Derivatives Level 3 (Capital Markets Programme) – Quiz 03

Last Updated: June 2024

Table of Contents

CISI – Derivatives Level 3 (Capital Markets Programme) Quiz 03 is completed –
Exchanges and OTC Trading :
know the main products of the main exchanges
know the exchange membership structures (brokers, dealers and broker / dealers) and their principal rights: • executing trades for third parties • executing trades for their own account • executing trades for other members • capacity as broker • capacity as dealer
know the basic structure of OTC markets

Trading Environment :
know the essential details of the trading environment: • open outcry, telephone and electronic platforms Derivatives
whether quote or order driven • how the trading host matches orders • the order types accepted by the markets • the trading strategies that are recognised
know the essential details of wholesale trading facilities: • block trades • basis trades
understand the significance, implications and uses of wholesale trading facilities
understand the reasons for using OTC markets

Order / Instruction Flow and Order Type :
know the principles of order flow: • how clients, brokers and exchange members are linked • electronic and open outcry markets • audit trail
know the definition, significance and differences between principal and agency orders (ie of dual capacity versus agency orders): • dealing as a principal • cross trading • advantages to the client
understand the range of types of orders, their uses and effects: • market order • limit order • market if touched order • opening and closing orders • good ‘til cancelled Derivatives
• immediate or cancel / fill or kill order • stop order • stop limit order • day order

Trade Registration and Clearing Mechanisms :
know the processes involved in trade registration, trade input and trade matching and differing requirements of electronic and open outcry markets
understand the purpose and importance of give-ups / allocations: • reasons to allocate a trade to an account • use of give-up agreements • risk implications
understand the use of different types of accounts: • use of house accounts • customer accounts – segregated and non-segregated

Market Transparency, Trade Reporting and Monitoring :
know the purpose and requirements of trade reporting in markets: • information to be reported • process and timelines of reporting • responsibility for reporting
know the advantages and main sources for Exchange Price Feeds: • price transparency • current bids and offers • trade prices
• high / low prices • last night closing price • traded volume
understand the importance of monitoring volume and open interest: • purpose of monitoring open interest • breach of credit limit • guarantee in the event of settlement failure

Principles of Exchange-Traded Derivatives :
understand the mechanisms for futures pricing and the relationship with the underlying cash prices together with the significance of contributing factors: • contango and backwardation • price convergence at maturity • the concept of fair value
understand the implications of the cost or benefit of carry and what may be included in these: • what is cost of carry • storage costs, insurance and interest costs • asset yields
be able to calculate the fair value of a future from relevant cash market prices, yields and interest rates

Principles of Exchange-Traded Derivatives :
understand the importance of basis risk
understand the principles of cash / futures arbitrage: • what should be included in arbitrage calculations • when arbitrage opportunities exist • cash and carry arbitrage
• arbitrage risk

Continue Reading