Free CISI IAD Securities Practice Questions: Money Markets, FX, and Short-Term Instruments

CISI means Chartered Institute for Securities & Investment. IAD means Investment Advice Diploma, and this page is for the Securities unit. Use this focused CISI IAD Securities page as a short practice test for Money Markets, FX, and Short-Term Instruments. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CISI questions, copied live-exam content, or exam dumps.

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Use this page to isolate Money Markets, FX, and Short-Term Instruments for CISI IAD Securities. Work through the 10 questions first, then review the explanations and return to mixed practice in Finance Prep.

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Sample questions

These are original Finance Prep practice questions aligned to this topic area. They are not official CISI questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Money Markets, Foreign Exchange, and Short-Term Instruments

A UK client bought a US-listed money market ETF. The ETF is priced in US dollars, and there are no dealing costs, taxes, or income distributions.

• Amount initially converted: £10,000
• Initial spot rate: £1 = $1.2500
• ETF price movement in US dollars: +4.0%
• Spot rate when the holding is sold: £1 = $1.2000

What is the approximate sterling return on the investment?

• A. A loss of 0.2%, because the exchange rate movement offsets the ETF’s price rise
• B. A gain of 4.2%, because the exchange rate movement is the only source of return
• C. A gain of 8.3%, because the US dollar investment gain was increased by sterling weakness
• D. A gain of 4.0%, because only the ETF’s US dollar price movement affects the return

Best answer: C

What this tests: Money Markets, Foreign Exchange, and Short-Term Instruments

Explanation: For a UK investor, the sterling return on an overseas holding depends on both the security’s local-currency return and the exchange rate at conversion. The client’s £10,000 initially buys $12,500 at $1.2500 per £1. A 4.0% rise increases the dollar value to $13,000. When sterling has weakened to $1.2000 per £1, each dollar converts into more pounds than before, so $13,000 ÷ 1.2000 = £10,833. The gain is £833 on £10,000, or about 8.3%. Sterling weakness against the dollar has enhanced the return from the US dollar asset.

• The 4.0% figure ignores the currency conversion back into sterling.
• The 4.2% figure captures only the approximate currency effect and omits the ETF’s price rise.
• Treating the result as a small loss reverses the FX effect; a fall from $1.2500 to $1.2000 per £1 means sterling has weakened, benefiting a UK investor holding dollars.

The $12,500 initial value grows to $13,000, which converts back at $1.2000 per £1 to £10,833, giving an 8.3% sterling gain.

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Question 2

Topic: Money Markets, Foreign Exchange, and Short-Term Instruments

A UK corporate treasury team is comparing two sterling funding routes. Ignore fees.

Based on the exhibit, which conclusion correctly compares the two issues and calculates Issue A’s cash discount?

• A. Issue A is commercial paper and Issue B is a corporate bond; Issue A’s cash discount is £60,000.
• B. Issue A and Issue B are both corporate bonds; commercial paper would normally need asset security.
• C. Issue A is commercial paper and Issue B is a corporate bond; Issue A’s cash discount is £600,000.
• D. Issue A is a corporate bond and Issue B is commercial paper; Issue A’s cash discount is £600,000.

Best answer: C

What this tests: Money Markets, Foreign Exchange, and Short-Term Instruments

Explanation: Commercial paper is a short-term money-market instrument, commonly issued unsecured by companies with strong short-term credit standing. It is often placed through dealers under a programme with money-market investors and may be issued at a discount rather than carrying a coupon. Issue A fits that pattern: 120 days, dealer distribution, strong short-term rating, unsecured, and issued below par. Its cash discount is the redemption amount less the cash raised: £50,000,000 less £49,400,000, or £600,000. Corporate bonds are longer-term capital-market instruments, usually with fuller documentation, coupon terms, lead-manager distribution, and may be secured or unsecured. Issue B’s seven-year term, coupon and fixed-charge security point to a corporate bond.

• Reversing the classifications ignores the short-term discount structure of Issue A and the long-term coupon structure of Issue B.
• A £60,000 discount is a decimal-place error; the difference between £50,000,000 and £49,400,000 is £600,000.
• Lack of asset security does not prevent an issue being commercial paper; unsecured issuance is common for high-quality short-term issuers.

The 120-day unsecured dealer-placed issue is commercial paper, the seven-year coupon issue is a corporate bond, and the discount is £50,000,000 less £49,400,000.

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Question 3

Topic: Money Markets, Foreign Exchange, and Short-Term Instruments

A client has £750,000 temporarily awaiting a property purchase. They need £250,000 in one month and may invest the rest for a further three months after the first instrument matures. A dealer suggests buying a 90-day sterling commercial paper issue from one corporate issuer; purchase settlement would be delivery-versus-payment, and the client would sell part of the holding in the secondary market after one month. Which risk assessment is the single best answer?

• A. The early sale removes reinvestment risk, because commercial paper can normally be redeemed by the issuer at par before maturity.
• B. Delivery-versus-payment helps control settlement exposure, but the strategy still has issuer-default risk, possible liquidity risk on the early sale, and reinvestment risk when the balance is rolled.
• C. The 90-day term removes issuer-default risk and liquidity risk, leaving only the risk that the client reinvests at a lower rate after 90 days.
• D. The main risk is long-term interest-rate volatility, while settlement and issuer credit quality are normally irrelevant for money-market securities.

Best answer: B

What this tests: Money Markets, Foreign Exchange, and Short-Term Instruments

Explanation: Short-term securities can reduce exposure to long-term price volatility, but they are not risk-free. Commercial paper is an issuer obligation, so the investor remains exposed to the issuer’s ability to repay. Because the client needs part of the money before the 90-day maturity, the plan also depends on finding a buyer in the secondary market at an acceptable price, creating liquidity risk. If the remaining balance is rolled after maturity, the return available then may be lower than today’s rate, creating reinvestment risk. Delivery-versus-payment settlement reduces the risk of paying without receiving the security, but it does not remove credit, liquidity, or reinvestment risks.

• A short maturity does not eliminate issuer-default risk or the risk of needing to sell into a thin secondary market.
• Commercial paper is not assumed to be redeemable by the issuer at par whenever the investor wants cash.
• Long-term interest-rate volatility is less central here than issuer credit, sale liquidity, settlement mechanics, and the rate available on reinvestment.

The facts combine a single corporate issuer, a planned secondary-market sale before maturity, and a later roll-over decision.

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Question 4

Topic: Money Markets, Foreign Exchange, and Short-Term Instruments

A treasury dealer is comparing two sterling money-market instruments for a client’s short-term cash portfolio. Both are quoted on the same day and there are no tax differences.

• UK Treasury bill: 3 months to maturity, issued by HM Treasury, actively traded through a broad dealer market.
• Commercial paper: 6 months to maturity, issued by a BBB+ industrial company, placed with a small group of investors and rarely traded before maturity.

Which is the single best explanation of the expected pricing difference?

• A. The commercial paper should trade at a lower yield because its longer maturity gives investors a more certain return for a longer period.
• B. The two instruments should trade at similar yields because both are money-market instruments with less than one year to maturity.
• C. The Treasury bill should trade at a higher yield because actively traded instruments expose investors to more frequent price changes.
• D. The Treasury bill should trade at a lower yield and higher price than the commercial paper because it has shorter maturity, stronger credit quality, and better liquidity.

Best answer: D

What this tests: Money Markets, Foreign Exchange, and Short-Term Instruments

Explanation: Money-market pricing reflects the return investors require for holding a short-term claim. Instruments with stronger issuer credit quality, shorter time to maturity, deeper secondary-market liquidity, and broader market access normally require a lower yield and therefore trade at a higher price. Here, the Treasury bill benefits from sovereign credit quality, a 3-month maturity, and an active dealer market. The commercial paper has more issuer credit risk, a longer 6-month maturity, and limited secondary-market access, so investors would usually demand a higher yield and pay a lower price.

• Longer maturity does not normally reduce required yield when credit and liquidity risk are also higher.
• Being a money-market instrument does not make all short-term instruments equivalent; issuer quality and tradability still matter.
• Active trading generally improves liquidity and reduces the liquidity premium, rather than increasing the required yield on its own.

Higher liquidity, shorter maturity, stronger issuer credit quality, and wider market access reduce the yield investors require, increasing the instrument’s price.

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Question 5

Topic: Money Markets, Foreign Exchange, and Short-Term Instruments

A UK company will need to buy US$1 million in six months to pay a supplier. Its dealer quotes GBP/USD spot at 1.2800 and six-month forward at 1.2700. The dealer confirms that GBP/USD means the number of US dollars for £1.

Which statement best applies the quote to the company’s hedging decision?

• A. Sterling is at a forward premium; a forward purchase of dollars would fix the future exchange rate at more dollars per pound than the spot rate.
• B. The forward rate is a forecast, so the company should remain unhedged because the six-month spot rate must be 1.2700.
• C. The dollar payment creates no foreign exchange risk once the invoice amount is known, so using a forward would only add speculation.
• D. Sterling is at a forward discount; a forward purchase of dollars would fix the future exchange rate at fewer dollars per pound than the spot rate.

Best answer: D

What this tests: Money Markets, Foreign Exchange, and Short-Term Instruments

Explanation: In a GBP/USD quote, the rate shows how many US dollars one pound buys. A forward rate below the spot rate means each pound buys fewer dollars for forward delivery than for spot delivery. Sterling is therefore trading at a forward discount against the dollar. For a UK company with a future US dollar payable, a fall in GBP/USD would increase the sterling cost of buying the required dollars. Entering into a forward contract would not guarantee a profit or forecast the future spot rate, but it would lock in the exchange rate for the future dollar purchase and reduce exchange-rate uncertainty.

• Calling it a sterling premium reverses the quote: 1.2700 is below 1.2800, so pounds buy fewer dollars forward.
• Treating the forward rate as a certain forecast misunderstands forwards; it is an agreed dealing rate, not a guaranteed future spot rate.
• Knowing the dollar invoice amount does not remove FX risk for a sterling-based company, because the sterling cost can still change.

The forward rate is lower than spot in a USD-per-GBP quote, so sterling buys fewer dollars forward and is at a forward discount.

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Question 6

Topic: Money Markets, Foreign Exchange, and Short-Term Instruments

A sterling-based client holds a $600,000 US Treasury bill maturing on Friday. The position is currently matched by a forward contract to sell $600,000 for sterling on Friday. The client now wants to reinvest the proceeds into a new 90-day US Treasury bill, but the cash is required in sterling at the end of those 90 days. The mandate does not permit material open currency positions and the client is not seeking to take a USD/GBP view.

What is the single best action?

• A. Close the forward contract and wait to convert the dollars at the spot rate when the new Treasury bill matures.
• B. Convert the dollar proceeds into sterling on Friday and then leave the new US Treasury bill unhedged for 90 days.
• C. Roll the forward hedge so that the client sells the expected dollar proceeds for sterling at the new 90-day maturity date.
• D. Leave the dollar exposure open because the underlying instrument is a short-dated US Treasury bill.

Best answer: C

What this tests: Money Markets, Foreign Exchange, and Short-Term Instruments

Explanation: The key issue is the currency risk, not the credit quality of the Treasury bill. The client is sterling-based, needs sterling cash at the end of the next 90 days, and is not permitted to run a material open FX position. Because the investment is being extended in US dollars, the existing forward hedge should be rolled or replaced with a new forward sale of dollars for sterling at the new maturity date. This keeps the investment exposure in the desired short-term dollar instrument while fixing, or at least hedging, the sterling value of the future dollar proceeds.

• Converting into sterling immediately does not fit the decision to reinvest in a dollar Treasury bill and would not by itself hedge the 90-day dollar exposure.
• Waiting for the future spot rate leaves the client exposed to USD/GBP movements, contrary to the mandate.
• The low credit risk of a US Treasury bill does not remove foreign exchange risk for a sterling-based client.

Rolling the hedge maintains the USD investment while matching the sterling conversion to the revised cash-flow date and risk constraint.

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Question 7

Topic: Money Markets, Foreign Exchange, and Short-Term Instruments

A UK-listed industrial company has an established commercial paper programme and a short-term credit rating acceptable to money-market investors. It needs unsecured funding for seasonal working capital.

Use simple annualised cost = (redemption amount - issue proceeds) / issue proceeds × 365 / days.

Which action is most appropriate?

• A. Draw the committed bank facility because the proposed paper is more expensive.
• B. Issue 90-day UK Treasury bills to money-market investors.
• C. Invest in 90-day Treasury bills until the working-capital need arises.
• D. Issue 90-day commercial paper under the existing programme.

Best answer: D

What this tests: Money Markets, Foreign Exchange, and Short-Term Instruments

Explanation: Commercial paper is a short-term unsecured money-market instrument normally issued by creditworthy companies to raise funds for periods such as 90 days. The discount on the proposed issue is £97,500 (£15,000,000 minus £14,902,500). The annualised cost is £97,500 / £14,902,500 × 365 / 90, which is approximately 2.65% per annum. That is lower than the 3.15% bank facility and the issuer already has the programme and credit standing needed for CP issuance. Treasury bills are issued by governments, not by an industrial company, and buying them would use cash rather than raise it.

• UK Treasury bills are suitable government short-term debt instruments, but they are not issued by a corporate borrower.
• Buying Treasury bills would be an investment for surplus cash, not a way to fund a working-capital shortfall.
• The bank facility is available but costs more than the annualised CP funding shown by the figures.

The CP issue matches the 90-day unsecured funding need and has an annualised cost of about 2.65%, below the 3.15% bank facility.

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Question 8

Topic: Money Markets, Foreign Exchange, and Short-Term Instruments

A UK securities adviser is checking a 3-month forward FX quote for a client who will receive US dollars and may convert them into sterling. The dealer provides these market inputs:

Using simple money-market interest and ignoring dealing spreads, what is the closest theoretical 3-month forward rate?

• A. USD 1.2500 per GBP 1, because the forward equals the spot rate when both currencies are freely traded
• B. USD 1.2625 per GBP 1, with sterling at a forward premium
• C. USD 1.2469 per GBP 1, with sterling at a forward discount
• D. USD 1.2531 per GBP 1, with sterling at a forward premium

Best answer: D

What this tests: Money Markets, Foreign Exchange, and Short-Term Instruments

Explanation: A forward FX rate reflects the spot rate adjusted for the interest-rate differential over the maturity period. For a quote in USD per GBP, the adjustment is:

\[ F = S \times \frac{1 + r_{USD}t}{1 + r_{GBP}t} \]

Here, \(F = 1.2500 \times \frac{1 + (0.05 \times 0.25)}{1 + (0.04 \times 0.25)} = 1.2500 \times \frac{1.0125}{1.0100} \approx 1.2531\). Because the forward rate is above the spot rate, sterling buys more dollars forward than spot, so sterling is at a forward premium in this quote convention.

• Reversing the interest-rate adjustment gives a rate below spot and incorrectly treats sterling as being at a discount.
• Applying the full 1% annual interest differential without adjusting for the 3-month period overstates the forward rate.
• Assuming the forward must equal the spot rate ignores covered interest-rate parity and the money-market return available in each currency.

For a USD-per-GBP quote, the higher US dollar interest rate raises the forward USD price of £1 to about 1.2531.

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Question 9

Topic: Money Markets, Foreign Exchange, and Short-Term Instruments

An adviser is explaining a successful tender in a short-term securities auction. The contract note states:

• Issuer: HM Treasury, acting through the UK Debt Management Office
• Instrument: Treasury bill
• Accepted amount: £250,000 nominal
• Accepted tender price: £99.10 per £100 nominal
• Coupon: none
• Maturity: 91 days, with redemption at £100 per £100 nominal

Ignoring fees, which interpretation best applies to the transaction?

• A. The client pays £247,750 for £250,000 nominal of short-term UK government debt and earns the £2,250 discount if it is held to maturity.
• B. The client pays £250,000 because the nominal amount is the purchase price, and receives coupon interest during the 91-day term.
• C. The client can require HM Treasury to redeem the bill at £250,000 on any business day before the 91-day maturity.
• D. The client is buying company commercial paper, so repayment depends primarily on the cash flow of the issuing company.

Best answer: A

What this tests: Money Markets, Foreign Exchange, and Short-Term Instruments

Explanation: A Treasury bill is a short-term money market instrument issued by the government, typically on a discount basis rather than with a coupon. The auction tender determines the price paid for a stated nominal amount. Here, the accepted price is £99.10 per £100 nominal, so the cash cost is £247,750 for £250,000 nominal. If held to the 91-day maturity, the bill is redeemed at £100 per £100 nominal, giving £250,000 back. The £2,250 difference is the investor’s return before costs and tax. The issuer fact is also important: HM Treasury issuing through the UK Debt Management Office means this is UK government short-term funding, not corporate commercial paper.

• Treating the nominal amount as the purchase price ignores the accepted discount price and the no-coupon structure.
• Calling the instrument company commercial paper ignores the named issuer, HM Treasury.
• A short maturity does not make the bill repayable on demand; early liquidity would normally depend on selling in the market.

The tender price is applied to the nominal amount, and a Treasury bill is redeemed at its nominal value at maturity with no coupon.

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Question 10

Topic: Money Markets, Foreign Exchange, and Short-Term Instruments

A UK client expects to convert £500,000 into US dollars in three months. The dealer quotes:

The quote is US dollars per £1 and dealing costs are ignored. Which explanation of the forward quote is correct?

• A. The US dollar is at a forward discount; the lower GBP/USD forward rate means dollars are cheaper for the client to buy.
• B. Sterling is at a forward discount; the 3-month forward rate would lock in $624,000, which is $6,000 less than conversion at the spot rate.
• C. Sterling is at a forward premium; the 3-month forward rate would lock in $624,000, which is $6,000 more than conversion at the spot rate.
• D. There is no forward premium or discount; the spot and forward rates are only different because the trade date is three months away.

Best answer: B

What this tests: Money Markets, Foreign Exchange, and Short-Term Instruments

Explanation: GBP/USD is quoted as the number of US dollars for £1. At the spot rate of 1.2600, £500,000 would notionally buy $630,000. At the 3-month forward rate of 1.2480, the client would lock in $624,000. The forward rate is lower than the spot rate, so sterling buys fewer dollars for forward delivery. That means sterling is at a forward discount against the US dollar, while the US dollar is at a forward premium against sterling. The difference is $6,000 on the stated amount, calculated as £500,000 × (1.2600 - 1.2480).

• Calling sterling at a premium reverses the quote direction: the lower forward rate gives fewer, not more, dollars per pound.
• Calling the dollar at a discount misreads the effect of a lower GBP/USD quote; the dollar is stronger forward relative to sterling.
• A different forward rate normally reflects a forward premium or discount, not merely the passage of time.

Because the forward GBP/USD rate is lower than spot, each pound buys fewer dollars forward than spot.

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