Derivatives Level 3 (Capital Markets Programme) – Quiz 06

Last Updated: June 2024

Table of Contents

CISI – Derivatives Level 3 (Capital Markets Programme) Quiz 06 is completed –
Principles of Clearing :
Collateral / Credit On completion, the candidate should:
the definition, purpose and uses of collateral and the major types of acceptable collateral (cash versus non-cash)
understand the significance of credit and initial margin lines
understand the mechanisms of collateral management: • Valuation and pricing • Credit Support Annex (CSA) • One-way CSAs • Threshold amounts • Haircuts • Minimum Transfer Amount

Position and Price Limits On completion, the candidate should:
understand price limits / circuit breakers and position limits and the effects of their application: • price limits • who imposes limits • purpose of price and position limits • action in the event of breach

Delivery and Settlement :
Aspects of Delivery On completion, the candidate should:
understand the purpose of the Exchange Delivery Settlement Price (EDSP) and the factors affecting it: • purpose of EDSP • auction process • factors included in calculating the EDSP value • reasons for exchange to set the EDSP
understand the differences between cash settlement and physically delivered contracts and the final payment process: • what is cash settlement • what is physical delivery • factors used in ascertaining the invoice amount • who calculates the invoice amount • differences between financial and commodity products
understand the importance and implications of the delivery of open contracts at expiry and the significance of the short position: • physical versus cash delivery • financials versus commodities • avoidance of delivery – reasons and methods • advantages and disadvantages of cash delivery • asset delivery via the clearing house • relevance of first notice day, last notice day and delivery day or period
know the role of the clearing house as counterparty in delivery: • when the clearing house becomes the counterparty • role of the clearing house as counterparty • role of the clearing house as guarantor • counterparty risk • assignment • use of warrants delivery
be able to calculate the profit / loss on delivery / expiry of futures and options

Delivery and Settlement :
Exercising Options On completion, the candidate should:
understand the significance and implications of the exercise of options, the assignment of obligations, abandonment and expiry: • purpose of assignment of obligations • instigating an assignment notice • receiving an assignment notice • abandonment • which options are most likely to be exercised before expiry • exercise at expiry • European, American and Asian options • action upon exercise • assignment
understand the significance of automatic exercise: • purpose of automatic exercise • options that may be subject to automatic exercise • reasons for clearing houses to adopt automatic exercise • benefits to members and holders of long positions • prevention of automatic exercise
Settlement and Processing On completion, the candidate should:
know the importance of accurate and timely settlement processes: • deal tickets and term sheets • trade confirmations • reconciliation processes (internal and external) • cashflow / asset movement instructions and control processes
• close out or maturity instructions
understand the main control process: • front to back office reconciliation • trade validation • profit and loss reporting

Trading, Hedging and Investment Strategies :
Derivative Users
On completion, the candidate should:
understand the categories of users of derivatives and structured products and their respective uses of these products: • hedger • speculator • arbitrageur

Futures Basis Trading On completion, the candidate should:
know the distinctions between intra-market spreads and intermarket spreads and the scenarios in which they may be appropriate: • use in differing market conditions • situations resulting in profitability / loss

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