Derivatives Level 3 (Capital Markets Programme) – Quiz 04

Last Updated: June 2024

Table of Contents

CISI – Derivatives Level 3 (Capital Markets Programme) Quiz 04 is completed –
Principles of Exchange-Traded Derivatives :
Understand basic option pricing concepts: • option premium • intrinsic and time value • in-the-money, out-of-the-money and at-the-money
understand the factors determining option premiums: • volatility • interest rates • strike or exercise price • time to expiry • the underlying price • dividends / coupons (where relevant)
be able to calculate the Put / Call Parity Theorem: • what is the Put / Call Parity Theorem • identifying arbitrage opportunities • risk free interest rate

understand the qualitative characteristics of the following Greeks and their uses: • delta • gamma • theta • vega • rho
be able to calculate the approximate change in option price due to a change in underlying price • what is delta • uses of delta
know the requirements of, and process for, premium payment: • when paid, immediately or marking to market • the roles of the clearing house and broker • what the seller receives

Principles of OTC Derivatives :
Concepts and Characteristics On completion, the candidate should:
understand the basic concepts and fundamental characteristics of: • Forwards • Caps • Floors • Collars • Swaps • Swaptions (options on swaps)
understand the basic concepts and fundamental characteristics of interest rate swaps: • underlying (fixed / fixed, fixed / floating, floating / floating) • interest calculation (compared to bond markets)
understand the basic concepts and fundamental characteristics of FX and currency forwards and swaps: • FX forward (outrights quotes v pips) • Currency swaps
understand the basic concepts and fundamental characteristics of equity forwards, swaps and swaptions: • equity baskets / index • equity forwards • equity swaps
understand the basic concepts and fundamental characteristics of commodity forwards, swaps

understand the basic concepts of total return and asset swaps
understand the basic concepts and fundamental characteristics of zero-coupon inflation products
understand the basic concepts and fundamental characteristics of credit derivatives and the main credit events for single entity and index contracts: • default events • ratings transitions
understand how spread betting differs from other contracts for difference (CFDs)
understand the basic concepts and fundamental characteristics of flex options: • how they differ from standard exchange traded options • how they differ from OTC options
understand the basic concepts and fundamental characteristics of CFDs

ISDA Documentation On completion, the candidate should:
know the main ISDA documents supporting OTC derivative activities: • Master Agreements • Credit Support Annex Documentation • Confirmations
• ISDA Protocols
OTC Collateral Processes On completion, the candidate should:
understand the potential impact of credit exposures on OTC positions: • nature of OTC contracts • mark to market and potential exposures • term of OTC derivatives • acceptable forms of collateral (certainty and currency of asset) • the margin / collateral process (upfront margin, mark to market, hurdle, minimum cashflow, parties involved)
understand the impact of uncleared margin rules (UMR): • what does UMR stand for? • what are UMR rules? • what is the purpose of UMR? • what are the UMR phase 6 thresholds? • what is the ANNA calculation? • what derivatives are in scope? • what is the standardised initial margin schedule? • UMR collateral thresholds

Forwards and Swaps On completion, the candidate should:
understand the mechanisms for OTC derivative pricing and the relationship with the underlying cash prices together with the significance of contributing factors: • forward and forward / forward rates • cash flow analysis and the zero curve • the role of interest rates and yields
• other factors affecting pricing
Credit Derivatives On completion, the candidate should:
know the common credit derivative instruments and their relationships to other markets and products: • Credit default swaps • Credit linked notes • Collateral Debt Obligations
understand the mechanisms for pricing credit derivatives and the relationships with asset swap prices

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