Derivatives Level 3 (IOC) – Quiz 09

Last Updated: June 2024

Table of Contents

CISI – Derivatives Level 3 (IOC) Quiz 09 is completed –
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
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
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
understand the categories of users of derivatives and structured products and their respective uses of these products: • hedger • speculator • arbitrageur
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
understand the use of derivatives for speculation and hedging: • speculation: long calls, short puts (bullish) • speculation: short call, long puts (bearish) • covered calls and protective puts • recognise diagrammatic representation of each strategy • maximise upside and downside for each strategy
understand how to create basic synthetic options and futures: • synthetic long / short • synthetic put / call
understand the characteristics and effects of vertical spreads: • bull call and bear call spreads • bull put and bear put spreads • use in differing market conditions • anticipating modest market rises / falls (bull / bear markets) • risks
understand the characteristics and effects of long and short straddles and strangles: • use in differing market conditions • anticipating modest market rises / falls (bull / bear markets) • risks
be able to calculate maximum profits / losses in simple examples of the above strategies
understand the uses, characteristics and effects of horizontal and diagonal spreads: • use in differing market conditions • anticipating modest market rises / falls (bull / bear markets) • risks
know the characteristics and implications of long and short positions

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