Reading 2-II: Standards of Professional Conduct & Guida

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Q1. Steve Waters, a CFA Level I candidate, has decided to enter into a long position of Farmco stock. Since Farmco is thinly traded, Waters is concerned the order will overwhelm the liquidity of Farmco and the price will surge. Waters engages in a series of block trades in order to accomplish the purchase. According to Standard II(B), Market Manipulation, Waters has engaged in:

A) neither transaction-based manipulation nor information-based manipulation.

B) transaction-based manipulation, but not information-based manipulation.

C) both transaction-based manipulation and information-based manipulation.

Q2. Which of the following is a violation of Standard II(B), Market Manipulation?

A) Overstating an earnings projection in order to increase the price of a stock.

B) Implementing a trading strategy to exploit differences in market power and information.

C) Engaging in a block trade to limit the effect on the price of a thinly traded security.

Q3. Ron Taylor, a CFA Level I candidate, trades cotton contracts for a small commodity broker. Taylor convinces a government cotton inspector to issue a warning that the Texas cotton crop is in danger from insect infestation. The price of cotton soars. Taylor immediately shorts cotton futures. Once the position is created, the government inspector issues a second report reversing his original opinion and cotton prices plummet.

Cedric Sims, a CFA Level III candidate, would like to generate a tax loss on a security held in his personal portfolio; however, he believes the security has significant upside potential. To avoid the wash sale provisions of the income tax code, Sims sells the security and simultaneously creates a synthetic long position using derivatives.

With regards to Standard II(B), Market Manipulation, which of the following statements concerning Taylor’s and Sims’s conduct is TRUE?

A) Neither Taylor nor Sims is in violation of Standard II(B).

B) Taylor is in violation of Standard II(B), but Sims is not in violation.

C) Both Taylor and Sims are in violation of Standard II(B).