Derivatives Level 3 (Capital Markets Programme) – Quiz 05

Last Updated: June 2024

Table of Contents

CISI – Derivatives Level 3 (Capital Markets Programme) Quiz 05 is completed –
Principles of OTC Derivatives :
Other Swap types On completion, the candidate should:
know the common equity swap instruments and their relationship to other markets and products: • total return • volatility • variance • dividend swaps
know the common interest rate swap features and their relationships to other markets: • amortising • accreting • rollercoaster • forward start
know the basic purpose of commodity swaps
know the purpose of inflation swaps

Structured Products On completion, the candidate should:
understand how structured products utilise embedded derivatives to achieve a risk/return profile: • convertible bonds • index linked notes • capital protected products • callable / puttable bonds
Options On completion, the candidate should:
know the common OTC option products and features: • European, American, Asian • barrier products • lookbacks and variants
understand the basic mechanisms of option pricing and the relationship with the underlying cash prices together with the significance of contributing factors: • structure • valuation inputs
know the basic requirements of, and process for, premium payment: • when paid • credit exposure • the collateral process

Principles of Clearing :
Definition and Purpose of Clearing On completion, the candidate should:
understand the purpose of clearing and the function of novation: • mutual offset system • principal to principal • broker’s position
understand the risks mitigated through the clearing process: • settlement risk • counterparty risk
understand the role played by the clearing house in the clearing process: • margin process • clearing house relationship with members in settlement • transfer of payments

understand the principles and backing arrangements in place in the event of a member default: • novation • guarantee of performance of the contract • default fund • members’ contributions • principal to buyer and seller • control of funds to clearing members’ accounts • requirement for members to use an approved bank
understand the relationship between clearing members and nonclearing members: • clearing versus non-clearing member • use of general clearing members to clear trades
understand the services offered by prime brokers as they relate to derivatives: • borrowing and lending securities • financing positions • providing custody and safekeeping of assets • clearing and settling trades • administering onshore and offshore funds • corporate actions • capital introductions • risk management
understand how OTC products can be centrally cleared: • eligibility and credit standing of counterparts • constraints placed upon contract terms • advantages and uses of centralised clearing of OTC products

The Principles of Margin On completion, the candidate should:
understand the differences between initial and variation margin: • marking to market • offsetting long and short positions • when paid
know the means by which exchanges establish settlement prices: • what are settlement prices • closing ranges / prices
understand the nature and use of offsets for spread/spot month margining: • purpose of offsets • what is spot month margin
• purpose of spot month margins • purpose of spread margins

understand why the clearing house might call intra-day margin: • purpose of intra-day margin • when is intra-day margin paid
know methods of initial margining including SPAN: • use of delta • use of SPAN
know methods of margining for centrally cleared OTC products and their implications: • how exposure is calculated • what margins are applied • how and when margin payments are made
understand how a firm deals with margin payments for its own positions and for its clients’ positions through its books: • use of house accounts • use of client segregated accounts • use of client non-segregated / pooled accounts
understand the difference between the clearing house’s margin and that of the broker and the collection / payment process: • amounts paid by clearing member and its clients • flow of margin

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