CMFAS M6a Final Mock Exam

The transaction made by ABC Corporation with XYZ Bank is called hedging. ABC Corporation entered into a forward contract with XYZ Bank to hedge the risk due to the fluctuations in foreign exchange. A forward contract is a type of derivative which is financial security used by entities whose value is linked to the value of one or more underlying assets. Derivatives can either be traded on centralized and regulated exchanges such as Singapore Exchange Limited (SGX) or it can be between counterparties in the unregulated over+the-counter markets.

Different types of derivatives financial instruments that are commonly used in hedging or insuring risk are present in the market such as the swap contract, option contract, futures contract, and warrants contract. Futures are financial security used which mainly derives its value from the price movement of another asset or instrument. Therefore, it elucidates the impression that the derivative’s price is not a function of its inherent value, instead, it is the changes with the value of whichever asset the derivative is tracking.

The leaders of the G20 countries created the Financial Stability Board (FSB) which is an international regulatory body that oversees the financial system by the implementation of changes and reforms. Furthermore, the responsibility of the Financial Stability Board (FSB) involves developing international standards, adopting the legislative framework and regulatory framework, and actual changes in market structures and activities. The main objective of the Board is to improve the transparency in the derivatives markets, mitigating system risk, and protecting its participants against market abuse.

A money market instrument is characterized as low-risk, highly liquid, and a short-term debt instrument which commonly includes treasury bills, commercial paper, banker’s acceptance, negotiable certificates of deposits, and repurchase agreements. The correct answer is a banker’s acceptance as it is like a post-dated check that is used specifically for importing and exporting goods. Choices like collateral trust bonds can be eliminated right away because collateral trust bonds aren’t money market instruments, rather, they’re secured long-term bonds.

Statement 1 is incorrect because Singapore is not the largest, but the second-largest OTC Derivatives trading center and a leading commodity derivatives trading hub in the Asia Pacific region while statement 2 is correct because SGX AsiaClear is considered to be Asia’s first clearing platform for OTC Derivatives traded in Singapore usually for commodities such as freight, energy, commodity, and financial derivatives.

The prices in the futures market depend on the continuity of information around the world causing the fluctuation to exist, so a high amount of transparency is significantly required. Several factors affect the changes in the price such as political information such as elections and wars, economic information such as recession and bankruptcies, socio-cultural information such as disruptive societies and ethnic tensions, and environmental changes caused by pollution, deforestation, and other factors. All of the factors have an effect on the supply and demand where the result is the fluctuation of price.

The futures market is a place where investors gather to manage the risks. In the market, the prices are transparent and readily available to the consumers which is why the consumers already know the amount they need to buy or sell, therefore, the risks are reduced. However, in the consumers or buyers of goods such as commodities, hedging with futures contracts helps manage the risk for allowing the consumers the opportunity of reducing the final cost by lowering the risk of the sellers raising the price due to the volatility in the spot market.

A change in the level of the S&P index would indicate and show the ability of the investor to achieve large profits in the market due to the leverage with a relatively modest market move in the underlying asset. It is one of several reasons why some people are into trading in futures contracts. One good example of the change in the level of the S&P index is when the S&P rallies into 1,600, then the price of the contract would increase to $480,000 which would result in a higher profit of $32,640 compared to the initial margin of $29,250.

A term sheet is described as a non-binding agreement that sets the basic terms and conditions under which an investment will be made. It may not be a binding agreement but it already covers all the important aspects of the contract without violating the confidentiality of the binding agreement. It is used for ensuring that all of the parties involved in the contract agreed to the terms and conditions stated in the contract which would allow the parties to clarify the terms or aspects of the contract to prevent future misunderstandings.

A Margin is the amount of money that is deposited by the investor to his or her broker. This margin has the role of providing a guarantee that the investor can cover any losses that might arise with the futures contracts. Daily, the amount of the margin is adjusted to reflect the gains or losses in the futures contracts. In a scenario where the margin losses are above a certain level, the investors would need to provide additional deposits to further the margin. This kind of system is very significant in futures contracts as it makes it unlikely that the investors will default.

A Cash-and-Carry arbitrage is one of the two arbitrage strategies that are associated with the Cost-and-Carry model. Several transactions or circumstances can make a Cash-and-Carry arbitrage occur such as when a trader borrows a loan and sells a futures contract which would result in profits. It would also occur when a trader buys an underlying commodity from another entity or when a trader delivers a commodity against the futures contracts. Lastly, it would occur when a trader recovers the money from the delivery or pays off the loan. The profits that would be made from these transactions would be an arbitrage profit.

A calendar spread is a type of spread strategy which simultaneously enters a long and short position on the same underlying asset, however, it uses different delivery months. According to the Market view at the end of November, the traders think that there is a possibility that the yield curve would steepen. If the trader would use the calendar spread strategy, then he would choose to buy December contracts and sell the January contracts because the ratio for the purchase of a calendar spread is always +1:-1.

It is known that derivatives have different purposes depending on the user in the financial market and because of this variety of uses, it became a common subject in the financial market. One of its purposes is the use of the implementation of investment views to give the investors broader investment securities. Furthermore, it is commonly used because of the existence of fluctuation in the market for either hedging, which is the reduction of risk, or speculation which attempts to make a profit through the risk.

The different types of financial instruments inevitably have their distinction which makes it different from each other. The characteristics of a futures contract that makes it different from any other financial instruments are; its value as the futures contract has no inherent value and is only determined by the movement of price and the underlying value of its asset, its lifespan is only finite and it has an expiration date, the trading objectives are employed with the use of sophisticated strategies, and lastly, futures contract considers leverage as an important aspect of the investment strategy of its investors.

The first, third, and fourth statements are advantages and disadvantages of a Forwards contract, not of a futures contract. The advantages and disadvantages of futures contracts can be enumerated as; First, it is standardized according to quality, quantity, delivery time, and place. Second, it is normally traded in a futures exchange, with price discovery through an auction-like process. Third, it follows the requirements of the futures exchange which is the mark-to-market procedures. And lastly, the futures exchange is the counterparty for the futures contract and there is no other counterparty risk.

Given the circumstance of having a broad range of underlying combinations available, the representatives of CMS license holders are responsible for the different aspects of the products. Their responsibilities can be enumerated as follows; First, they are responsible for ensuring that they understand the aspects associated with their products. Second, they are responsible for giving explanations or discussions of the features, potential risks, costs, and trade-offs associated with their products. And lastly, they must be able to perform an adequate suitability assessment before recommending their products to potential clients.

The way of settlement between the buyers and the sellers in a futures contract is different from other types of financial instruments as it cannot use over the counter as it has a specific place and time for the settlement. Different ways can be used for settling the futures contracts such as Delivery or Hold to expiry where the buyer would accept the delivery of the underlying asset at the expiration date while the seller liquidates his position by settling to delivering the asset according to the contract. Also one of the ways is the offset position where the investor can sell the contracts of the same type and quantities for offsetting of his position and the Roll position where the traders maintain their position by rolling or moving their position to a new contract every month.

Due to the many factors that affect the financial markets, volatilities continue to increase as time passes by which affects the participants of the financial markets. Most of the participants have the desire to continuously search for derivatives for hedging or maximization of profit. Due to the continuous changes in the financial markets, it became important for the participants to understand the motivations of the participants are significant as it allows the participants to have multiple perspectives of derivatives at different times. Learning the current trend in the financial market has a big impact on going with or against the market decision as it a wrong financial decision could result in the investor very big losses.

The main participants included in the futures market are the hedgers, speculators, market makers, proprietary trading firms, arbitrageurs, portfolio managers, and hedge funds. Each of these participants serves different roles and purposes in the futures market such as the purpose of hedgers is to reduce risks while the speculators aim to maximize profits. They also face different levels of risks based on their characteristics and processes.

A spread trade is described as the combination of both a long and short position which are executed at the same time in related futures contracts. The rationale behind the use of spread as a trading strategy involves a tradeoff: limiting risk in exchange for limiting upside potential. Many spread traders aim to hedge or insulate against short-term volatility or price declines in a stock or other asset, yet still, hold on to shares of that asset. In most cases, spread trading allows traders to define their risk.

The analysis of the risk-return profile is done by examining the derivative’s price paths and payoffs, taking into account the upside and downside possibilities of the product risk-return profile, and seeing how a change in some of the variables can lead to different outcomes. However, the overall risk-return profile of the structured product must be evaluated against the investor’s risk tolerance and objectives to determine its suitability for the investor.

An equity-linked structured note is a popular type of structured product and we will use it here for illustration. This note is a debt instrument issued by a financial institution. The construction of this type of structured product consists of:

• A principal/low-risk component (zero-coupon bond)
• A return/high-risk component (call option

Auto-callable structured products are embedded with one or more barrier options and the barrier levels are set at a time of issuance. If any barrier level is breached, a mandatory callable event is triggered and the product terminates. The issuer will redeem the product and pay the investors based on the payout terms specified in the product agreement.

Structured products are available to investors in a variety of wrappers. Common wrappers include deposits, notes and bonds, funds, warrants, insurance-linked policies (ILPs), exchange traded funds (ETFs) and exchange-traded notes (ETNs). A specific wrapper offers certain benefits (as well as drawbacks). Variations of wrappers also enable financial intermediaries to focus on their clients’ needs in various market segments

When evaluating structured products, investors should go beyond comparing the potential returns. As structured products contain derivatives, they should understand the risk exposure of the specific type of derivative as well as the underlying asset’s representative market benchmark.

• Classic Structured Product – Equity-Linked Structured Note
• Participation Rate
• Interest Rates and Maturity
• Volatility of Underlying Asset Price
• Mitigating Investment Risk

Hedging could be constructed into two different ways called ‘for currently held positions’ and ‘for an anticipated cash position’. In the circumstance where the hedge is constructed for currently held positions, the use of immunization by the participants of the market would arise. It is used by the participants of the market such as the financial institutions and fund managers use immunization for their portfolio to be protected.

Market RISK refers to the price movement in the financial markets and its influence on the asset’s price. Changes in the market PRICE LEVELS cause market disruption this is the risk where regulators and securities exchanges put Circuit Breakers, Shock Absorbers, and Limits as measures to mitigate this risk.

The price of the bond will fall by 4.6%. The formula for changes in bond price is the negative Modified Duration multiplied by the Basis points (bps). To calculate for the changes in the bond price of Bond A, the modified duration of 4 will be multiplied to the Bond yield changes of 115 basis points. Changes in bond price is equal to -4 x 115 = -460bps or -4.6%

The new price is $199, to compute for the new price multiple the basis points by the PVBP (price value of a basis point) then subtract it to the original price because price & yield move inversely. In the case of Bond X, 1bps x $1 = $1 and the new price is equal to $200 – $1 = $199.

For statement:
I. Option holders or buyers are that run the risk of losing the entire premium paid for the option in a relatively short period
II. Option writers or sellers of naked call or put options are exposed to unlimited losses if the underlying asset rises or drops, respectively.
III. Obligation of option writers to fulfill under the options sold whatever the status of the market is is under General Risks Assumed by Option Writers
IV. Specific exercise provisions of a specific option contract may create additional risk is under General Risks Assumed by Option Holders

Unlike any other derivatives such as the use of interest rate futures for hedging, the use of bond futures for hedging is considered to have a more complicated process because of several rationales. One of the reasons why it is more complicated to use bond futures for hedging is because it may require the underlying asset to be hedged by several futures contracts that is not a round number for the conversion factor for deliverable bonds. Furthermore, any additional contracts are also required to be closed out before the time of delivery.

Fuji San should sell 69 contracts to hedge the bond. With all the information given above, we could already solve the hedge ratio which is needed in getting the needed number of contracts. The formula of hedge ratio is the price value of the basis point of hedge security divided by the price value of the basis point of most deliverable bonds multiplied by the conversion factor of most deliverable bonds. (0.5954/0.6895)x0.91 = 0.7858071. The hedge ratio is 0.7858071 or 79. The formula for the number of contracts is hedge ratio x total value to be hedged/Par value of futures contract. 0.7858071 x (35,000,000/400,000) = 68.76. The number of contracts needed to be sold is 69 contracts.

In the time value of options, the option price normally has a higher value compared to the intrinsic value before expiry. The formula of the time value of the option is equal to the option price minus the intrinsic value. With this formula, we can derive to get the missing value of intrinsic value, so the formula of calculating the intrinsic value would equal the difference of the time value of the option with the option price.

Typically, the time value of the option would yield a positive amount. However, at the date of expiration, the time value would be equal to 0 as it is already the end of the contract, so it is only reasonable that the time value would equal 0. With a 0 amount of time value, it would result in an equal amount of the value of the option price and the intrinsic value at the date of expiration.

Higher volatility in the financial market means a higher rate of fluctuations or changes in the share prices. This high volatility has a significant effect on the buyers of the option as it would affect the time value portion of the option’s premium. It indicates that the value of the underlying shares would put the option buyer in advantage as the high volatility would result in higher option prices.

Put-Call parity shows that a combination of put and call options can create positions that are equivalent to holding the shares itself. In circumstances that the market conditions create a divergence in the value of the options, then an arbitrage opportunity would exist. This Put-Call parity principle allows buyers to understand how financial institutions can value options.

An option is a type of derivative which implies that its value depends on the value of the underlying assets, so when there is a change in the movement of the underlying shares then it would initiate a change in the value of the option price. It would yield opposite effects on calls and puts options wherein in the case of the increasing value of underlying shares, there would be an increase of value in the calls option while the value of puts option would decrease or vice versa in case of a decrease in the value of underlying shares.

In options, there is a great possibility of constructing a position in the underlying share with the use of synthetic positions. These positions replicate the risk and payoff of either being long or short in the underlying asset. Several examples of these positions are present in the market. In terms of the stocks/shares and equity options, the examples of the synthetic structures would include synthetic long stock, synthetic short stock, synthetic long call, and synthetic long put.

An option can be traded in either an exchange-traded or OTC traded. However, it is inevitable for either of them to have advantages and disadvantages. Several differences between the two are commonly known in the market such as how the exchange is more formal than an OTC. These differences can be enumerated as; first, exchange-traded is organized through a regulated exchange while OTC traded is simply organized by the parties involved. Second, the items in exchange-traded are standardized in the form of public transactions while in OTC traded, it is fully customized by the parties involved. Third, in exchange-traded, there are guarantees in the performance of the option contract while there are no guarantees in the OTC traded. And lastly, Mark-to-market is always available in the exchange-traded while it is rarely available in OTC traded.

A call option is one of the most availed options as it is considered to be the simplest and most popular strategy done by options buyers. Buyers commonly buy a call option for taking advantage of the leverage or to hedge. Some of the motivations that investors have in buying a call option are capital investment, Limited risk exposure, cash extraction, and hedging.

He should use a neutral strategy. A neutral options trading strategy is used by options traders who do not have any idea or knowledge on whether the underlying share price will rise or fall from the current price levels. This kind of strategy is commonly used by first-timers or risk-averse investors as the potential to profit in this kind of strategy does not depend on the changes in the underlying asset.

A bond option gives an investor the right, but not an obligation, to buy or sell the option at a pre-agreed price before the date of expiration. It is typically OTC traded which elucidates the impression that option prices are not always readily available in the market. The pricing valuation is also considered to be more complex compared to equity options.

A warrant is another type of derivative instrument that gives the investors the right to buy or sell a stated number of shares of an underlying instrument at a specified price within a specific period. Warrants are normally issued by companies and are traded on the SGX-ST. The investors also have the option to buy structured warrants that are also listed on the SGX-ST. These structured warrants are issued by the third parties which are not the same entity who issued the underlying asset.

For the benefit of the investors, structured warrants are priced only at a fraction of the share price which allows the investors to trade more warrants. In a normal warrant, the investors can only trade an underlying asset in one investment outlay but structured warrants, it allows the investors to trade more warrants than the underlying asset for the same investment outlay.

There is a difference in the intrinsic value of the exercise price and the market price. The only one that is considered to have an intrinsic value is the in-the-money type of warrants. The Intrinsic value can be described as the measure of what an asset is worth. This measure is arrived at by utilizing an objective calculation or complex financial model, rather than using the current trading market price of that asset.

In an option contract, there is a listing document that contains the terms and conditions of the structured warrant. Also in this document, the contractual rights and obligations of the warrant holder and issuer are written. It is written in the document that the warrant holder has the right to buy or sell a stated number of shares while the warrant issuer has the obligation to deliver the underlying instrument and receive the exercise price.

Several types of warrants are present in the market such as exotic warrants. Exotic warrants are known to have exotic features and their terms may be more complicated than standard warrants. An exotic warrant is identified with an “X” in its English stock short name. Some of these exotic warrant structures include different subtypes such as index warrants, currency translated warrants, basket warrants, yield enhanced securities, commodity warrants, and foreign exchange warrants.

When the investor uses the traditional valuation approach, it implies that the investor does not directly value the embedded option in the convertible bonds. Under the approach, the convertible bonds are evaluated through the following steps: The first step is the computation of the conversion value of the contracts. The second step is the computation of the minimum value of the convertible bonds. The third step is the computation of the conversion price and premium. The fourth step is the assessment of the downside risk and the fifth step is the computation of the premium payback period.

Structured deposits are another product similar to structured notes as they are both debt obligations of the bank. A structured deposit is essentially a combination of a deposit and an underlying financial instrument, where the return is linked to the performance of the underlying financial instrument. The distinguishing feature of the structured deposit is that the principal sum, with or without interest, has to be repaid in full maturity while for structured notes which are not principal protected, investors may potentially lose part of or the whole principal sum. From a risk perspective, structured deposits are generally less risky than direct investments in underlying assets / financial instruments such as equities or bonds, because the bank has to repay the full principal at maturity or when it redeems the deposit before the maturity date (applicable to structured deposits with early redemption features).

The basic characteristics and features of a structured note are as follows: It is a debt instrument/ debenture whose return characteristics, such as coupon amount or market value, are linked to the performance of other underlying instruments. These structures usually have one or more embedded options or derivatives or may employ other strategies using derivatives. It is governed by the SFA and subject to SFA prospectus requirement unless the note is offered only to accredited investors EXCEPT Issuer can enter into a derivative contract or swap transaction with the same party. The issuer can enter into a derivative contract or swap transaction with another institution.

A corporation with net assets exceeding $10million in value or such other amount as the Authority may prescribe, in place of the first amount as determined by a. The most recent auditable balance sheet of the corporation; or b. Where the corporation is not required to prepare audited accounts regularly, a balance-sheet of the corporation is certified by the corporation as giving a true and fair view of the state of affairs of the corporation as of the date of the balance-sheet, which date shall be within the preceding 12 months.

Variable Maturity – Multi-Callable Range Accrual Notes is a RAN embedded with callable features at each interest fixing date. The note holder will receive a higher yield as he will be selling a Bermudan Swaption on top of buying a RAN. The note issuer will have the right to terminate the structure on the various rate-fixing dates if the implied forward rate proves to be higher than the strike fixed rate, which then exposes the holder to reinvestment risk. A Bermudan swaption is an interest rate option, where the seller is obligated to enter into an underlying swap on various exercise dates during the life of the swaption and can only be exercised on the rate-fixing dates.

Equity Linked Notes (ELNs) is a type of short option structured notes which uses an issuer’s note and a shot put, which is either linked to a stock index or individual stock. An ELN may pay a higher yield than the market interest rate arising from the value of the short option position associated with the underlying stock or index and can be structured to allow for physical or cash settlement at maturity. When the underlying is an index, the ELN will be settled in cash.

These future contracts are the oldest of all derivative contracts that initially began within the agricultural sector in which farmers were provided with the means by which they could hedge against changes in crop prices. However, with the progression of time, the market has evolved correspondingly. The volume of financial futures far exceeds commodity futures and are a major part of the global financial system. This roughly translates to its increasing economic importance that has been emphasized by its ability to assist business managers and financial investors as a part of their plans of reaching their investment objectives. Futures markets also pave way for the reduction of risks due to the fact that market prices are transparent and readily available; providing investors with suitable knowledge with regards to how much they need to buy or sell. In addition, they act as an important tool that allows for the determination of prices based on today’s information and tomorrow’s projected supply and demand. In order to make this possible, a continuous flow of information from around the world is required and as well as a high amount of transparency,

Knock-out products is a term used for structured products which terminate when the price of the underlying asset (equity, interest rates, indices, commodities, currencies and others) hits certain predetermined levels. Knock-out products are constructed with one or several knock-out options. Investors can buy knock-out products to take an investment position with respect to both rising and falling prices. Products which benefit from increasing prices are described as call, long or bullish while those which gain from declining prices are often referred to as put, short or bearish.

Complex Options is an umbrella term that envelopes structured products whose termination is dependent upon the price of the underlying asset (equity, interest rates, indices, commodities, currencies, and others) hitting certain predetermined levels. Complex options are also called “exotic” options. These are characterized by flexible features such as those relating to the timing of exercise, that can be any other data apart from the final expiry date or the ability to exercise it at any given date prior to expiration for as long as they are made at specific intervals prior to the expiration date or triggered by the occurrence of an event. These products also provide the liberty to determine the price level at which the payoff can be calculated that can be any number other than the actual spot price. In the event that the price level of the underlying asset touches or crosses a trigger point, it shall impose effects on the option’s validity and will have a corresponding impact on the final payoff. Lastly, the diversity of underlying assets extend beyond traditional asset classes and market indices to include alternative investments, such as commodities, real estate, and market indicators like volatility.

The advantages of a long position in barrier options are listed below:
1. Barrier options are cheaper and require a lower premium compared to standard options
2. Higher returns on capital investment for the investor if barrier conditions are satisfied as the investment sum is lower due to cheaper cost
3. Greater selection of option products available for investors with diverse market views and with the benefit of leverage on capital invested.

Barrier options can be packaged into various types of products. One of which is referred to as the Barrier Capital Preservation Certificate. This product essentially possesses an up-and-out barrier knock-out call. Investors view this product as “sharks fin” due to the fact that the shape of its payoff diagram highly resembles an actual shark’s fin.This is product is further defined by the fact that an investor receives a return at maturity, which is capped, in the event that the knock-out event does not occur because of the price hitting the barrier level. If it does, however, the investor becomes entitled to the agreed capital amount. It is although characterized by minimal redemption at expiry equivalent to the capital preservation, defining the capital preservation as a percentage of the nominal, the value of the product falling below its capital preservation during the lifetime, participation in a positive performance of the underlying until knock-out, possible payment of a rebate following a knock-out, and being capped upside. The characteristic of having participation in the rising or falling of the underlying until a barrier is breached is attached to Barrier Capital Preservation Certificate (Straddle), while Knock-Out Warrants are the most suitable for short-term speculation or hedging.

Several variables, that are broadly classified into theoretical and market factors, affect the price of a CBBC. With regards to derivative products, the price of a CBBC is directly associated with an underlying asset. To restructure the product, financial costs are accounted for. Accordingly, theoretical factors are used to determine the intrinsic value of the CBBC (the simple definition of intrinsic value is the difference between the underlying asset price and the strike price). The main variables under theoretical factors are the price movement of the underlying assets, strike price, and financial cost. The price movement of the underlying asset reflects the fact that the major component of a CBBC is its intrinsic value. Therefore, the CBBC price is majorly impacted by the movement in the price of the underlying asset. Also, the strike price represents the fact that with the price of the underlying, the maturity date, and the CBBC conversion ratio constant, the higher the strike price, the lower will be the intrinsic value. When it comes to financial costs, the issuer incurs funding and other costs in structuring the CBBC. Demand and supply factors, however, that relate to the specific CBBC on a day-to-day basis impacting the CBBC price are market factors.

Risks of CBBCs are the following

• Potential Loss of Capital
• Mandatory Call
• Gearing Effect
• Limited Life
• Price Movement (Trading Close to Call Price)
• Liquidity & Market Disruption
• Financial Cost
• Counterparty Risk

The CBBCs and warrants differ in the following categories;

• Mandatory call mechanism
• Implied volatility
• Bullish view
• Bearish view
• Call price
• Holding cost

An Extended Settlement contract is an agreement between two parties which constitutes the trading of several securities at a specified price on a future date when it reaches its imminent expiration. It derives its values from underlying securities. An investor who vests in an ES contract aims to purchase underlying shares as specified in the contract. The basis of settlement is the offsetting trade in the same contract, wherein the investor may choose to liquidate or clear the contract through physical delivery.

No assurance can be reasonably made when it comes to the existence of a liquid market for an ES contract. The illiquidity of markets is crucial to investors as it may lead to an upsurge of risks and losses and may affect his liquidating position. The liquidity of markets in ES contracts heavily attracts day traders because it can generate profit in a short amount of time. To be able to keep track of the liquidity of the market, two useful indicators are the volume of trading and open interest. The open interest shall constitute the residual number of open ES positions to be liquidated or cleared through delivery.

A corporate action is issued by a publicly-traded entity as an indication of significant changes in the stock price being traded in the market. The underlying securities, where ES contracts are generally derived, may have corporate events that may influence the value of the contract itself. Therefore, it is necessary for investors in ES contracts to make adjustments to consider the impact of these corporate events on the contract value. The contract value should, at the minimum, be equivalent to the value before the said event. There are five main adjustments to be made and these are special dividends, bonus share issues, share splits, right issues, and dividends. Dividends are issued in the form of cash or stocks. Either way, its payments affect the equity of the entity, and these changes may indicate key decision variables for both the company and its investors. Rights issues are offered to existing shareholders to purchase additional shares in proportion to existing holdings. The price of the shares is usually discounted and it indicates an advantage to the shareholders who already invested in the company.

A position represents an economic interest in an underlying security and transactions in ES contracts that may become changes in the interests of the security. In managing positions, an utmost priority shall be the protection of these positions against market manipulation and cornering. To do so, the Singapore Exchange will oblige its members to report the positions over definite thresholds as prescribed. The imposition of monitoring thresholds may include the maximum number of lots of both the long and short positions that have not been offset, in gross or net, in any ES contract. These thresholds provide security to the holders of shares whether they enter into a short or long position.

In trading, investors find techniques that fit their personalities as some dive into risks and some avoid it as much as possible. Of course, they will pick the one which may benefit them the most after weighing the costs. The benefits of Trading ES Contracts are capital efficiency, ability to take a longer view, greater flexibility to structure investment strategies, ability to take short positions, an avenue for hedging, and arbitraging. By securing an ES contract, an investor has the capability of maximizing the efficiency of their capital because the collateral required is a minimal portion of the contract value which will lead to prominent exposure to a large number of securities. Instead of a limited view of the market, the ES contract provides the investor with a longer view due to the extended maturity dates. ES contracts also offer investors special opportunities in spreads that will help them in formulating their investment strategies and can protect them against adverse price impact on the value of the assets.

The initial margin is defined as the minimum amount required to be deposited by customers. This is to follow the prescriptions of the Singapore Exchange and shall be given to Members and Trading Representatives. No new trades would be made available for customers who have not deposited the initial margins that have been set within two (2) market days. This initial deposit will be used in maintaining the customer’s account using maintenance margins.

When the market closes, the open positions in ES contracts are subject to revaluation. This daily revaluation is called mark-to-market. In calculating the mark-to-market gains or losses, a Member is required to make use of the valuation price as prescribed by the Singapore Exchange, which represents the official price of the contract to be used in settling Additional Margins. The formula for the valuation price may include the last traded price, bid and offer spread at the close of the market, and price data derived from pricing models. These are the factors because they indicate the finalized amounts at the end of the day.

A Range Accrual Note is a structured note received by the investor wherein he acquires a target level of return if a reference index falls within a conformed range. The principal will not be affected but the client will obtain little to no interest. A Hang Seng Index Daily Range Accrual Note results in a magnified yield every day for which trades are fixed at or above the accrual barrier and ceaselessly trades below the knock-out barrier. A knock-out event happens when a breach has occurred. This breach consists of trading at or above the knock-out barrier or trading at or below the accrual barrier. If this transpires, the accrual coupon accumulation comes to a halt and it shall be paid on their respective interest payment dates.

The reason investors trade and invest in ETFs is that ETFs generally incur relatively lower transaction cost and are also a cost-effective way for investors to have a diversified market exposure, other reasons are Broad range of asset classes available, ETF can be a good diversification vehicle as they create exposure to a basket or a large number of securities, ETF offer liquidity, and flexibility, Some exchanges allow ETFs to be shorted, and ETFs are passive instruments.

Tracking error is a measure of how the value of the ETF may deviate from the value of the underlying which it tracks, it arises due to factors such as the impact of transaction fees and expenses incurred to the ETF, changes in the composition of the underlying index, index replication costs resulting from liquidity and ownership restrictions on the underlying, cash drag, and the structured ETF manager’s replication strategy; and tracking error is: Lower for synthetic replication ETFs than physical replication ETFs and Higher for benchmarks with higher volatility such as emerging markets.

ETFs are structured funds that are listed and tradable in exchanges, one of the risks associated with ETFs is tracking error it refers to the disparity in performance between an ETF and its underlying index; other risks are Market Risk, NAV Trading at Discount or Premium, Foreign Exchange Risk, Liquidity Risk, and Counterparty Risk.

Under the Financial Advisors Act, several characteristics of an individual are listed for classifying a high net worth individual. Written in the act is that for an individual to be classified as a high net worth individual, he or she must be an individual who has a minimum of $1 million of assets or the equivalent in foreign currencies. The assets may be in the form of bank deposits, capital markets products, life policies, or other investment products as prescribed by the authority. An individual whose total net personal assets exceed $2 million in value or the equivalent in foreign currencies and whose annual income exceeds $300,000 or the equivalent in foreign currencies can also be classified as a high net worth individual. An individual who has potential within 2 years is also one of the classifications of a high net worth individual.

In the financial markets, an issuer has many ways and options to choose from as there are different combinations of the underlying instruments available in the market. The variety of combinations that the issuer can choose from include a single underlying instrument, two or more underlying instruments from the same asset class, and two or more underlying instruments from different asset classes.

Several varieties of maturity are present in the market. The main reason why the investors invest their money in a trade or other investment is to gain profit or returns. At the date of maturity, the investors would have their returns of investment and it could be determined based on the price performance of the underlying asset and based on the performance metric which could be the best-performing, worst-performing, average price, or even a spread.