HKSIYES — Question Explanations: Short-Term Licences, CAPM, Options, Intrinsic Value, and Simple Interest

Getting ready for HKSI exams can feel overwhelming if you jump straight into the numbers. In this post, we walk through five representative questions from the HKSI Question Explanations category, turning each question into a learning moment about the underlying concepts. By tying regulatory licensing topics to fundamental finance thinking, you’ll see how the pieces fit together and sharpen your exam approach.

1) Short-Term Licence: Which statement is not correct?

Options:

1. It permits the firm to carry out 1-10 regulated activities in HK.
2. The licence is valid for a period not exceeding 3 months.
3. An overseas-operating company cannot be granted a short-term licence.
4. The total time a single person can hold a short-term licence within any 24-month period must not exceed 6 months.

Answer: C

Explanation: Statement 1 is incorrect because a short-term licence does not cover all 1-10 activities; it only authorizes a subset of activities, with some classes (e.g., 3, 7–9) not being eligible for expeditious waivers. Statement 3 is also incorrect: the short-term licence is designed to address overseas operating business needs, so it is possible for overseas entities to be granted it. Therefore, the incorrect statements are (1) and (3). The option that lists these together is (C).

This question reinforces two important HKSI licensing nuances:

• Short-term licences are activity-specific rather than blanket permissions across all categories.
• The eligibility of overseas entities for short-term licensing can differ from common assumptions, so always check the regulation text for the exact scope.

2) CAPM: The expected return of a stock with beta = 8, risk-free rate 2%, market return 20%, and no dividends is ?

Formula (CAPM): Expected return = Risk-free rate + Beta × (Market return − Risk-free rate)

Plugging in the numbers: 2% + 8 × (20% − 2%) = 2% + 8 × 18% = 2% + 144% = 146%

Options: A) 120% B) 128% C) 164% D) 146%

Answer: D

Explanation: CAPM expresses how a stock’s expected return compensates investors for time value of money and systematic risk relative to the market. The key takeaway is to identify the right components: risk-free rate, beta, and the market risk premium (market return minus risk-free rate).

3) Options: Who has the right but not the obligation to sell shares at a strike price?

Options: A) Holder of a call option B) Writer of a call option C) Holder of a put option D) Writer of a put option

Answer: C

Explanation: A put option gives the buyer (holder) the right, but not the obligation, to sell the underlying stock at a pre-set strike price. The counterparty (writer) has the obligation if the option is exercised. This distinction between rights and obligations is fundamental to understanding option contracts.

4) Call option intrinsic value: If a call option strike is $30 and the stock price at expiration is $25, what is the intrinsic value?

Options: A) $30 B) $35 C) $5 D) $0

Answer: D

Explanation: Intrinsic value for a call option is max(S − K, 0). Here, S = $25 and K = $30, so max(25 − 30, 0) = max(−5, 0) = 0. Since an option with negative intrinsic value is not exercised, the intrinsic value is zero.

5) Simple interest: A $10,000 deposit for 5 years at 6% annually, with interest not reinvested, what is the total interest earned over 5 years?

Options: A) $3,000 B) $3,382 C) $13,000 D) $13,882

Answer: A

Explanation: With simple interest, total interest = Principal × Years × Rate. Here, 10,000 × 5 × 6% = 10,000 × 0.05 × 6 = $3,000. This is a straightforward application of the simple interest formula, highlighting the difference between simple and compound interest.

Final thoughts

These five questions blend regulatory knowledge with core financial concepts. The key is to identify what concept each question tests—licensing scope, CAPM mechanics, options rights vs obligations, intrinsic value calculations, and simple interest math—and apply the appropriate rule or formula step by step.

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