Lab Test: How financial markets work · RiskAtoms Academy

How it works

8 problems, each set in a real job, and most need ideas from more than one lesson. Some ask for a number, others for a judgement. Answer, press “Check”, then step through the worked solution. Your score builds at the bottom.

Problem 1One company or two hundred?

L1.1.01

A financial adviser

A client has £20,000 to lend. A local firm offers a private loan. A bond fund instead spreads money equally across 200 issuers. Assume every borrower has a 3% chance of defaulting this year, independently, and a default loses that whole loan.

Which statement best describes the difference?

AThe fund has a much lower average lossBThe average loss is the same, but the fund makes a very large loss far less likelyCThe single loan is safer because there is only one borrower to watchDThe fund removes the risk of loss altogether

Problem 2Where did the money go?

L1.1.03 · L1.1.02

A company treasurer

Your company sells 4 million new shares at €15 each, paying the underwriters fees of 3% of the money raised. On the same day, investors trade 2.5 million existing shares among themselves at €16.

How much cash does the company receive that day, in € millions?

€m

Problem 3Futures or a forward?

L1.1.04 · L1.1.05

An importer's treasurer

A UK importer must pay a German supplier €2,300,000 on 14 May. It wants to fix the exchange rate today. Euro futures on an exchange come in contracts of €125,000 and expire in June. Its bank offers a forward for the exact amount and date.

If it uses the whole number of futures contracts just below the exact need, how many euros are left unhedged?

€

Problem 4Walking the book

L1.1.06 · L1.1.07

A trader at an asset manager

You must buy 2,500 shares at market. The order book (euros) shows:

Side	Price	Shares
Ask	25.08	2,000
Ask	25.05	1,000
Ask	25.03	700
Ask	25.02	800
Bid	24.98	900
Bid	24.96	1,200

How much more than the mid price does the whole order cost you, in €?

€

Problem 5All at once, or bit by bit?

L1.1.06 · L1.1.07

The same trader

Your portfolio manager suggests that instead of one market order, you work the 2,500 shares with small limit orders at or just above the best bid over the afternoon.

Which statement best describes the choice?

AWorking the order is always better: it can only lower the costBWorking the order lowers the expected impact cost, but adds the risk that the price moves away before you finishCA market order has no cost, because it trades at onceDLimit orders cannot trade at all, so only a market order works

Problem 6Reporting a fund's return

L1.1.08

A performance analyst

A fund unit was worth 120.00 at the start of last year and 112.80 at the end. During the year it paid out a distribution of 2.40 per unit. This year it has returned +5%. Marketing wants to say the fund is “up 1% over two years”.

What is the correct two-year return, in %?

Problem 7Which fund is riskier?

L1.1.08 · L1.1.10

A risk analyst

Two funds have the same average monthly return over six months. Fund Steady: 2%, 2%, 1%, 2%, 1%, 2%. Fund Swing: 9%, −6%, 8%, −5%, 7%, −3%.

Which is the better risk assessment?

AThey carry the same risk, because their averages are equalBSwing is far more volatile, and six calm months do not prove Steady is safeCSteady is riskier because it never had a bad monthDNeither has any risk, because both made money overall

Problem 8The broker fails overnight

L1.1.04 · L1.1.09 · L1.1.10

An operations risk manager

Your fund dealt with one broker yesterday. It bought shares on an exchange, cleared through a CCP and due to settle T+1 by delivery versus payment. It also agreed a six-month currency forward with the same broker, bilateral and not cleared, on which the broker would owe you money today. Overnight, the broker goes bust.

Which exposure should worry you most?

AThe share purchase, because the cash may be lostBThe uncleared currency forward, because you face the broker directlyCBoth equally, because the same broker is involvedDNeither, because regulators guarantee all trades

Your score

0 / 8

0 of 8 problems checked.