Derivatives Level 3 (IOC) – Quiz 05

Last Updated: June 2024

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CISI – Derivatives Level 3 (IOC) Quiz 05 is completed –
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
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
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
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
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)

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