contract multiplier is SGD 20 per index point. Plugging these values into the formula: Number of Contracts = (8,500,000 × 1.30) / (2,800 × 20). This simplifies to 11,050,000 / 56,000, which equals approximately 197.32 contracts. Since futures contracts are traded in whole numbers, Ms. Li would need to sell 197 contracts to achieve the desired hedge.

The financial cost embedded in a Callable Bull/Bear Contract (CBBC) is influenced by several factors. As stated in the syllabus, the financial cost will be higher for CBBCs with longer maturities and will decline over time as the CBBC approaches its expiration date. Therefore, the statement that the financial cost typically decreases as the CBBC approaches its expiration date is correct. Regarding dividends, regular share dividends are already factored into the funding cost by the issuer at the time of issuance, so no post-issuance adjustment is needed for them. However, bonus shares, special, and extraordinary dividends do require adjustments. A shorter time to maturity would generally result in a lower financial cost, not higher. Lastly, the financial cost explicitly includes the issuer’s profit margin, along with their cost of borrowing and adjustments for dividends, making the statement that it’s excluded incorrect.

An Exchange Traded Fund (ETF) is an open-ended investment fund that aims to replicate the performance of a published market index. A defining feature is that it is listed and traded on a stock exchange, allowing investors to buy or sell units throughout the trading day. This structure enables investors to gain diversified exposure to all constituents of an index without needing to purchase individual assets, which directly matches the investor’s objective in the scenario. A traditional Unit Trust, while also open-ended and capable of diversification, is typically bought and sold directly from the fund manager at its Net Asset Value (NAV) and is not continuously traded on a stock exchange in the same manner as an ETF. A Closed-End Fund (CEF) is traded on an exchange but has a fixed number of shares and does not primarily aim to replicate a market index. A Private Equity Fund is a distinct investment vehicle, typically illiquid and targeting private companies, and is not structured for general market index replication or exchange trading for broad investor diversification.

Forward contracts are distinguished by their highly customizable nature. Unlike standardized futures contracts, which are traded on regulated exchanges with fixed specifications for quality, quantity, and delivery, forward contracts are private agreements negotiated directly between two parties. This allows for bespoke terms to be established, making them suitable for hedging unique, non-standardized exposures, such as a specific raw material with particular quality requirements or a non-standard delivery schedule. While futures offer advantages like price transparency, reduced counterparty risk through a clearing house, and daily mark-to-market settlements, these features are inherent to their standardized, exchange-traded nature and do not cater to highly customized needs.

Effective gearing is a crucial metric for understanding the true leverage of a warrant. It is calculated by multiplying the warrant’s delta by its gearing. Gearing indicates how many more warrants can be bought compared to the underlying share for the same capital outlay. Delta, on the other hand, measures the rate at which the warrant’s price changes with respect to changes in the underlying asset’s price. Therefore, effective gearing combines these two factors to provide a more accurate representation of the warrant’s sensitivity to the underlying asset’s movements. In this scenario, with a gearing of 8 and a delta of 0.65, the effective gearing is 0.65 multiplied by 8, which equals 5.2.

The question describes a scenario where a Singapore-based enterprise requires a highly customized solution for hedging foreign exchange exposure, specifically involving an uncommon currency pair and a non-standard settlement date. Forward contracts are private, over-the-counter agreements negotiated directly between two parties, allowing for bespoke tailoring of terms such as currency pair, notional amount, and delivery date to meet unique business needs. While this flexibility is a significant advantage, a key characteristic of forward contracts is the exposure to direct counterparty risk, as there is no central clearing house guaranteeing the contract. Futures contracts, in contrast, are standardized, exchange-traded instruments designed for liquidity and the elimination of counterparty risk through a clearing house, making them unsuitable for highly specific, non-standard hedging requirements. Exchange-traded options are also standardized and primarily offer a right, not an obligation, which might not fully meet a direct hedging need for a specific, non-standard exposure. A credit default swap is an instrument used to hedge credit risk, not foreign exchange exposure.

The effectiveness of a hedge is evaluated after it is lifted, and the primary sources of error are typically attributed to the projected value of the basis at the lift date and the parameters estimated for cross hedges. Unforeseen divergence between the spot price of the underlying asset and the futures price at the hedge’s termination directly reflects the basis risk, which is a key component of the ‘projected value of the basis at the lift date’. While initial hedge ratio calculations (Option 2) are crucial, the text specifically highlights basis risk and cross-hedge parameter estimation as main sources of error. The text also indicates that ‘most hedges require very little active monitoring during their life span,’ making continuous daily adjustments (Option 3) generally unnecessary unless volatilities or yield spreads change significantly. Unexpected operational events like early receipt of funds (Option 4) are not typically classified as a ‘main source of error’ in the effectiveness of the hedge itself, although they can impact overall outcomes.

The question describes a common strategy for investors using Equity Linked Notes (ELNs) with a physical settlement option. An investor who wishes to acquire shares of a company but believes the current market price is too high can use an ELN with an out-of-money put option. If, at maturity, the underlying share price falls below the strike price, the put option embedded in the ELN is exercised. With physical settlement, the investor receives the underlying shares. This outcome allows the investor to acquire the shares at an effective price (the strike price) that is lower than the market price at the time the ELN was initially purchased, thus fulfilling their objective of buying shares at a discount. The other options describe different scenarios or non-standard features of ELNs. Receiving the notional principal and a yield typically occurs in the best-case scenario where the share price is at or above the strike price, and often implies cash settlement. A total loss of investment is generally associated with the worst-case scenario where the underlying asset’s value drops to zero, but even then, with physical settlement, shares are delivered, which may have some residual value or potential for future recovery. Automatic extension is not a standard feature of ELNs.

The Barrier Capital Preservation Certificate (Straddle) is designed for an investment view where there is no firm directional view on the underlying asset, and the expectation is that the underlying will remain within a defined range without large price swings. This aligns with the characteristic of having both an upper and lower knock-out barrier, meaning the product performs optimally when the underlying does not breach either barrier. The other options describe scenarios or characteristics that are either incorrect for this specific product (e.g., unlimited upside, guaranteed value above nominal during lifetime) or are more suited for different types of knock-out products (e.g., a strong belief in a sharp upward trend would be for a knock-out call or a standard Barrier Capital Preservation Certificate, not a straddle).

The trust deed is a crucial legal document that establishes the terms and conditions governing the relationship between investors, the fund manager, and the trustee. Its primary purpose is to outline the fund’s investment objectives and the obligations and responsibilities of both the fund manager and the trustee. The trustee, being independent of the fund manager, acts as the custodian of the fund’s assets. A key responsibility of the trustee is to ensure that the fund is managed strictly in accordance with the provisions of the trust deed. This oversight function is vital for minimising the risk of mismanagement by the fund manager and for protecting the interests of the unitholders. Therefore, if a fund manager proposes a strategy that deviates from the stated objectives, the trustee’s fundamental role is to ensure adherence to the established terms, rather than to approve deviations, merely advise, or directly seek unitholder approval for every operational change.

The question addresses liquidity risk, a key characteristic of structured products as outlined in the CMFAS Module 6A syllabus, Chapter 9. Structured products are typically designed for investors willing to hold them to maturity due to their customised nature and often illiquid underlying components. The text explicitly states that there is ‘typically a limited secondary market making it hard for investors to sell it before maturity date’ and that ‘investors may also lose some part or even a substantial part of the principal sum if they were to liquidate the investment before maturity.’ Therefore, the most prominent challenge for an investor seeking early liquidation is the potential for significant loss of principal due to the lack of marketability and any existing lock-up periods. Option 2, regarding the issuer’s discretion to provide a secondary market, is a contributing factor to the liquidity challenge, as issuers are not obliged to provide such a market. However, the direct consequence for the investor is the potential loss of principal, which is more encompassing. Option 3, concerning a downgrade in the issuer’s credit rating, relates to credit risk, which affects the product’s value but is distinct from the inherent liquidity challenge of finding a buyer for a customised, illiquid product. Option 4, about difficulty finding a counterparty for a complex product, describes a reason why the secondary market is limited, but the ultimate challenge for the investor is the financial impact of that limited market, i.e., the loss of principal.

The investor’s profile describes a conservative individual who prioritizes capital preservation, holds a moderate bullish view on an underlying asset, and is prepared for illiquidity. A structured product employing a zero plus option strategy is explicitly designed for such an investor. This strategy aims to provide principal preservation at maturity (subject to the issuer’s creditworthiness) while offering participation in the upside performance of the underlying asset, albeit with limited returns if the asset performs exceptionally well. It is also typically illiquid, aligning with the investor’s preparedness for this characteristic. Conversely, a short option strategy, while used for yield enhancement, carries substantial downside risk and a negatively skewed risk-reward ratio, making it unsuitable for an investor prioritizing capital preservation. A Dual Currency Investment (DCI) is an example of a short option strategy, and in its worst-case scenario, the investor can lose part of their principal in base currency terms, directly contradicting the capital preservation objective. While a Constant Proportion Portfolio Insurance (CPPI) strategy also focuses on principal preservation by dynamically allocating between risky and risk-free assets, the zero plus option strategy is a more direct fit for an investor with a ‘moderate bullish outlook on a specific underlying asset’ seeking ‘participation’ linked to that asset’s performance, as described.

The question describes the key characteristics and construction of a Discount Certificate, as detailed in the CMFAS Module 6A syllabus. A Discount Certificate is issued at a discount, with its construction involving a long zero-strike call and a short call, where the premium from the short call is greater than the cost of the long zero-strike call. The syllabus explicitly states that for both Reverse Convertibles and Discount Certificates, ‘On the downside, the… short call component of the discount certificate expose the investor to the full decline of the stock price, with the entire amount of the investment capital at risk.’ Therefore, the investor faces full exposure to the underlying asset’s price decline. The other options are incorrect: the product’s upside is capped, not unlimited; it does not guarantee principal preservation; and it typically does not provide regular, fixed coupon payments, but rather the face value at maturity (assuming no adverse events).

For an equity-linked structured note, high prevailing interest rates are advantageous for the issuer because they lower the present value of the zero-coupon bond component, thereby providing more funds that can be allocated to purchase the embedded call option. This allows for a higher potential participation rate for investors. Concurrently, low volatility in the underlying asset makes the cost of equity options cheaper, further contributing to a more attractive product structure. Furthermore, incorporating a shorter-tenor product, especially one with exotic options like an ‘up-and-out’ barrier call, is a key strategy to mitigate investment risk. A shorter maturity reduces the impact of mark-to-market fluctuations caused by interest rate changes, and barrier options are generally cheaper than conventional options, allowing for better risk-return profiles and potentially higher participation rates. The other options present combinations that are either suboptimal or directly contrary to these advantageous conditions and risk mitigation strategies.