Derivatives Level 3 (Capital Markets Programme) – Quiz 01

Last Updated: June 2024

Table of Contents

CISI – Derivatives Level 3 (Capital Markets Programme) Quiz 01 is completed –
understand the basic concepts and fundamental characteristics of options contracts, including: • basic puts and calls • options on cash and derivative products • American, European, Asian • Exotics
understand the basic concepts and fundamental characteristics of swaps
understand the risks and rewards associated with derivatives: • rewards • counterparty risk • market risk • liquidity risk • operational risk
understand the significance of gearing to derivatives: • how trading on margin facilitates gearing • effect on derivative positions • reward versus outlay • reward versus risk
understand the principles and differences between the two major measures of exchange-traded liquidity (open interest and volume)

understand the main features and differences of OTC traded products in contrast to exchange-traded products: • how an OTC traded product is traded • standard versus bespoke OTC contracts • set maturity or expiry dates versus bespoke OTC contracts • margin requirements versus collateral • counterparty risk • liquidity • market transparency versus confidential transactions
understand the trading mechanisms by which OTC and exchange traded markets meet: • EFPs (Exchange for Physical)
understand how to interpret basic options diagrams (long call, long put, short call, short put)

know the basic characteristics of Treasury Bills: • term • how and when issued • issued / redemption • promissory note
know the uses and requirements of inter-bank deposits: • what are inter-bank deposits • why do they exist • determination of inter-bank offer rates • reference rates Derivatives 8 © Chartered Institute for Securities & Investment
know the basic characteristics of Certificates of Deposit and Commercial Paper: • term • how and when issued • issued / redemption
understand the risk implications of trading in the money market contracts: • as a depositor • as a source of funding

understand the nature of the spot market and the trading and settlement of spot transactions: • purpose of the market • what is the spot market • contract value dates • settlement periods and timescales
understand the nature, characteristics, markets and uses of currency forward contracts: • what is a currency forward contract including non-deliverable forwards • commercial, speculative and hedging
understand the factors that determine forward rates and how forward rates are quoted: • effect of interest rate differentials • the relationship between the spot market and the forward market • what are forward points • how prices are quoted (may be tested by the use of simple calculations) Derivatives
be able to calculate forward foreign exchange rates using interest rate differentials

understand the reasons for the government issuing bonds • public sector finance requirements • finance long term debt • role of national debt in government finances
understand the different categories of gilts and their special features such as (short, medium and long dated / undated / index linked / coupons and strippable)
know the main overseas government bonds and their main features (T bonds / JGBs / Bunds / OATs): • settlement • coupon • maturities • countries • spreads between different government bonds

understand the relationship between return and maturity shown by yield curves: • normal yield curves • inverted yield curves • flat yield curves
know the main features of the corporate bond market
understand the relationship between government and corporate bonds: • yield spread over governments • high grade and high yield bonds • bond ratings, transition and default

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