CIRO Derivatives Exam Cheat Sheet

Use the tables for a quick pre-exam check. Expand a topic’s notes for explanations, examples, and additional distinctions.

Scope and study context

Use this Cheat Sheet as independent review support for the Canadian Investment Regulatory Organization CIRO Derivatives Exam, official exam code Derivatives Exam.

The exam commonly rewards applied judgment: identify the derivative, determine the position exposure, calculate payoff or hedge effect, then apply suitability, risk disclosure, and account supervision logic.

High-Yield Question Pattern

Step	Ask yourself	Common exam trap
1. Product	Option, future, forward, swap, structured note, or embedded derivative?	Treating an option like an obligation instead of a right.
2. Direction	Long or short? Buyer or writer? Pay fixed or receive fixed?	Confusing bullish market view with hedging direction.
3. Underlying risk	Equity, index, rate, currency, commodity, credit, volatility?	Ignoring inverse rate/price relationship for debt instruments.
4. Payoff	Linear or nonlinear? Limited or unlimited loss?	Forgetting premium, contract multiplier, or number of contracts.
5. Settlement	Physical, cash, daily mark-to-market, or OTC net settlement?	Assuming all contracts settle the same way.
6. Suitability	Objective, knowledge, risk tolerance, liquidity, time horizon, margin capacity?	Recommending leverage without matching client capacity and disclosure.
7. Conduct	KYC, KYP, suitability, supervision, disclosure, conflicts, market integrity?	Treating derivatives as a calculation-only topic.

Derivative Product Selection Matrix

Core Formulas

Option Payoffs

\[ \text{Long call payoff} = \max(0, S_T - K) \]\[ \text{Long put payoff} = \max(0, K - S_T) \]\[ \text{Long call profit} = \max(0, S_T - K) - \text{premium} \]\[ \text{Long put profit} = \max(0, K - S_T) - \text{premium} \]

For a short option, reverse the sign of the corresponding long option profit.

Intrinsic Value and Time Value

\[ \text{Option premium} = \text{intrinsic value} + \text{time value} \]\[ \text{Call intrinsic value} = \max(0, S - K) \]\[ \text{Put intrinsic value} = \max(0, K - S) \]

Futures and Forwards

\[ \text{Long futures P/L} = (\text{exit price} - \text{entry price}) \times \text{contract multiplier} \times \text{contracts} \]\[ \text{Short futures P/L} = (\text{entry price} - \text{exit price}) \times \text{contract multiplier} \times \text{contracts} \]\[ \text{Notional exposure} = \text{contract price} \times \text{contract multiplier} \times \text{contracts} \]

Basis and Hedge Ratio

\[ \text{Basis} = \text{spot price} - \text{futures price} \]\[ \text{Contracts needed} = \frac{\text{exposure to hedge}}{\text{futures contract value}} \times \text{hedge adjustment} \]

Use the hedge adjustment for beta, duration, currency ratio, commodity conversion factor, or other exam-provided relationship.

Put-Call Parity Concept

For comparable European-style options on the same underlying, strike, and expiry:

\[ C + PV(K) = P + S \]

With known dividends or distributions, adjust the stock side conceptually by the present value of expected distributions. The exam point is usually the arbitrage relationship, not memorizing a single unadjusted formula for every asset.

Notes and examples

Intrinsic Value, Time Value, and Premium

Concept	Meaning	Exam clue
Premium	Total option price paid by buyer and received by writer	Includes intrinsic value + time value
Intrinsic value	Immediate exercise value if positive	Never below zero for a long option
Time value	Premium minus intrinsic value	Decays as expiry approaches, all else equal
Volatility value	Higher expected volatility usually increases option premiums	Especially important for long straddles/strangles
Moneyness	Relationship between underlying price and strike	Determines intrinsic value
Expiration	Remaining life of option	More time usually increases premium

Plain-language formula:

Premium = intrinsic value + time value

Futures and Forwards: Essential Distinctions

Feature	Forward	Futures
Trading venue	OTC/private contract	Exchange-traded
Standardization	Customized	Standardized
Counterparty risk	Direct counterparty exposure	Reduced by clearinghouse structure
Settlement	As agreed in contract	Daily marking-to-market and final settlement
Margin	Negotiated collateral arrangements	Exchange/broker margin requirements
Liquidity	Depends on counterparties and terms	Often more liquid for standard contracts
Common use	Customized hedging	Standardized hedging/speculation

Basis and Convergence

Basis is commonly understood as the difference between the spot price and futures price.

Basis risk matters when:

• The futures contract does not perfectly match the asset being hedged.
• The hedge expiry does not match the exposure date.
• The grade, location, currency, or duration differs.
• The hedge must be lifted before contract maturity.

At expiry, spot and futures prices generally tend to converge for deliverable contracts, but real-world frictions can still matter.

Options Reference

Rights, Obligations, and Market View

Notes and examples

Moneyness

Option	In the money	At the money	Out of the money
Call	Market price above strike	Market price near strike	Market price below strike
Put	Market price below strike	Market price near strike	Market price above strike

Option Pricing Drivers

Factor increases	Call value	Put value	Why it matters
Underlying price	Increases	Decreases	Calls benefit from upside; puts benefit from downside.
Strike price	Decreases	Increases	Higher strike makes calls less valuable and puts more valuable.
Volatility	Increases	Increases	Optionality benefits from wider possible outcomes.
Time to expiry	Usually increases	Usually increases	More time means more chance to finish in the money.
Interest rates	Usually increases	Usually decreases	Higher rates reduce present value of strike payment for calls.
Expected dividends/distributions	Usually decreases	Usually increases	Distributions reduce expected underlying price.

Greeks

Greek	Measures	Long call sign	Long put sign	Exam use
Delta	Price sensitivity to underlying move	Positive	Negative	Directional exposure and hedge ratio.
Gamma	Change in delta	Positive	Positive	Convexity; delta changes faster near at-the-money.
Theta	Time decay	Usually negative	Usually negative	Long options lose time value as expiry approaches.
Vega	Sensitivity to volatility	Positive	Positive	Long options benefit from rising implied volatility.
Rho	Sensitivity to interest rates	Usually positive	Usually negative	Often lower priority than delta, volatility, and time.

Assignment and Exercise Logic

Concept	Practical exam meaning
Exercise	Holder uses the option right.
Assignment	Writer is selected to fulfill the option obligation.
American style	May be exercised before expiry, subject to contract terms.
European style	Exercisable only at expiry, subject to contract terms.
Cash settlement	Profit/loss settled in cash; common for many index-style contracts.
Physical settlement	Underlying security or commodity changes hands.
Automatic exercise	In-the-money options may be exercised under clearing or firm procedures unless contrary instructions apply.
Early exercise	Usually considered when dividends, interest, deep in-the-money status, or carrying economics make exercise rational.

Option Greeks Cheat Sheet

Greek	What it measures	Long call	Long put	High-yield exam use
Delta	Sensitivity to underlying price	Positive	Negative	Directional exposure; hedge ratio
Gamma	Change in delta	Positive	Positive	Delta changes fastest near-the-money
Theta	Time decay	Usually negative	Usually negative	Option buyers lose time value as expiry approaches
Vega	Sensitivity to volatility	Positive	Positive	Long options benefit from volatility increases
Rho	Sensitivity to interest rates	Usually positive	Usually negative	Often secondary but can matter for longer-dated options

Trap: “Long options have limited loss” does not mean “low risk.” A long option can still lose 100% of the premium.

Options Strategy Matrix

Protective and Income Strategies

Notes and examples

Volatility Strategies

Strategy	Construction	Best if	Worst if	Breakeven concept
Long straddle	Long call + long put, same strike/expiry	Large move either direction; volatility rises	Underlying stays near strike; time decay	Strike plus total premium; strike minus total premium
Short straddle	Short call + short put, same strike/expiry	Underlying stays near strike; volatility falls	Large move either direction	Same breakevens as long straddle, but risk outside them
Long strangle	Long OTM call + long OTM put	Large move with lower cost than straddle	Moderate/no move	Upper strike + total premium; lower strike - total premium
Short strangle	Short OTM call + short OTM put	Range-bound market	Large move beyond either strike	Wide but high-risk range strategy

Vertical Spreads

Spread	Construction	Bias	Max gain	Max loss	Breakeven
Bull call spread	Buy lower-strike call, sell higher-strike call	Bullish	Strike width - net debit	Net debit	Lower strike + net debit
Bear put spread	Buy higher-strike put, sell lower-strike put	Bearish	Strike width - net debit	Net debit	Higher strike - net debit
Bull put spread	Sell higher-strike put, buy lower-strike put	Bullish/neutral	Net credit	Strike width - net credit	Short put strike - net credit
Bear call spread	Sell lower-strike call, buy higher-strike call	Bearish/neutral	Net credit	Strike width - net credit	Short call strike + net credit

Debit vs Credit Spread Shortcut

Spread type	Paid or received?	Wants time decay?	Risk profile
Long/debit spread	Net premium paid	No, generally hurt by time decay	Max loss usually debit paid
Short/credit spread	Net premium received	Yes, generally helped by time decay	Max gain usually credit received

Options Strategy Quick Table

Strategy	Construction	Market view	Primary benefit	Primary risk/trap
Covered call	Long underlying + short call	Neutral to mildly bullish	Income from premium	Caps upside; downside remains
Protective put	Long underlying + long put	Bullish with downside protection	Floor on downside	Premium cost reduces return
Collar	Long underlying + long put + short call	Conservative/limited range	Put protection funded partly by call premium	Upside capped
Long straddle	Long call + long put same strike/expiry	Big move either direction	Benefits from volatility	Needs large move; time decay
Short straddle	Short call + short put same strike/expiry	Low volatility/range-bound	Premium income	Large losses if big move
Bull call spread	Buy lower-strike call + sell higher-strike call	Moderately bullish	Lower cost than long call	Upside limited
Bear put spread	Buy higher-strike put + sell lower-strike put	Moderately bearish	Lower cost than long put	Downside gain limited
Calendar spread	Different expiries	Time/volatility view	Exploits time decay differences	Complex; volatility and assignment risk
Ratio spread	Unequal number of options	Targeted view	Can reduce upfront cost	Extra short options can create large risk

Futures and Forwards Reference

Futures vs Forwards

Notes and examples

Long vs Short Futures

Position	Profits when	Used by	Hedging example
Long future	Futures price rises	Buyer/user of underlying; bullish speculator	Manufacturer locks in purchase price of commodity.
Short future	Futures price falls	Seller/producer/holder of underlying; bearish speculator	Farmer or portfolio manager locks in sale value.

Basis Risk

Hedge	Position	Problem being hedged	Basis impact
Short hedge	Sell futures	Future sale price may fall	Short hedger benefits if basis strengthens.
Long hedge	Buy futures	Future purchase price may rise	Long hedger benefits if basis weakens.
Cross hedge	Use related but not identical futures	No perfect matching contract	Adds basis and correlation risk.

Margin and Mark-to-Market

Term	Meaning	Exam cue
Initial margin	Performance deposit to open position	Not a down payment on ownership.
Maintenance margin	Minimum equity level before more funds required	Falling below it can trigger margin call.
Variation margin	Daily settlement of gains/losses	Futures losses can require immediate cash.
Leverage	Small margin controls larger notional	Magnifies gains and losses.
Liquidation risk	Position closed if margin not met	Suitability must consider liquidity and cash resources.

Interest Rate Futures and Bond Exposure

If interest rates…	Bond prices generally…	Long bond future generally…	Short bond future generally…
Rise	Fall	Loses	Gains
Fall	Rise	Gains	Loses

High-yield rule: a bond portfolio manager worried about rising rates may short interest rate or bond futures to offset potential portfolio price decline.

Margin, Leverage, and Mark-to-Market

Term	Meaning	Candidate mistake
Initial margin	Amount required to open a futures or margined position	Treating it as the maximum loss
Maintenance margin	Minimum equity level required to keep position open	Ignoring margin calls
Variation margin	Daily gain/loss settlement in futures	Forgetting cash flow impact
Margin call	Requirement to deposit additional funds	Assuming time is always available to respond
Leverage	Large exposure from small capital commitment	Confusing low capital outlay with low risk
Forced liquidation	Broker may close positions if margin not met	Forgeting liquidation can crystallize losses

Critical rule: margin is performance security, not a measure of maximum loss.

Swaps and OTC Derivatives

Swap Types

Notes and examples

Interest Rate Swap Direction

Position	Pays	Receives	Benefits if	Common use
Pay fixed / receive floating	Fixed	Floating	Rates rise	Hedge floating-rate borrowing.
Receive fixed / pay floating	Floating	Fixed	Rates fall	Hedge fixed-rate asset exposure or express falling-rate view.

OTC Risk Checklist

Risk	What to check
Counterparty risk	Ability of counterparty to perform.
Collateral risk	Margin/collateral terms and calls.
Valuation risk	Model assumptions, inputs, and independent pricing.
Liquidity risk	Ability to terminate, novate, or offset.
Legal/documentation risk	Master agreement, confirmations, netting, events of default.
Operational risk	Trade capture, settlement, reconciliations, authority.
Suitability risk	Client sophistication, objective, leverage tolerance, disclosure.

Hedging Decision Rules

Equity Portfolio Hedging

Notes and examples

Currency Hedging

Exposure	Risk	Hedge direction
Future foreign currency receivable	Foreign currency may weaken vs domestic currency	Sell foreign currency forward/future.
Future foreign currency payable	Foreign currency may strengthen vs domestic currency	Buy foreign currency forward/future.
Foreign investment asset	Asset currency may depreciate	Sell that currency exposure.
Foreign liability	Liability currency may appreciate	Buy that currency exposure.

Commodity Hedging

Participant	Natural exposure	Hedge
Producer/seller	Price may fall before sale	Short futures/forward.
Consumer/buyer	Price may rise before purchase	Long futures/forward.
Inventory holder	Inventory value may fall	Short futures.
Processor with input and output prices	Margin/spread risk	Hedge input, output, or spread depending on exposure.

Quick Hedge Direction Table

Exposure	Risk	Typical hedge action
Own asset / long portfolio	Price decline	Sell futures/forward or buy puts
Need to buy asset later	Price increase	Buy futures/forward or buy calls
Foreign currency receivable	Currency received may weaken	Sell/hedge that currency forward
Foreign currency payable	Currency owed may strengthen	Buy/hedge that currency forward
Floating-rate borrower	Rates rise	Use rate derivative to reduce floating exposure
Fixed-income portfolio	Rates rise, bond prices fall	Short bond futures or reduce duration
Short stock exposure	Price rises	Buy calls or buy underlying/futures

Hedge Ratio Formula Review

For an equity index futures hedge:

\[ \text{Number of contracts} = \frac{\text{Portfolio value} \times \text{Beta}}{\text{Futures price} \times \text{Contract multiplier}} \]

Interpretation:

• Long portfolio and want protection: generally sell index futures.
• Need market exposure quickly: generally buy index futures.
• Higher beta means more contracts needed for the same dollar portfolio value.
• Contract count may require rounding; rounding creates residual risk.

Suitability, Account Approval, and Supervision

Derivative questions often combine payoff math with client obligations. For the CIRO Derivatives Exam, do not stop at “the strategy works mathematically.” Ask whether it is suitable and properly supervised.

Client Review Factors

Notes and examples

KYC, KYP, Suitability, and Disclosure

Obligation	Practical meaning
Know your client	Understand the client’s circumstances before recommending or accepting unsuitable derivative activity.
Know your product	Understand contract terms, payoff, liquidity, margin, issuer/counterparty, and embedded risks.
Suitability determination	Match strategy to client profile, not just market view.
Risk disclosure	Explain leverage, losses, margin calls, expiry, assignment, liquidity, and counterparty risks.
Account approval	Derivative permissions should align with strategy complexity and risk level.
Supervision	Firms monitor account activity, concentration, margin, trading patterns, and approvals.
Conflict management	Identify and address compensation, inventory, issuer, or proprietary conflicts.
Complaint handling	Client complaints and disputes require proper escalation and records.

Strategy Suitability Shortcuts

Client profile	Usually more defensible	Usually problematic
Conservative, income-focused	Covered calls on suitable holdings, protective puts for risk reduction	Uncovered calls, speculative futures, short straddles
Needs capital protection	Protective puts, collars, principal-aware structures with clear issuer risk	Leveraged naked writing or futures speculation
Sophisticated hedger	Forwards, futures, swaps tied to documented exposure	Oversized hedge or speculative position disguised as hedge
Liquidity-constrained	Limited-risk option purchase if premium affordable	Futures or short options requiring margin liquidity
Short-term speculator	Clearly disclosed limited-risk option trades	Complex OTC product without valuation transparency

Market Conduct and Risk Controls

Common Calculation Traps

Notes and examples

Product Mechanics Traps

Trap	Correct thinking
Option buyer has an obligation	Option buyer has a right; writer has potential obligation
Futures margin is maximum loss	Margin is not maximum loss
Covered call eliminates downside risk	It only offsets downside by the premium received
Protective put creates free protection	The premium reduces net return
Long straddle always profits from volatility	It needs enough movement to overcome premiums and time decay
Short put is conservative because premium is received	Loss can be large if underlying falls
Forward and futures are identical	Similar economics, different trading, margin, clearing, customization
Hedging removes all risk	It may leave basis, liquidity, operational, and counterparty risk
Structured products are simple because payoff is packaged	Embedded derivatives can be complex and illiquid

Directional Traps

Scenario	Likely correct direction
Own stock and fear decline	Buy put or sell futures
Need to buy stock later and fear rally	Buy call or buy futures
Own bonds and fear rising rates	Short bond futures/reduce duration
Borrower with floating-rate exposure fears rates rising	Consider pay-fixed/receive-floating economics
Exporter will receive foreign currency	Sell foreign currency forward
Importer must pay foreign currency	Buy foreign currency forward
Producer fears commodity price decline	Sell commodity futures
Consumer fears commodity price increase	Buy commodity futures

Scenario Decision Table

Final Exam-Day Checklist

Before choosing an answer, verify:

1. Position direction: long or short, buyer or writer, payer or receiver.
2. Underlying direction: bullish, bearish, neutral, volatile, or hedging.
3. Loss limit: premium-only, limited spread risk, substantial downside, or unlimited.
4. Cash flow: premium paid/received, margin required, daily settlement, or periodic swap payment.
5. Contract specs: strike, expiry, multiplier, settlement style, exercise style.
6. Client fit: knowledge, risk tolerance, liquidity, objective, time horizon, financial capacity.
7. Risk disclosure: leverage, margin calls, expiry, assignment, liquidity, counterparty.
8. Regulatory conduct: KYC, KYP, suitability, supervision, records, conflicts, fair dealing.

Notes and examples

Final Rapid Checklist

Before exam day, make sure you can confidently answer:

• Who has the right and who has the obligation?
• Is the position long or short the underlying exposure?
• Is the client hedging, speculating, generating income, or transforming cash flows?
• What happens if the underlying rises, falls, stays flat, or volatility changes?
• Is the maximum loss limited, large, or potentially unlimited?
• Does margin create cash-flow risk?
• Is the hedge direction correct?
• Is there basis, liquidity, counterparty, or assignment risk?
• Does the recommendation fit the client’s knowledge, objectives, risk tolerance, and time horizon?
• Has the risk been explained clearly and documented appropriately?

High-Yield Exam Mindset

Derivatives questions usually test whether you can identify:

1. The position: long or short?
2. The instrument: forward, futures, option, swap, structured derivative, or embedded derivative?
3. The economic exposure: bullish, bearish, volatility, interest rate, currency, commodity, or credit exposure?
4. The obligation: optional right, firm obligation, margin obligation, collateral requirement, or settlement obligation?
5. The client purpose: hedge, speculate, generate income, lock in a price, manage duration, or create leverage?
6. The risk: market, liquidity, counterparty, basis, leverage, volatility, operational, legal, tax, or suitability risk?
7. The regulatory/conduct issue: KYC, KYP, suitability, risk disclosure, conflicts, supervision, fair dealing, account approval, or documentation?

Fast rule: derivatives are rarely tested as isolated formulas only. Expect the exam to combine product mechanics + client objective + risk + suitability/conduct.

Core Derivatives at a Glance

Rights, Obligations, and Payoff Logic

Core Payoff Formulas

At expiration, ignoring transaction costs and taxes:

\[ \text{Long forward/futures payoff} = S_T - K \]\[ \text{Short forward/futures payoff} = K - S_T \]\[ \text{Long call payoff} = \max(S_T - K, 0) \]\[ \text{Long put payoff} = \max(K - S_T, 0) \]

Where:

• \(S_T\) = underlying price at expiration
• \(K\) = strike price or contract price

Option Position Summary

Moneyness: Do Not Reverse Calls and Puts

Common mistake: A put is valuable when the market falls below the strike. Candidates often apply call logic to puts and answer backward.

Strategy Selection Decision Path

    flowchart TD
	    A[What is the client objective?] --> B{Need protection?}
	    B -->|Protect long asset| C[Consider protective put or collar]
	    B -->|Protect future purchase price| D[Consider long call or long futures/forward]
	    A --> E{Need income?}
	    E -->|Own underlying| F[Covered call may fit if upside cap acceptable]
	    E -->|No underlying| G[Uncovered short option is high risk]
	    A --> H{Need hedge certainty?}
	    H -->|Lock price| I[Forward/futures hedge]
	    H -->|Keep upside/downside flexibility| J[Option-based hedge]
	    A --> K{Speculating on volatility?}
	    K -->|Expect large move| L[Long straddle/strangle]
	    K -->|Expect quiet market| M[Short volatility strategies require strong risk capacity]

Interest Rate Derivatives Review

Notes and examples

Bond Price and Rate Direction

Interest rates	Bond prices	Long bond futures	Short bond futures
Rise	Fall	Loses	Gains
Fall	Rise	Gains	Loses

Trap: If a client owns bonds and fears rising rates, the hedge is typically to short bond futures or otherwise reduce duration.

Currency Derivatives Review

Exam trap: Identify the currency the client is long or short economically.

• Receivable = long that currency.
• Payable = short that currency.
• Hedge generally takes the opposite exposure.

Commodity Derivatives Review

Watch for:

• Contract grade mismatch
• Location/delivery mismatch
• Storage costs
• Seasonality
• Contango/backwardation
• Liquidity differences across maturities

Swaps: Fast Review

Trap: Swaps can reduce one risk while creating another. A hedge may reduce market price uncertainty but introduce counterparty, liquidity, collateral, or basis risk.

Structured Products and Embedded Derivatives

Structured products may combine:

• A debt instrument
• An option payoff
• Participation in an index, commodity, currency, rate, or basket
• Conditional protection or contingent income
• Callable, autocallable, barrier, or leveraged features

High-yield review points:

Common mistake: Treating “principal protected” as risk-free. Issuer credit risk, liquidity risk, opportunity cost, fees, and conditions can still matter.

Lifecycle of a Derivatives Trade

Order and Position Terminology

Trap: Selling an option can mean either closing a long option or opening a written option. The context matters.

Suitability, Conduct, and Supervision Review

For the CIRO Derivatives Exam, expect product knowledge to be connected to professional obligations. Without relying on memorized slogans, think through whether the derivative is appropriate for the client.

High-Yield Conduct Themes

Notes and examples

Suitability Red Flags

Be cautious when a question includes:

• Limited investment knowledge but complex strategy
• Need for capital preservation but leveraged or uncovered short options
• Short time horizon with illiquid structured products
• Low risk tolerance but margin exposure
• Income objective but strategy creates large downside risk
• Client does not understand assignment or margin calls
• Concentrated exposure to one issuer, sector, currency, or commodity
• Strategy described as a hedge but exposure does not match the risk

Calculation Review: Break-Even and Strategy Logic

Long Call

Break-even at expiry:

\[ \text{Call break-even} = \text{Strike price} + \text{Premium paid} \]

Long Put

\[ \text{Put break-even} = \text{Strike price} - \text{Premium paid} \]

Covered Call

Plain-language result:

• Maximum gain is capped once the underlying rises above the call strike.
• Downside risk remains because the investor still owns the underlying.
• Premium received lowers the effective cost base but does not eliminate loss risk.

Protective Put

• Put creates a downside floor.
• Upside remains, reduced by the cost of the put.
• Useful when the client wants continued participation but needs risk control.

Time Value and Volatility Decision Rules

These are general relationships. Real prices can be affected by multiple variables at once.

Risk Categories You Should Recognize Quickly

“Best Answer” Approach for Scenario Questions

When answer choices are close, use this sequence:

1. Identify the client’s real risk.

   • Price falling?
   • Price rising?
   • Rates changing?
   • Currency movement?
   • Need for income?
   • Need for protection?

2. Choose the instrument that matches the objective.

   • Need certainty: forward/futures.
   • Need protection with upside retained: option.
   • Need income and accepts trade-off: covered call or other premium strategy.
   • Need complex cash-flow transformation: swap.

3. Check whether the client can bear the risks.

   • Margin?
   • Assignment?
   • Liquidity?
   • Complexity?
   • Potential loss?

4. Eliminate unsuitable or excessive strategies.

   • Uncovered short options are rarely appropriate for low-risk clients.
   • Leveraged speculation is not a hedge.
   • A product the client does not understand is a conduct problem.

5. Confirm disclosure and supervision.

   • Derivatives recommendations should be supported by clear rationale, documentation, and appropriate approvals.

Quick Practice Prompts

Use these prompts before starting a question bank:

1. A client owns a concentrated equity position and wants downside protection for six months. Which option strategy fits best, and what is the cost?
2. A company must pay USD in three months. Does it buy or sell USD forward?
3. An investor writes an uncovered call. What is the maximum gain and main risk?
4. A bond portfolio manager fears rising rates. What futures position reduces exposure?
5. A client wants income from a stock holding but refuses to cap upside. Is a covered call suitable?
6. A long straddle loses money even though volatility increased slightly. What might explain the loss?
7. A futures hedge reduces price risk but losses occur because the hedged asset and futures contract differ. What risk is this?
8. A structured product advertises principal protection. What remaining risks must be explained?

Question-Bank Practice Plan

After reviewing this sheet, move into original practice questions in stages:

Focus especially on explanations for wrong answers. In derivatives, the wrong answer is often a strategy that is mechanically possible but unsuitable for the client’s objective or risk profile.

Put the review into practice