CME-1 Financial Instruments 1 — Questions and Answers
Question 1: What is 'sukuk' and how does it differ from a conventional bond?
- Sukuk and bonds are identical instruments
- Sukuk represents ownership in an underlying asset or project and pays returns from asset performance, while bonds are interest-bearing debt (Correct answer)
- Sukuk is equity; bonds are hybrid
- Sukuk is only for government issuers
Correct answer: Sukuk represents ownership in an underlying asset or project and pays returns from asset performance, while bonds are interest-bearing debt
Sukuk are Shariah-compliant securities representing proportional ownership in tangible assets or projects, generating returns from asset use or profit, not interest (riba).
Question 2: What is the most common structure used for corporate sukuk in Saudi Arabia?
- Murabaha Sukuk
- Ijara Sukuk (lease-based) (Correct answer)
- Mudaraba Sukuk
- Musharaka Sukuk
Correct answer: Ijara Sukuk (lease-based)
Ijara (lease-based) sukuk is the most widely used structure in Saudi Arabia, where sukuk holders own assets leased to an obligor who pays periodic rental (equivalent to coupon).
Question 3: What is an 'Exchange Traded Fund' (ETF) listed on the Saudi Exchange?
- A closed-end fund requiring CMA approval for each trade
- An open-ended fund whose units trade on the exchange like shares, tracking an index or basket of assets (Correct answer)
- A money market fund
- A private equity fund
Correct answer: An open-ended fund whose units trade on the exchange like shares, tracking an index or basket of assets
ETFs are open-ended investment funds listed on the Saudi Exchange that track an index or asset basket, offering intraday tradability and typically lower fees than active funds.
Question 4: What is a 'derivative instrument' in the context of Saudi capital markets?
- A fixed-income instrument
- A financial contract whose value is derived from an underlying asset such as a stock, index, or commodity (Correct answer)
- A government savings bond
- An Islamic finance product only
Correct answer: A financial contract whose value is derived from an underlying asset such as a stock, index, or commodity
Derivatives are financial contracts — such as futures, options, or swaps — whose value depends on the performance of an underlying asset, index, or rate.
Question 5: What does a 'call option' give the holder the right to do?
- Sell the underlying asset at the strike price
- Buy the underlying asset at the strike price before or at expiry (Correct answer)
- Receive dividends only
- Borrow against the asset
Correct answer: Buy the underlying asset at the strike price before or at expiry
A call option grants the holder the right (not obligation) to buy the underlying asset at the specified strike price on or before the expiration date.
Question 6: What is the relationship between bond prices and interest rates?
- They move in the same direction
- They move inversely: when interest rates rise, bond prices fall, and vice versa (Correct answer)
- There is no relationship
- Bond prices only change at maturity
Correct answer: They move inversely: when interest rates rise, bond prices fall, and vice versa
Bond prices and interest rates have an inverse relationship: when market rates rise, existing bond prices fall because their fixed coupons are less attractive relative to new bonds.
CME-1 Financial Instruments 1
What is 'sukuk' and how does it differ from a conventional bond?