Pass the CISI CISI level 3 Certificate in Wealth & Investment Management ICWIM Questions and answers with CertsForce

Passive fund managers can use synthetic replication to track an index through derivatives like swaps. In this arrangement, the fund agrees to pay a pre-defined return (e.g., LIBOR or a fixed rate) to a counterparty in exchange for the counterparty delivering the total return of the index. This approach allows the fund to replicate index performance without holding the physical securities, reducing costs and eliminating tracking error.

Bearer shares are unregistered securities, meaning ownership is determined by physical possession of the share certificate rather than being recorded in a shareholder register.

Why is Option B Correct?

If the physical certificate is lost or stolen, the holder loses legal ownership, as no record of ownership exists.

Unlike registered shares, where ownership is recorded with a company or broker, bearer shares do not have a recovery process.

Why Not Other Options?

A (Not being publicly named) → While bearer shares offer anonymity, the major risk is loss of ownership.

C (Difficult to value) → They can still be valued based on the issuing company’s performance.

D (Not possible to sell part of the holding) → Bearer shares can be sold partially, like other shares.

???? Reference: OECD Guidelines on Transparency & Bearer Shares, CISI Wealth & Investment Management.

Global Currency Trading

The US dollar dominates the foreign exchange market due to its status as the global reserve currency.

It is heavily used in international trade, financial transactions, and as a benchmark currency.

Market Share

The US dollar is involved in approximately 88% of all forex trades.

Other currencies like the euro, Japanese yen, and British pound have significant market shares but are far behind the US dollar.

ICWIM Study Guide, Chapter on Global Financial Markets: Highlights the US dollar as the most traded currency.

Bank for International Settlements (BIS) Forex Market Surveys: Confirms trading dominance of the US dollar.

References

Equities are often used to hedge against inflation because they represent ownership in real assets that can grow in value. Companies generally have the ability to pass on inflationary costs to consumers, which can preserve or enhance their profitability and the equity value.

Lower cost (B): Equities may incur higher transaction and management costs than other asset classes.

Align liabilities (C): While equities offer returns, liability alignment is more relevant to fixed-income assets.

Low volatility (D): Equities are more volatile than bonds or cash, making this statement incorrect.

References:

International Certificate in Wealth & Investment Management: Equities as inflation hedges and their risk/reward profile.

Historical analysis of equity performance in inflationary periods.

Passive fund managers use synthetic replication via total return swaps to track an index without directly holding the underlying securities.

How It Works:

The fund manager enters into a swap agreement with a counterparty (e.g., an investment bank).

The fund pays a pre-defined return (e.g., cash or fixed rate) to the counterparty.

In exchange, the counterparty provides the exact return of the target index.

Advantages:

Lower trading costs compared to full replication.

More efficient tracking of the index, especially in emerging markets.

Example: An ETF tracking the S&P 500 may use swaps to receive the total return of the S&P 500 index without buying all 500 stocks.

???? Reference: CFA Institute (Index Replication), CISI Wealth & Investment Management (Passive Strategies).

Withholding tax is a tax deducted at source on dividends, interest, and royalty payments before they are paid to non-residents.

Taxation on Foreign Dividends: Investors receiving dividends from foreign companies may have tax deducted by the source country before the net dividend is paid.

Double Taxation Relief: Many countries have Double Taxation Agreements (DTA) with the UK, allowing UK investors to claim relief against withholding tax.

Stamp Duty & VAT Irrelevance: Stamp Duty applies to purchases of shares, and VAT does not apply to dividends.

???? Reference: HMRC Double Taxation Agreements, CISI Wealth & Investment Management.

Compound Interest Formula:A=P×(1+r)nA = P \times (1 + r)^nA=P×(1+r)n

P: Initial principal (£1,000)

r: Annual interest rate (3% or 0.03)

n: Number of years (5)A=1,000×(1+0.03)5A = 1,000 \times (1 + 0.03)^5A=1,000×(1+0.03)5A=1,000×(1.159274)A = 1,000 \times (1.159274)A=1,000×(1.159274)A=£1,157.63A = £1,157.63A=£1,157.63

Elimination of Other Options:

All other values result from incorrect application of the formula or ignoring compounding.

References:

ICWIM Module 2: Focus on time value of money and compounding.

Central banks use foreign currency reserves to stabilise or influence their national currency in the foreign exchange (FX) market.

Why Intervene?

To prevent excessive currency depreciation/appreciation.

To control inflation by managing exchange rates.

To maintain export competitiveness.

Example: The People’s Bank of China (PBOC) intervenes in FX markets to stabilise the Chinese Yuan (CNY).

???? Reference: IMF Guidelines on Currency Intervention, CISI Wealth & Investment Management.

Definition of Recession:

A recession is defined as two consecutive quarters of negative GDP growth, indicating a sustained economic downturn.

It reflects reduced consumer spending, higher unemployment, and lower production.

Elimination of Other Options:

B (Slump): A slump is a more general term and not a specific phase.

C (Depression): Refers to prolonged and severe economic downturns.

D (Inflationary): Opposite of the scenario described.

References:

ICWIM Module 1: Explanation of economic cycles and recession indicators.

A recommendation report (or suitability report) is a formal document provided by financial advisers to clients. It outlines investment recommendations and justifications based on the client’s personal circumstances.

Why is Option D Correct?

The FCA requires firms to consider a client’s existing investments, pensions, and insurance policies before making recommendations.

This ensures that clients are not sold duplicate or unsuitable products.

Reviewing previous arrangements helps advisers identify gaps in financial planning.

What Else Is Included in a Recommendation Report?

Investment objectives & risk tolerance.

Tax considerations.

Cost disclosures and fees.

Why Not Other Options?

A (Inflation rate) → While inflation is considered, it is not a mandatory section in suitability reports.

B (Interest rate) → Relevant for fixed income investments, but not always necessary.

C (Protection) → Only included if insurance products are being recommended.

???? Reference: FCA Conduct of Business Sourcebook (COBS 9 – Suitability Reports), CISI Wealth & Investment Management.