Introduction
Preparing for HKSI exams is not just about memorizing facts; it's about developing a structured way to reason through questions that test your grasp of market mechanics and risk concepts. In this post, we walk through five representative questions that illustrate common HKSI topics: Delta signs for different option positions, the nature of the Hong Kong debt market, the mechanics of warrant exercise, what constitutes a stress test for portfolios, and how yield curves influence security selection under inflation concerns. After each item, you’ll find a concise takeaway to reinforce the key idea. Let’s dive in.
Question 1: Delta signs for various option positions
Question
- Which positions have a negative Delta? I. Buy call options II. Buy put options III. Sell call options IV. Sell put options Options: [A] I,II [B] I,III [C] II,III [D] I,IV
Answer: C
Explanation and HKSI insight
- Delta measures how much an option price moves with a small move in the underlying stock price.
- Long call options (I) have positive Delta (0 to 1).
- Long put options (II) have negative Delta (−1 to 0).
- Short call options (III) have negative Delta (−1 to 0), as you’re short the positive Delta of a call.
- Short put options (IV) have positive Delta (0 to 1).
- Therefore, the combination with negative Delta is II and III.
Takeaway: In option trading, negative Delta arises from holding a long put or short a call. Understanding Delta signs helps you anticipate how portfolio exposure changes with stock moves.
Question 2: Facts about the Hong Kong debt market
Question
- Which statement about Hong Kong’s debt market is correct? A. Hong Kong’s debt securities market is as globally mature and active as its equity market B. Semi-official entities in Hong Kong can issue bonds, such as the Hong Kong Railway Limited C. Bonds are mainly traded on the exchange (on-market) D. Most Hong Kong bonds are listed and traded on the Hong Kong Stock Exchange
Answer: B
Explanation and HKSI insight
- Statement A is incorrect: Hong Kong’s debt market, while important, is generally considered less developed than its equity market.
- Statement C is incorrect: Bond trading is predominantly over-the-counter (OTC), not primarily on-market.
- Statement D is incorrect: While some bonds are listed on the exchange, the vast majority are not; there are many over-the-counter issues.
- Statement B is correct: Hong Kong has semi-official and other entities that issue bonds (e.g., infrastructure or public-utility borrowers like the Hong Kong Railway Limited).
Takeaway: HK debt-market development emphasizes the OTC market and a mix of issuers, including semi-official entities. This nuance is important for understanding liquidity and risk in HK fixed income.
Question 3: Warrant exercise and share conversion
Question
- Investor雷先生 holds 20,000 warrants on a stock with a conversion ratio of 1:10 and an exercise price of $10. If fully exercised, the investor can: [A]. Buy 2,000 shares of the stock for $20,000 [B]. Receive 2,000 shares for free [C]. Buy 20,000 shares for $200,000 [D]. Buy 20,000 shares for $2,000
Answer: A
Explanation and HKSI insight
- The conversion ratio (1:10) means 10 warrants are needed to obtain 1 share.
- With 20,000 warrants, you can obtain 2,000 shares (20,000 / 10).
- The exercise price is $10 per share, so the total cash required is 2,000 × $10 = $20,000.
- Thus, exercising all warrants would cost $20,000 to acquire 2,000 shares.
Takeaway: Warrant math hinges on the exercise price and the conversion (exercise) ratio. Always verify how many warrants are needed per share and the total cost to exercise the entire position.
Question 4: What is a stress test?
Question
- Stress testing is: [A]. A test for a securities investment portfolio [B]. A common method to assess and aggregate institutional risk [C]. A measure of a security’s sensitivity to yield changes over a horizon using specific cash flow methods [D]. A measure of how a security’s value changes for a 0.01% (one basis point) yield change
Answer: A
Explanation and HKSI insight
- Stress testing focuses on evaluating portfolio performance under extreme but plausible market scenarios, not only standard yield-change sensitivity or general risk aggregation.
- It is a scenario-based assessment that helps institutions understand potential losses during adverse events.
Takeaway: Stress testing is portfolio-centric and scenario-driven—useful for risk management and capital planning in HKSI-style risk questions.
Question 5: Yield curve, inflation, and securities to avoid
Question
- If a positive (upward-sloping) yield curve is expected and inflationary pressure is anticipated, which security should you not buy? [A]. Long-term bonds [B]. Short-term notes [C]. Floating-rate bonds [D]. Common stock
Answer: A
Explanation and HKSI insight
- A positive yield curve implies higher yields for longer maturities relative to short-term rates; when inflation is expected to rise, long-duration bonds are more sensitive to rate increases, and their prices decline more.
- Therefore, avoiding long-term bonds is prudent in this scenario, while shorter-duration or floating-rate instruments, or equities, may be preferable depending on risk appetite.
Takeaway: Anticipating yield-curve dynamics and inflation helps you manage duration risk. Long-duration bonds tend to underperform in rising-rate/inflation environments.
Conclusion
These five questions illustrate how HKSI exam concepts connect to practical market facts: option Delta logic, the HK debt market structure, warrant mechanics, the purpose of stress testing, and how yield curves influence security choices under inflationary expectations. By internalizing the core ideas and practicing the reasoning steps shown, you can approach similar HKSI items with greater confidence.
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