CIRO Derivatives Exam Quick Reference

Last revised: June 29, 2026

Compact exam-prep reference for the Canadian Investment Regulatory Organization CIRO Derivatives Exam: options, futures, swaps, hedging, pricing, suitability, and common traps.

Exam Identity and Fast Orientation

Use this Quick Reference 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

Product	Buyer/holder exposure	Seller/writer exposure	Main use	Key risks
Call option	Right to buy; bullish	Obligation to sell if assigned; bearish/neutral	Upside participation, leverage, hedging short exposure	Premium loss for buyer; potentially unlimited loss for uncovered writer
Put option	Right to sell; bearish/protective	Obligation to buy if assigned; bullish/neutral	Downside protection, bearish speculation	Premium loss for buyer; substantial downside for writer
Future	Obligation for both sides; exchange-traded	Obligation for both sides; exchange-traded	Hedging, speculation, price discovery	Leverage, margin calls, basis risk, daily variation
Forward	Bilateral obligation	Bilateral obligation	Customized hedge	Counterparty risk, liquidity risk, valuation risk
Swap	Exchange cash flows	Exchange cash flows	Rate, currency, equity, credit, or commodity exposure management	Counterparty, collateral, termination, valuation, legal documentation
Option on future	Right involving a futures position	Assignment creates futures obligation	Futures exposure with optionality	Option premium plus futures margin after exercise/assignment
Structured product	Depends on embedded derivative	Issuer obligation depends on structure	Packaged exposure, yield enhancement, principal-linked outcomes	Complexity, liquidity, issuer credit, capped upside, embedded fees
CFD/leveraged derivative	Economic exposure without owning underlying	Provider/counterparty exposure	Short-term leveraged trading	High leverage, rapid losses, financing costs, counterparty/platform risk

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.

Options Reference

Rights, Obligations, and Market View

Position	Investor does what?	Market view	Maximum gain	Maximum loss	Breakeven at expiry
Long call	Pays premium for right to buy	Bullish	Unlimited upside	Premium paid	Strike + premium
Short call, uncovered	Receives premium; may have to sell	Neutral to bearish	Premium received	Unlimited upside risk	Strike + premium
Long put	Pays premium for right to sell	Bearish or protective	Large, limited by underlying going to zero	Premium paid	Strike - premium
Short put	Receives premium; may have to buy	Neutral to bullish	Premium received	Large, limited by underlying going to zero	Strike - premium

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.

Options Strategy Matrix

Protective and Income Strategies

Strategy	Construction	Investor objective	Max gain	Max loss	Key trap
Covered call	Own underlying + short call	Income; mildly bullish/neutral	Capped at strike plus premium benefit	Downside in underlying, reduced by premium	It is not risk-free; stock can fall sharply.
Protective put	Own underlying + long put	Downside insurance	Upside less premium	Limited below put strike, plus premium cost	Protection has a cost and expiry.
Collar	Own underlying + long put + short call	Define downside and upside range	Capped by short call	Limited by put, net of premiums	Upside is sacrificed to reduce protection cost.
Cash-secured put	Short put with cash to buy underlying	Income; willingness to buy lower	Premium	Downside if underlying falls	Economic exposure resembles covered call in many outcomes.
Uncovered call	Short call without owning underlying	Aggressive income/bearish	Premium	Unlimited	Usually the highest-risk basic option writing position.

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

Futures and Forwards Reference

Futures vs Forwards

Feature	Futures	Forwards
Trading venue	Exchange-traded	OTC/bilateral
Standardization	Standard contract terms	Customized terms
Counterparty	Clearinghouse structure for exchange contracts	Direct counterparty exposure
Settlement process	Daily mark-to-market through margin/variation	Typically settled at maturity or by agreed terms
Liquidity	Often more liquid for standard maturities	Depends on counterparty and contract
Credit risk	Reduced by clearing and margin, not eliminated operationally	Higher counterparty risk
Suitability focus	Margin capacity, leverage, volatility, contract specifications	Counterparty, documentation, valuation, liquidity

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.

Swaps and OTC Derivatives

Swap Types

Swap	Cash flows exchanged	Typical user objective	Key exam distinction
Interest rate swap	Fixed rate vs floating rate	Convert debt or asset exposure	Pay-fixed hedges rising floating borrowing costs.
Currency swap	Principal and interest in different currencies	Manage FX funding exposure	Adds FX and counterparty risk.
Equity swap	Equity/index return vs fixed/floating payment	Gain or hedge equity exposure	Economic exposure without direct ownership.
Commodity swap	Fixed commodity price vs floating market price	Stabilize input or output cost	Similar hedge logic to forwards/futures.
Credit default swap	Premium payments vs credit event protection	Hedge or take credit exposure	Protection buyer is economically short credit risk.

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

Exposure	Concern	Common derivative action	Notes
Own stock/portfolio	Downside market risk	Buy puts or sell index/equity futures	Put gives floor; futures hedge is linear.
Own stock and want income	Flat/modest upside	Sell covered calls	Upside capped.
Need future stock purchase	Price may rise	Buy calls or buy futures	Call limits loss to premium; future creates obligation.
Short stock	Price may rise	Buy calls	Call can cap short-sale risk.

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.

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

Factor	Derivatives-specific relevance
Investment objective	Hedging, income, speculation, capital preservation, leverage.
Risk tolerance	Must match nonlinear loss and margin-call potential.
Time horizon	Options expire; futures may need rolling; swaps may be long-term.
Liquidity needs	Margin calls and premiums require available cash.
Investment knowledge	Client must understand leverage, assignment, expiry, and settlement.
Financial capacity	Ability to absorb losses beyond premium for written options/futures.
Concentration	Derivatives can create large notional exposure quickly.
Tax/accounting profile	Treatment depends on facts, purpose, and client circumstances.
Authority	Discretionary or third-party trading authority must be properly documented.

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

Area	Exam-ready principle
Manipulation	Derivatives must not be used to create artificial prices, misleading volume, or distorted settlement values.
Insider information	Derivative trading can create prohibited economic exposure just like cash-market trading.
Front running	Trading ahead of client orders or known client activity is a serious conduct issue.
Wash/circular trades	Trades lacking genuine economic purpose can be manipulative.
Spoofing/layering	Non-bona fide orders intended to mislead the market are improper.
Best execution	Order handling should consider price, speed, certainty, liquidity, and client instructions.
Records	Orders, approvals, communications, confirmations, margin, and suitability evidence matter.
Error handling	Trade errors require prompt escalation and fair resolution under firm procedures.
Personal trading	Employee derivative trading is subject to firm policy, conflicts review, and supervision.

Common Calculation Traps

Trap	Correct approach
Ignoring contract multiplier	Multiply option or futures point value by contract size and number of contracts.
Forgetting premium	Option profit equals payoff minus premium for buyers; plus premium for writers.
Mixing up buyer and writer	Buyer has right; writer has obligation.
Treating premium as margin	Option premium is price paid/received; futures margin is performance collateral.
Confusing maximum loss	Long option max loss is premium; short uncovered call max loss is unlimited.
Missing breakeven	Add premium to call strike; subtract premium from put strike.
Ignoring time decay	Long options generally suffer theta; short options generally benefit but carry tail risk.
Assuming hedge eliminates all risk	Hedges can leave basis, timing, quantity, liquidity, and correlation risk.
Wrong rate direction	Interest rates up means bond prices generally down.
Forgetting assignment risk	Short options can be assigned according to contract and clearing rules.
Assuming OTC liquidity	Customized contracts may be difficult or costly to exit.
Calling every derivative speculative	Derivatives can hedge, speculate, generate income, or transform exposure. Purpose matters.

Scenario Decision Table

Scenario	Best first answer	Why
Client owns stock and fears near-term decline but wants upside	Buy protective put	Preserves upside while creating downside floor for option term.
Client owns stock and wants income, accepts capped upside	Write covered call	Premium income in exchange for possible sale/capped gain.
Client expects large move but direction uncertain	Long straddle or strangle	Benefits from volatility and large directional move.
Client expects little movement and understands high risk	Short straddle/strangle may fit only for sophisticated client	Premium income but large or unlimited loss potential.
Company must pay USD in three months	Buy USD forward/future	Locks or hedges cost of future payable.
Exporter will receive EUR later	Sell EUR forward/future	Protects domestic value of receivable.
Portfolio manager fears rising rates	Short bond/interest rate futures	Offsets falling bond prices.
Floating-rate borrower fears rate increases	Pay fixed, receive floating swap	Converts uncertain floating cost toward fixed exposure.
Investor wants leveraged upside with limited loss	Long call	Loss limited to premium; upside exposure retained.
Investor wants to acquire stock below current price and earn income	Cash-secured short put	Must be willing and able to buy if assigned.

Final Exam-Day Checklist

Before choosing an answer, verify:

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

Practical Next Step

Use this Quick Reference to build mixed practice sets: calculate payoff and breakeven first, then add a suitability or supervision issue to the same scenario. That mirrors how derivative knowledge is often tested on the real CIRO Derivatives Exam.

Scenario Guide

Element 1 — the Client Relationship