Derivatives Level 3 (IOC) – Quiz 10

Last Updated: June 2024

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CISI – Derivatives Level 3 (IOC) Quiz 10 is completed –
understand the importance of hedging ratios in cheapest to deliver bonds (CTDs): • price factors • highest implied repo rate • number of contracts to hedge an exposure to the CTD bond • duration based hedge ratios for non-CTD bonds
understand hedge ratio calculation for other short-term interest rate futures: • basis point value • number of contracts to hedge an interest rate exposure
understand hedge ratio calculation for equity futures: • stock and portfolio beta • number of contracts to hedge an equity exposure
understand basis, basis trading and basis risk: • problems caused by changes in basis • how changes in basis can be used to advantage by an investor
understand the application and effects of delta hedging and be able to establish an investor’s net long / short position
understand the advantages and disadvantages of using exchangetraded versus OTC products: • exposure flexibility versus contract specification • ease / cost of closing OTC transactions versus Exchange Traded positions • price transparency • best execution • documentation • clearing and settlement mechanisms
be able to calculate (through the knowledge gained above), a derivatives position with an underlying market equivalency, either to establish or to hedge a required exposure: • Long / short through futures • Long / short through single options • Long / short through option combinations • Limits to upside and / or downside exposures (Sufficient contract / product information will be provided to candidates in the exam to enable the required calculations)
understand the uses and advantages of covered calls and protective puts: • motivation for the writer of a covered call • motivation for the buyer of a protective put • risks / maximum losses • use in different market conditions
understand the relative attractiveness of derivative positions or investments to specific client circumstances: • Private Client investment portfolios • Individual portfolios • Institutional Asset Managers • Corporate Treasurers • Hedge Funds • Sovereign Wealth Funds • Pension Funds
know in general terms the scope and purposes of regulation of derivatives and the main activities of regulators: • UK / Europe / other • US (Fed, SEC & CFTC) • Far East (Hong Kong, Singapore and Japan) • MiFID II, ESMA, EMIR • Orderly Markets • Consumer Protection • Education • Combating Financial Crime • Regulation of individuals, companies • Supervision • Sanction processes • Passporting regulated status • Classifications / Exemption
know the primary requirements of a regulated derivatives exchange
know in general terms the importance of the principles based approach to derivatives regulation: • client classification • fair treatment of customers • suitability and appropriateness of the transaction/product • best execution
know the differences between rules-based and principles-based regulation
know the role of regulation on derivative markets: • MiFID II • client money • client accounts • margining practices • unregulated markets • access to overseas markets • access to overseas clients
know the role of the Securities and Exchange Commission (SEC) in the regulation of derivatives: • what is the SEC • regulated investments • regulated exchanges

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