The correct answer is that the licensed corporation has the right to liquidate any or all of the client’s open positions to cover the margin shortfall. When a client’s account equity falls below the maintenance margin level, a margin call is triggered. The client agreement, which is signed when the account is opened, grants the licensed corporation the authority to take protective measures if the client fails to deposit additional funds promptly. This right to liquidate positions is crucial for the firm to manage its credit and counterparty risk, preventing further losses from accumulating. The firm is not obligated to wait for a fixed period like three business days; the client agreement typically specifies a much shorter timeframe, and the firm can act swiftly to protect its interests. The firm is also not restricted to closing only the specific position that triggered the call; it can liquidate any positions necessary to restore the required margin level. Finally, the need for explicit consent at the time of liquidation is waived by the terms of the initial client agreement, which pre-authorizes the firm to take such action in the event of an unmet margin call.

A margin call is a formal demand from a licensed corporation for a client to deposit additional money or securities into their account to bring the margin level up to the required maintenance margin. Statement III is correct because the primary step after a margin shortfall is to notify the client and provide them with a specified period, as outlined in the client agreement, to meet the call. This gives the client an opportunity to rectify the situation. Statement II is also correct. If the client fails to meet the margin call within the stipulated time, or if the market continues to deteriorate rapidly, the licensed corporation has the right to liquidate positions to mitigate its risk. Liquidating only a portion sufficient to restore the margin level is a common and prudent practice. Statement I is incorrect because while the client agreement grants the firm the right to liquidate, the issuance of a margin call typically implies a grace period for the client to act. Immediate liquidation without any chance for the client to respond is an extreme measure reserved for severe market conditions or specific agreement clauses, not the standard initial procedure. Statement IV is incorrect as extending further credit to cover a margin call would be a breach of sound risk management principles, as it increases both the firm’s and the client’s exposure to risk. Therefore, statements II and III are correct.

In leveraged foreign exchange trading, margin serves as a good faith deposit to secure the licensed corporation against adverse market movements in a client’s position. Statement I is correct because when a client’s account equity falls below the maintenance margin level, the standard and required procedure is for the firm to issue a margin call, demanding the client to restore the equity to the required level. Statement II is also correct; the client agreement invariably gives the licensed corporation the right to liquidate the client’s positions if they fail to meet a margin call in a timely manner. This is a crucial mechanism for the firm to manage its credit and counterparty risk. Statement III is incorrect because a licensed corporation’s primary duty in this situation is to mitigate its own risk exposure, not to speculate on a market recovery on the client’s behalf. Delaying action could lead to greater losses for both the client and the firm. Statement IV is incorrect as extending further credit to cover a margin shortfall is not a standard practice and would contravene the fundamental principle of margining, which is to secure potential losses with the client’s own funds, not the firm’s credit. Therefore, statements I and II are correct.

This question assesses the proper procedures for a licensed corporation (LC) when handling a margin call, a critical aspect of credit and counterparty risk management in leveraged foreign exchange trading. Statement I is correct because clear, timely communication of the margin deficit and the required action (depositing funds or closing positions) and its deadline is a fundamental and necessary step. This ensures the client is fully informed of their obligation. Statement II is also correct. The client agreement is the legally binding document that outlines the rights and responsibilities of both the client and the LC. It invariably contains clauses that permit the LC to liquidate a client’s open positions to cover a margin deficit if the client fails to meet the margin call within the stipulated time. This is the LC’s primary tool for mitigating its credit risk. Statement III is incorrect. Providing unsolicited trading advice, especially during a high-stress event like a margin call, can be construed as a recommendation. This may breach suitability requirements under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, particularly if the client’s account is non-discretionary. The LC’s role here is risk management, not advisory. Statement IV is incorrect as it contradicts the core principle of risk management. An LC’s primary duty is to protect itself from credit losses. Waiting for a potential market reversal is speculative and exposes the firm to potentially larger deficits. The client agreement empowers the LC to act decisively to mitigate risk once the margin call deadline is missed. Therefore, statements I and II are correct.

The correct answer is that the client must deposit additional funds or acceptable collateral to bring the account equity back up to the required maintenance margin level. A margin call is a formal demand from a licensed corporation to a client to increase the equity in their account when it falls below the minimum required amount, known as the maintenance margin. This is a critical risk management tool used by firms to protect themselves and their clients from escalating losses in leveraged trading. The primary and most direct way to satisfy this call is by adding more capital to the account. Failing to do so in a timely manner gives the licensed corporation the right to liquidate the client’s open positions to cover the deficit and prevent further losses. While closing the position is an option for the client, it is not the obligation demanded by the margin call itself; the call is a request for more funds to keep the position open. Requesting a waiver based on market outlook is not a standard procedure and is unlikely to be granted, as firms must adhere to strict internal risk policies. Similarly, opening an opposite hedging position does not resolve the existing margin shortfall, as the unrealized loss on the original position still exists and the account’s equity remains below the required level.

Statement I is correct. Client agreements for leveraged foreign exchange trading almost universally grant the licensed corporation the right to liquidate a client’s open positions if a margin call is not met by the specified deadline. This is a critical mechanism for the firm to manage its credit and counterparty risk. Statement II is also correct. When a margin call is triggered because equity has fallen below the maintenance margin level, the call is typically for an amount sufficient to restore the account equity back to the higher initial margin level, not just to the maintenance level. This replenishes the risk buffer. Statement III is incorrect. While a firm will notify a client of a margin call, the client agreement allows the firm to liquidate positions without the client’s explicit consent if the call is not met. Waiting for consent would expose the firm to potentially unlimited risk. Statement IV is incorrect. A deficit resulting from the liquidation of a client’s position is an actual, immediate debt owed by the client to the firm, not a contingent liability. The firm has the right to pursue recovery of this debt immediately. Therefore, statements I and II are correct.

In leveraged foreign exchange trading, the client agreement is a critical document that outlines the rights and obligations of both the client and the licensed corporation. When a client’s account equity falls below the maintenance margin level, the firm faces significant credit and counterparty risk. To mitigate this, the agreement typically grants the firm the right to liquidate a client’s positions if a margin call is not met within the specified time (Statement I). This action does not require separate, specific consent at the time of liquidation because the client has pre-authorized it by signing the agreement (making Statement II incorrect). Furthermore, leveraged trading carries the risk of losses exceeding the initial deposit. If the liquidation of positions is insufficient to cover the losses, resulting in a negative balance, the client is contractually obligated to pay the deficit to the firm (Statement III). While a firm might choose to liquidate only part of a position, their contractual right is usually much broader, allowing them to liquidate any or all positions at their discretion to protect themselves from further losses; they are not restricted to only restoring the margin to the maintenance level (making Statement IV incorrect). Therefore, statements I and III are correct.

The correct answer is that the licensed corporation has the right to liquidate some or all of the client’s positions to restore the required margin level. This is a critical risk management measure outlined in the client agreement to protect both the client from accumulating further losses and the firm from incurring credit risk. When an account’s equity falls below the maintenance margin, a margin call is triggered. If the client is unreachable or fails to deposit additional funds promptly, the firm is contractually entitled to close out positions to mitigate the risk. Extending a temporary credit line would increase the firm’s risk exposure, which is contrary to the purpose of a margin call. Waiting for a fixed grace period, such as 24 hours, is not standard practice as rapid market movements could lead to significant further losses for both parties; client agreements typically permit immediate action. Using the firm’s own funds to place an offsetting trade is inappropriate as it commingles the firm’s and client’s risk and does not resolve the margin deficiency within the client’s account.

In leveraged foreign exchange trading, managing credit and counterparty risk is paramount. When a client’s account equity falls below the maintenance margin level, the licensed corporation must act to mitigate potential losses. Statement I is correct; the standard first step is to issue a margin call, formally notifying the client of the shortfall and giving them a specific deadline to deposit funds or close positions to restore the margin level. This is a fundamental part of the process. Statement II is also correct; client agreements for leveraged products invariably grant the firm the right to liquidate the client’s positions without their explicit consent if they fail to meet the margin call within the stipulated time. This is a crucial mechanism to protect the firm from incurring losses due to the client’s under-margined position. Statement III is incorrect; firms are not required to wait until the end of a session. In fact, delaying liquidation in a volatile market could exacerbate the losses. The firm has the right to liquidate as soon as is practicable after the margin call deadline has passed. Statement IV is incorrect; the client remains liable for any debit balance (shortfall) remaining in their account after the liquidation of all positions. The firm has the right to pursue the client for this debt. Therefore, statements I and II are correct.

The correct answer is that the currency of Nation A is likely to appreciate against the currency of Nation B. A central bank’s decision to unexpectedly increase its benchmark interest rate typically makes holding that country’s currency more attractive to international investors. This is because financial assets denominated in that currency, such as government bonds and money market instruments, will now offer a higher yield. To invest in these assets, foreign investors must first purchase the local currency, which increases its demand. According to the principles of supply and demand, this heightened demand causes the currency to strengthen, or appreciate, relative to other currencies. Therefore, an unexpected rate hike by Nation A’s central bank would most likely lead to an increase in the value of its currency against Nation B’s currency. A depreciation would be the opposite of the expected outcome, as higher returns attract, rather than repel, capital. The notion that the rate would be unchanged is incorrect because the scenario specifies the rate hike was ‘unexpected,’ meaning it was not priced into the market beforehand and would therefore cause a significant reaction. While the forward exchange rate is influenced by interest rate differentials, the most immediate and pronounced impact of a surprise monetary policy shift is on the spot exchange rate.

The correct answer is that the licensed corporation has the right to liquidate any or all of the client’s open positions to cover the margin shortfall. This right is a standard and critical component of risk management in leveraged foreign exchange trading and is outlined in the client agreement signed when the account is opened. When a client’s account equity drops below the maintenance margin level, the firm issues a margin call. If the client fails to deposit the required funds within the stipulated time, the firm is contractually entitled to close out positions to mitigate its own credit and counterparty risk. The firm does not need to seek further consent at the time of liquidation because this authority was pre-agreed upon in the client agreement. The firm is not restricted to liquidating only the position that caused the shortfall; it can close any positions necessary to bring the account back into compliance. While a firm might choose to offer an extension as a matter of customer service, it is under no regulatory or contractual obligation to do so, as its primary duty is to manage risk exposure.

The correct answer is that the licensed corporation should proceed to liquidate a sufficient portion of the client’s open positions to restore the margin level to an acceptable state. In leveraged foreign exchange trading, the client agreement invariably grants the licensed corporation the right to close out a client’s positions without further notice if a margin call is not met within the stipulated time. This is a critical risk management measure to protect the firm from credit risk, preventing the client’s losses from exceeding the funds in their account. The firm’s primary duty in this situation is to mitigate its exposure. Extending the deadline for the margin call based on the client’s past performance would constitute an unacceptable assumption of credit risk and is not standard procedure. Seeking additional explicit consent before liquidation is unnecessary, as this right is pre-authorized in the client agreement to allow for swift action in volatile markets. While a client agreement might permit the use of funds from other accounts, the direct and standard procedure is to reduce the risk by closing the leveraged positions causing the margin shortfall.

This question assesses the understanding of margin call procedures and client liabilities in leveraged foreign exchange trading, which are critical aspects of risk management for a licensed corporation.

Statement I is incorrect. When a margin call is issued, the client is typically required to restore the account equity to the maintenance margin level, not necessarily the higher initial margin level. The specific requirement is detailed in the client agreement.

Statement II is correct. The client agreement for a leveraged trading account grants the licensed corporation the right to liquidate a client’s open positions if they fail to meet a margin call within the stipulated time. This is a fundamental mechanism for the firm to manage its credit and counterparty risk.

Statement III is incorrect. There is no mandatory or fixed grace period, such as 24 hours, for meeting a margin call. The timeframe is specified in the client agreement and can be very short, especially in volatile market conditions. The firm has the discretion to act quickly to protect itself from escalating losses.

Statement IV is correct. The client’s liability is not limited to the funds deposited in their account. If the market moves against the client’s position so severely that liquidating the position results in a negative account balance (a deficit), the client is legally obligated to pay this deficit to the licensed corporation. Therefore, statements II and IV are correct.

The correct answer is that the licensed corporation has the right to liquidate the client’s positions without their consent to cover the margin shortfall. In leveraged foreign exchange trading, the client agreement, which must be signed before trading commences, invariably contains a clause granting the firm the authority to close out a client’s open positions if the client fails to meet a margin call in a timely manner. This is a critical risk management tool for the licensed corporation to protect itself from incurring losses due to a client’s deficit. The firm is obligated to act in the best interests of the client but also has a primary duty to manage its own financial risk. When a client is unreachable and the market is moving adversely, immediate liquidation is often the only prudent course of action. The option suggesting the firm must wait for a fixed period, such as 24 hours, is incorrect. Market conditions can change rapidly, and such a delay could expose the firm to significant and unacceptable losses. Client agreements typically allow for immediate action. The option stating the firm must absorb the loss until the client can be contacted is incorrect. This would transfer the client’s trading risk to the firm, which contradicts the fundamental principle of margin trading and would be an unsound business practice. The option proposing that the firm must transfer its own funds to the client’s account is also incorrect. This would be equivalent to providing an unsecured loan to cover trading losses, which is not a standard practice and would violate the firm’s internal risk control policies.

Statement I is correct. When a client’s account equity falls below the maintenance margin, the licensed corporation’s immediate and standard procedure is to issue a margin call. This formally notifies the client of the deficit and requests the deposit of additional funds to meet the margin requirements as stipulated in the client agreement.

Statement II is also correct. A fundamental component of the client agreement for leveraged foreign exchange trading is the licensed corporation’s right to liquidate a client’s open positions if they fail to meet a margin call within the specified time. This right is crucial for the firm to manage its credit and counterparty risk and prevent losses from escalating.

Statement III is incorrect. The client agreement typically grants the licensed corporation the discretion to decide which positions to liquidate to cover a margin shortfall. Requiring the client’s specific instructions would be operationally inefficient and could hinder the firm’s ability to act quickly in a volatile market, thereby increasing risk for both the firm and the client.

Statement IV is incorrect. A licensed corporation’s primary duty in a margin call situation is to mitigate its credit risk exposure promptly. Delaying liquidation in the hope of a market reversal amounts to speculation and is contrary to prudent risk management principles. The firm is not obligated to, and should not, take on additional market risk on the client’s behalf. Therefore, statements I and II are correct.

The correct answer is that the licensed corporation should liquidate a sufficient portion, or all, of the client’s open positions to restore the account’s margin level to the required minimum. This action is a critical risk management measure outlined in the client agreement to protect both the client and the firm from further losses. When a client’s account equity falls below the maintenance margin, a margin call is issued. If the client fails to deposit the required funds within the stipulated time, the firm is entitled to close out positions to mitigate the risk of the account balance turning negative. Extending the deadline for the margin call would expose the firm to unacceptable levels of market and credit risk, as the position could continue to deteriorate. Converting the shortfall into a loan is not a standard industry practice for margin calls and would create an additional credit exposure for the firm. Freezing the account to prevent new trades but leaving the existing positions open does not solve the underlying problem of insufficient margin and allows potential losses to continue accumulating.

The correct answer is that the licensed corporation has the right to liquidate any or all of the client’s open positions to cover the margin shortfall. When a client opens a leveraged foreign exchange account, they sign a client agreement. This agreement invariably contains a clause that grants the firm the authority to liquidate positions without further notice if the client fails to meet a margin call within the stipulated time. This is a critical risk management tool to protect the firm from incurring losses due to a client’s deficit. The firm is not obligated to seek the client’s specific consent for each liquidation transaction in this scenario, as prior consent was given in the client agreement. Furthermore, the firm is not restricted to closing only the position that caused the margin call; it can liquidate any open positions, including profitable ones, to bring the account’s equity back above the maintenance margin level. There is no regulatory requirement to wait a fixed number of business days; the firm can act as soon as the deadline specified in the margin call notice has passed, according to the terms of the client agreement.

The correct answer is that the licensed corporation should proceed to liquidate a sufficient portion of the client’s open positions to restore the account’s equity to the required maintenance margin level. This action is a standard and crucial risk management procedure outlined in the client agreement for leveraged foreign exchange trading. When a client fails to meet a margin call within the stipulated time, the firm must act decisively to mitigate its own credit and counterparty risk. Allowing the position to remain under-margined exposes the firm to potentially unlimited losses if the market continues to move unfavorably. Therefore, liquidating positions is necessary to protect the firm from the client’s potential default. Extending the deadline for the margin call without any collateral would be an imprudent risk management practice, as it increases the firm’s exposure to further adverse market movements. Seeking approval from the Responsible Officer to waive the margin requirement is not a standard procedure and would violate the firm’s internal risk controls and the terms of the client agreement. While the firm must act, it is not typically required to obtain the client’s explicit consent again before liquidation, as this right is pre-authorized in the client agreement signed when the account was opened.

The correct answer is that the licensed corporation is entitled to liquidate a sufficient portion, or all, of the client’s open positions to restore the account’s margin level. In leveraged foreign exchange trading, the client agreement is a critical document that outlines the rights and obligations of both the client and the firm. A key provision in these agreements grants the firm the authority to liquidate a client’s positions without prior notice if the account equity falls below the maintenance margin requirement and the client fails to meet the margin call promptly. This action is a crucial risk management measure to protect both the client from incurring losses greater than their deposited funds and the firm from credit risk exposure. The firm is not obligated to wait for a fixed grace period, as market volatility can lead to rapidly escalating losses. Relying solely on obtaining the client’s explicit instructions during a margin call is impractical and defeats the purpose of the margin agreement, which pre-authorizes such protective actions. It is also not standard practice for a firm to use its own capital to cover a client’s margin shortfall, as this would expose the firm to the client’s market risk, which is contrary to its role as an intermediary.

The explanation teaches the concept of margin calls in leveraged foreign exchange trading. When a client’s account equity falls below the pre-determined maintenance margin level due to adverse market movements, the licensed corporation is exposed to significant credit risk. The standard and primary procedure to manage this risk is to issue a margin call. This is a formal request for the client to deposit additional funds or securities to bring the account equity back up to the required level. Failure to meet the margin call within a specified timeframe typically gives the firm the right to liquidate the client’s positions to cover the deficit. This process is a fundamental risk management tool governed by the client agreement and the general principles of the SFC’s Code of Conduct, which requires licensed corporations to have adequate risk management systems. The correct answer is that the firm must issue a margin call to the client, demanding additional funds to meet the maintenance margin requirement. Liquidating the client’s positions without any prior notification is an extreme step, usually taken only after a margin call has been issued and not met, or if a specific stop-out level is breached. Advising the client to hold the position and wait for a market rebound is irresponsible advice, as it ignores the immediate risk and could lead to further losses, potentially violating the duty to act in the client’s best interests. Offering to provide a temporary credit line to cover the shortfall would increase the firm’s own credit exposure and is not a standard risk mitigation practice; the responsibility to meet margin requirements lies with the client.

This question assesses the understanding of risk management procedures in leveraged foreign exchange trading, specifically concerning margin calls and position liquidation. Statement (I) is correct because the standard first step when a client’s account equity falls below the maintenance margin is to issue a margin call, demanding additional funds or the closing of positions. Statement (II) is also correct; the client agreement for a leveraged account grants the firm the right to liquidate positions without further consent if the client fails to meet a margin call in a timely manner. This is a critical mechanism for the firm to control its credit risk exposure. Statement (III) is incorrect. The firm’s primary obligation is to manage its risk according to the agreed-upon margin terms, not to speculate on a potential market recovery on the client’s behalf. Delaying liquidation could exacerbate losses for both the client and the firm. Statement (IV) is correct. In leveraged trading, losses can exceed the client’s deposited funds. If a forced liquidation results in a negative account balance, this deficit represents a debt that the client is legally obligated to repay to the firm. Therefore, statements I, II and IV are correct.

This question assesses the understanding of procedures related to margin calls and position liquidation, which are critical aspects of credit and counterparty risk management for a licensed corporation offering leveraged foreign exchange trading services.

Statement I is correct. The client agreement, which forms the basis of the relationship, must stipulate the terms for a margin call, including the timeframe the client has to deposit additional funds. The corporation must adhere to these contractually agreed-upon terms.

Statement II is correct. A core risk management tool for the corporation is the right to liquidate a client’s positions if they fail to meet a margin call. This right is outlined in the client agreement and protects the firm from incurring losses due to the client’s under-margined position.

Statement III is incorrect. While a firm might choose to partially liquidate a position, it is not an obligation. The client agreement typically grants the licensed corporation the discretion to liquidate any or all of the client’s positions as it deems necessary to protect itself from risk. The primary goal is to bring the account back to a safe margin level, which could be the initial margin level, not just the maintenance level, and closing the entire position is often the simplest and safest action for the firm.

Statement IV is correct. Leveraged trading involves the risk of losses exceeding the initial margin deposit. If the liquidation of positions results in a negative account balance, the client is legally responsible for this debt to the licensed corporation. Therefore, statements I, II and IV are correct.

This question assesses the understanding of procedures related to margin calls and the liquidation of positions in leveraged foreign exchange trading, a critical aspect of credit and counterparty risk management.

Statement I is incorrect. Client agreements for leveraged FX trading invariably grant the licensed corporation the right to liquidate a client’s positions without their explicit consent if a margin call is not met in a timely manner. This is a fundamental mechanism for the firm to protect itself from escalating losses and credit risk.

Statement II is correct. The primary purpose of liquidating positions following an unmet margin call is to reduce the client’s exposure and restore the account’s margin level to at least the required maintenance margin. The firm has the right to close out enough positions to achieve this.

Statement III is correct. While a firm might choose to only partially liquidate, the client agreement typically gives the firm the discretion to liquidate any or all of the client’s open positions to manage its risk. The firm is not obligated to perform a partial liquidation and may opt to close the entire portfolio to eliminate the risk exposure completely.

Statement IV is incorrect. The client is fully responsible for all losses incurred in their account. If the liquidation of positions results in a negative balance (a debit), the client is legally obligated to pay that amount to the firm. The firm’s act of liquidation is a risk management measure, not an assumption of the client’s debt. Therefore, statements II and III are correct.

The correct answer is that the X/Y exchange rate will appreciate, as higher interest rates in Country X attract foreign capital inflows. This is a fundamental principle of foreign exchange rate determination. When a country’s central bank raises interest rates, financial assets denominated in that country’s currency (such as government bonds and bank deposits) offer a higher return compared to those in other countries. This increased yield differential attracts international investors seeking better returns, leading to an inflow of foreign capital. To purchase these assets, investors must first buy Country X’s currency, which increases its demand and causes its value to rise (appreciate) relative to other currencies like Country Y’s. The suggestion that the currency would depreciate due to weaker economic outlook is generally a longer-term consideration; the immediate impact is driven by capital flows seeking higher yields. The idea that the rate would remain stable because the action was priced in is incorrect, as the scenario explicitly states the interest rate hike was ‘unexpected’. Markets react to new, unanticipated information. The option distinguishing between spot and forward rates is misleading; an unexpected policy change has a direct and immediate impact on the spot rate, which is the primary effect tested here.

The correct answer is that the firm should issue a margin call to the client, requesting the deposit of additional funds. When a client’s account equity falls below the maintenance margin level in leveraged foreign exchange trading, the firm’s exposure to counterparty credit risk increases significantly. The standard and primary procedure is to issue a margin call. This action formally notifies the client of the margin shortfall and provides them with a specified timeframe to either deposit more funds to bring the equity back up to the required level or to close some positions to reduce the margin requirement. This process is a critical component of risk management as outlined in the client agreement and expected under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. Liquidating the client’s position without prior notification is typically a step taken only if the client fails to meet the margin call within the stipulated time; it is not the immediate first action. Advising the client to increase their position to average down is irresponsible and constitutes providing trading advice that would heighten, not mitigate, the risk for both the client and the firm. Temporarily absorbing the client’s risk by hedging the position on the firm’s own account is not a standard practice; the firm’s duty is to manage its own credit exposure to the client, not to take over the client’s market risk.

Statement I is incorrect. Client agreements for leveraged foreign exchange trading do not typically grant a fixed or legally mandated period like one business day for meeting a margin call. The terms usually require the client to meet the call ‘promptly’ or ‘immediately’. The licensed corporation (LC) has the right to act swiftly to protect itself from escalating credit risk, especially in volatile markets. Statement II is correct. This is a fundamental clause in any margin trading agreement. The right to liquidate positions without further consent is the LC’s primary tool for managing counterparty risk when a client fails to maintain the required margin. Statement III is also correct. The client is fully responsible for all losses incurred in their account. If liquidating the positions does not cover the total amount owed (the debit balance), the remaining negative balance is a debt that the client is legally obligated to pay to the LC. Statement IV is correct. The LC has a duty to achieve best execution under the prevailing market conditions. However, in a forced liquidation scenario, especially during high volatility or low liquidity, price slippage is a significant risk. The LC is not liable for losses resulting from such market dynamics, provided it acted in good faith. Therefore, statements II, III and IV are correct.

This question assesses the understanding of standard procedures for handling a margin call in a leveraged foreign exchange trading account, which is a critical aspect of credit and counterparty risk management.

Statement I is incorrect. While a licensed corporation has the right to liquidate positions, standard client agreements and industry practice typically provide the client with a specified, often short, period to meet the margin call. Immediate liquidation without any notice or time to deposit funds is an extreme measure and not the standard first step.

Statement II is correct. A margin call is a formal demand for the client to restore the account’s equity. The requirement is often to bring the equity back up to the initial margin level, not just the maintenance margin level, to provide a sufficient buffer against further adverse market movements.

Statement III is correct. If the client fails to meet the margin call within the stipulated timeframe, the licensed corporation has the right to liquidate positions at its discretion. This can be a partial liquidation (just enough to satisfy the margin requirement) or a full liquidation of all open positions to mitigate the firm’s credit risk.

Statement IV is correct. It is a standard risk management practice for a licensed corporation to restrict an account that is under a margin call from opening any new positions. This prevents the client from increasing their leverage and the firm’s potential exposure until the margin deficit is resolved. Therefore, statements II, III and IV are correct.

The correct answer is that the firm must issue a margin call to the client. To determine the required action, we must first calculate the client’s current equity and compare it to the margin call and liquidation thresholds. 1. Initial Equity (Initial Margin): The position was 200,000 EUR/USD at 1.0850. The initial contract value was 200,000 1.0850 = USD 217,000. The initial margin was 5% of this, which is 0.05 217,000 = USD 10,850. This is the client’s starting equity. 2. Unrealized Loss: The price dropped from 1.0850 to 1.0600. The loss per unit is 1.0850 – 1.0600 = 0.0250. For 200,000 units, the total unrealized loss is 200,000 0.0250 = USD 5,000. 3. Current Equity: The current equity is the initial equity minus the unrealized loss: USD 10,850 – USD 5,000 = USD 5,850. 4. Threshold Calculation: The thresholds are based on the current contract value. The current contract value is 200,000 1.0600 = USD 212,000. Margin Call Threshold (3%): 0.03 212,000 = USD 6,360. Liquidation Threshold (2%): 0.02 212,000 = USD 4,240. 5. Conclusion: The client’s current equity of USD 5,850 is below the margin call threshold of USD 6,360 but still above the liquidation threshold of USD 4,240. Therefore, the firm’s immediate and required action is to issue a margin call, requesting the client to deposit additional funds. Liquidating the position immediately is incorrect because the equity has not yet fallen to the 2% liquidation level. Taking no action is also incorrect as it ignores the breach of the 3% margin call threshold, which is a critical risk management control. Partially closing the position is not the standard first step; the firm must first formally notify the client via a margin call to give them the opportunity to deposit more funds.

The correct answer is that the client must promptly deposit sufficient funds or liquidate positions to restore the account equity to the required maintenance margin level. A margin call is a formal demand from a licensed corporation for a client to increase the equity in their account when it falls below the maintenance margin threshold. This is a critical risk management tool to protect both the client from catastrophic losses and the firm from credit risk. The client agreement, which the client signs upon opening the account, will stipulate the client’s obligation to meet margin calls. Failure to do so within the specified timeframe gives the firm the right to liquidate the client’s positions. While liquidation of the entire portfolio is a possible outcome, it is the consequence of failing to meet the margin call, not the initial step. The firm is not obligated to wait for a fixed period like 24 hours; the client agreement dictates the response time, which can be very short, especially in volatile markets. Finally, margin requirements are a non-negotiable part of the trading agreement and cannot be suspended upon a client’s request, as this would expose the firm to unacceptable levels of risk.

In leveraged foreign exchange trading, managing credit and counterparty risk is paramount for a licensed corporation. When a client’s account equity falls below the maintenance margin level, the firm is exposed to the risk that the client’s losses could exceed their deposited funds. The standard procedure is to first issue a margin call (Statement I), formally requesting the client to deposit additional funds to restore the margin to the required level. This is a critical first step in risk mitigation. If the client fails to meet this margin call within the specified time, the client agreement typically grants the licensed corporation the right to liquidate the client’s open positions to cover the shortfall and prevent further losses (Statement II). This right to liquidate is a crucial tool for the firm to protect itself from default risk and does not require separate, specific consent for each transaction at the time of liquidation (making Statement III incorrect), as this authority is pre-agreed upon in the client agreement. Advising a client to hold the position in the hope of a market reversal (Statement IV) is irresponsible, as it ignores the immediate risk to both the client and the firm and contradicts the firm’s obligation to manage its credit exposure. Therefore, statements I and II are correct.