Introduction

For HKSI examinations, solid understanding of core concepts—such as collateral management, bond mechanics, derivatives, and anti-money laundering (AML) indicators—can make the difference between guessing and knowing. In this post, we walk through five representative questions, unpack the reasoning behind the answers, and highlight the practical takeaways you can apply to both study and real-world scenarios. Let’s dive in with a calm, concept-driven approach rather than jumping straight to the solution.

1) Re-hypothecation limits and margin loan agreements

Question in focus (paraphrased): Which statement is not correct?

• A. The cap on re-hypothecating client securities collateral should be 120%.
• B. A margin loan agreement must specify whether different asset classes use different loan-to-value (LTV) rates.
• C. Real estate investment plan management falls under asset management.
• D. Under the Mandatory Provident Fund Schemes Ordinance, registered MPF schemes are not part of the asset management definition.

Answer: A

Explanation (in brief): The correct figure for the cap is 140%, not 120%. Therefore, option A contains the incorrect detail and is the statement that is not correct. The gist is to know the precise regulatory cap and to be aware that margin arrangements usually require clear disclosure of asset-class-specific LTVs in margin loan agreements. This matters because the risk profile and liquidity characteristics differ across asset classes, and the agreement should reflect that.

Takeaways:

• Know the current regulatory caps for collateral re-hypothecation (e.g., 140% in this context).
• Ensure margin loan agreements explicitly state whether different securities categories have different loan ratios.
• Understand how collateral management interacts with liquidity risk and borrower exposure.

2) Descriptions of zero-coupon bonds

Question in focus (paraphrased): Which statement about zero-coupon bonds is correct?

• A. Zero-coupon bonds must be issued at a discount to par.
• B. Because there are no coupon payments, the holder receives additional shares at maturity.
• C. They accrue interest daily and pay it out over time.
• D. They do not have a fixed maturity date.

Answer: A

Explanation: A zero-coupon bond is issued at a discount to its face value and pays the par value at maturity. There are no periodic interest payments; the yield comes from the difference between the discounted issue price and the par value received at maturity.

Takeaways:

• Zero-coupon bonds are issued below par and redeemed at par. No periodic coupon payments.
• Understanding the price-yield relationship for discount instruments is key for valuation and risk assessment.

3) Identifying a derivative from its description

Question in focus (paraphrased): The description—"an agreement between two parties to exchange cash flows or the incomes derived from a portfolio of assets or liabilities"—most likely refers to which derivative?

• A. Futures
• B. Options
• C. Forwards
• D. Swaps

Answer: D

Explanation: A swap is an over-the-counter (OTC) agreement where parties exchange (swap) cash flows or the incomes from a set of assets or liabilities. This is characteristic of swap agreements, which are typically customized and negotiated privately rather than standardized like futures or options.

Takeaways:

• Distinguish swaps from futures/forwards (obligation to transact at a future date) and options (rights, not obligations).
• Recognize OTC nature and customization as key features of swaps.

4) Bond market volatility and risk: which indicators apply?

Question in focus (paraphrased): Which indicators measure the volatility or risk of the bond market?

• I. Duration
• II. Beta (啤打系数)
• III. Convexity
• IV. Sharpe ratio

Answer: B (I and III)

Explanation: Duration approximates the percentage change in a bond's price for a 1% change in yield. Convexity measures the non-linear relationship between price and yield, reflecting how the duration itself changes as yields move. Beta and the Sharpe ratio are not standard primary measures for pure bond-market volatility risk in the same way that duration and convexity are.

Takeaways:

• Use duration for first-order price sensitivity to yield changes.
• Use convexity to capture the curvature of the price-yield relationship.
• Be cautious in interpreting beta and Sharpe ratio for pure bond risk without context.

5) AML considerations and employee risk indicators

Question in focus (paraphrased): Among statements about an employee’s status at a licensed entity, which one is unlikely to involve money laundering indicators?

• A. Mr. Zhang, who recently gained a large sponsor connection and saw a spike in performance as a result.
• B. Ms. Li, single, with unusually large recent spending and investments.
• C. Mr. Du, the company’s accounting manager, who is lazy yet seldom takes vacations.
• D. Ms. Gao, whose home address is used for client mail reception.

Answer: A

Explanation: The text suggests money laundering risk is more likely when employee sales performance shows unusual, unexpected surges that might indicate laundering activity. Option A’s described performance spike is not clearly abnormal by itself, whereas the other options describe more suspicious behavioral patterns (large unexplained expenditures, lax controls, unusual use of home addresses for mail).

Takeaways:

• AML screening considers unusual patterns in personal finances and behavior; not every surge in performance is suspicious, but unusual or unexplained activity warrants closer review.
• Employee risk indicators should be integrated with transaction monitoring and client activity analysis.

Final thoughts

These five questions illustrate the breadth of HKSI topics—from collateral management and bond math to derivatives and AML indicators. A solid grasp of definitions, regulatory caps, and how to interpret risk signals will serve you well on the exam and in practical compliance roles.

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