Free CISI CMP Sec/Deriv Practice Questions: Derivatives: Delivery and Settlement

CISI means Chartered Institute for Securities & Investment. CMP means Capital Markets Programme, and this page is for the Securities/Derivatives unit. Use this focused CISI CMP Securities/Derivatives page as a short practice test for Derivatives: Delivery and Settlement. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CISI questions, copied live-exam content, or exam dumps.

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These are original Finance Prep practice questions aligned to this topic area. They are not official CISI questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Derivatives: Delivery and Settlement

A clearing member is reviewing a failed physical delivery under an exchange-traded government bond futures contract.

Delivery facts:

• The client was short the June contract and submitted the delivery notice before the exchange cut-off.
• The contract permits delivery of Bond A or Bond B. The notice specified Bond A.
• The custodian confirmed that the client held enough Bond A to meet the delivery.
• The exchange delivery settlement price was used to calculate the invoice amount, and both clearing members accepted it.
• The failure occurred because the notice instructed delivery from the house account, while the bonds were held in the segregated client account. The custodian would not release the bonds without an amended account instruction.

Which factor is the single best explanation of the delivery issue?

• A. Market price, because the exchange delivery settlement price was disputed by the clearing members.
• B. Inventory, because the client did not hold enough Bond A to meet the delivery obligation.
• C. Delivery instructions, because the notice identified an account different from the account holding the bonds.
• D. Contract terms, because Bond A was not eligible for delivery under the futures contract.

Best answer: C

What this tests: Derivatives: Delivery and Settlement

Explanation: Physical delivery problems should be traced to the specific failing condition. Contract terms determine whether the instrument, grade, location, timing, and delivery method are permitted. Market price issues arise where the exchange delivery price or invoice amount is wrong or disputed. Inventory issues arise where the short cannot provide the required deliverable asset. Instruction issues arise where the delivery notice, account, custodian, or settlement details prevent an otherwise valid delivery from being processed. Here, Bond A is contractually deliverable, the inventory exists, and the invoice amount based on the exchange delivery settlement price is accepted. The decisive failure is that the delivery notice points to the wrong account, so the custodian cannot release the bonds under its controls.

• Contract terms do not explain the failure because Bond A is expressly within the deliverable basket.
• Market price is not the cause because the exchange delivery settlement price and invoice amount were accepted.
• Inventory is not the cause because the custodian confirmed sufficient Bond A holdings.
• Delivery instructions are decisive because the account stated in the notice did not match the account holding the bonds.

The delivery failed because the operational instruction could not be matched to the custody account from which the bonds could be released.

Question 2

Topic: Derivatives: Delivery and Settlement

A physically settled exchange-traded metals futures contract is in its delivery month.

Contract and delivery rules:

A short position holder gives a delivery notice on 8 September for 3 contracts, using an approved warehouse and Grade B metal.

Which statement correctly applies the delivery rules and calculates the invoice amount before fees?

• A. The notice is valid; Grade B is deliverable; the long pays £143,700.
• B. The notice is valid; the short pays £300 to compensate the long for the Grade B discount.
• C. The notice is valid; the long pays £144,000 because all acceptable grades use the same settlement price.
• D. The notice is invalid because only Grade A can be delivered against the contract.

Best answer: A

What this tests: Derivatives: Delivery and Settlement

Explanation: Delivery notices are operational instructions used in physically settled futures to start the delivery process during the contract’s delivery period. They identify key details such as the deliverer, warehouse or location, and deliverable grade. The exchange’s contract terms define which grades are acceptable and whether a quality premium or discount applies. The delivery settlement price provides the base invoice price for the physical delivery. Here, 8 September is within the 1-15 September delivery period, and Grade B is listed as acceptable. Because Grade B has a £4 per tonne discount, the invoice price is £1,916 per tonne. For 3 contracts of 25 tonnes each, the total quantity is 75 tonnes, giving an invoice amount of £143,700.

• Treating Grade B as unacceptable ignores the contract’s specified deliverable grades.
• Using £144,000 omits the stated £4 per tonne quality discount.
• Settling only the £300 discount confuses the quality adjustment with the full physical delivery invoice.

The notice is within the delivery period, Grade B is acceptable with a £4 per tonne discount, so 3 × 25 × (£1,920 - £4) = £143,700.

Question 3

Topic: Derivatives: Delivery and Settlement

A derivatives operations analyst is reviewing an expiring futures position for a client that is permitted to trade futures for price exposure but is not permitted to take or make physical delivery.

Which action is best supported by the review?

• A. Record a provisional delivery instruction so the client can decide whether to receive the commodity after first notice day.
• B. Escalate immediately and obtain a same-day instruction to offset or roll the July position before 16:00, then verify the expiring contract is flat.
• C. Leave the position open because daily variation margin will remove any settlement obligation at expiry.
• D. Wait for a delivery notice and then request cash settlement from the clearing broker.

Best answer: B

What this tests: Derivatives: Delivery and Settlement

Explanation: A physically settled futures position can create delivery exposure if it remains open into the notice or delivery period. The control should operate before that point, using expiry monitoring, broker cut-offs, escalation, and confirmation that the expiring contract has been closed out or rolled. The client’s restriction rules out taking delivery, while the desired continuing exposure supports a roll if authorised. Daily variation margin settles mark-to-market profit and loss, but it does not by itself remove a physical delivery obligation. Waiting until a notice is received is too late as a preventive control.

• Requesting cash settlement after a delivery notice is not reliable for a physically settled contract and does not prevent the exposure.
• Variation margin covers daily gains and losses; it is not a substitute for closing or rolling an expiring deliverable contract.
• Provisional delivery instructions conflict with the client restriction and allow the unwanted exposure to arise.

Closing out or rolling before the notice period is the direct control that prevents an unintended physical-delivery exposure.

Question 4

Topic: Derivatives: Delivery and Settlement

A derivatives operations team is reviewing expiry processing for a client account.

Positions and rules:

• Long 40 cash-settled equity index call options, strike 7,300, multiplier £10 per index point.
• The exchange delivery settlement price is 7,345.
• Exchange rule: contracts at least 1 index point in the money are automatically exercised unless the clearing member enters a valid do-not-exercise instruction by the cut-off.
• No do-not-exercise instruction has been received.
• Short 25 physically settled equity put options, strike 420p, contract size 1,000 shares.
• The clearing house has issued an assignment notice for 10 of the short put contracts, with settlement through CREST on T+2.

What is the single best operational response?

• A. Submit a do-not-exercise instruction for the index calls because they are cash settled, and deliver 10,000 shares against the put assignment.
• B. Allow automatic exercise of the index calls and book £18,000 cash settlement; act on the assignment notice by arranging to buy 10,000 shares at 420p on T+2.
• C. Take no exercise action on the index calls until the client gives an explicit exercise instruction, and treat the put assignment as conditional on the client’s consent.
• D. Exercise all 25 short puts and arrange to sell 25,000 shares at 420p because an assignment notice has been received.

Best answer: B

What this tests: Derivatives: Delivery and Settlement

Explanation: Exchange-traded option expiry processing is driven by exchange and clearing-house rules, plus any valid exercise or abandon instructions received before the deadline. The cash-settled index calls are 45 points in the money, and the rule says they are automatically exercised unless a valid do-not-exercise instruction is entered. With no contrary instruction, operations should let automatic exercise stand and book the £18,000 cash settlement. The short equity put position is different. A clearing-house assignment notice is not discretionary; it allocates the writer’s obligation. For a physically settled short put, assignment requires the writer to buy the underlying shares at the strike. Only 10 contracts were assigned, so settlement is for 10,000 shares at 420p through CREST on T+2.

• Waiting for an explicit exercise instruction ignores the stated automatic exercise rule and incorrectly treats assignment as discretionary.
• Submitting a do-not-exercise instruction because the calls are cash settled would give up in-the-money value; cash settlement replaces delivery of the underlying.
• Exercising all short puts confuses exercise with assignment and ignores that only 10 contracts were assigned.

The calls meet the automatic exercise condition with no contrary instruction, and the assigned short puts create a binding obligation to buy the assigned shares at the strike.

Question 5

Topic: Derivatives: Delivery and Settlement

A derivatives operations analyst is reviewing an expiry record for a client before confirming the settlement outcome.

Clearing note:

What is the best supported interpretation of the clearing note?

• A. The client has been assigned and must deliver ABC shares at 250p per share.
• B. The long calls should be automatically exercised, so the client will buy ABC shares at 250p per share.
• C. The contracts should lapse because the client did not submit a manual exercise instruction before expiry.
• D. The contracts have expired, so no settlement obligation can arise after the expiry deadline.

Best answer: B

What this tests: Derivatives: Delivery and Settlement

Explanation: Exercise is the use of an option holder’s right. Assignment is the allocation of the resulting obligation to an option writer. Expiry is the point at which the option reaches the end of its life, while lapse means it expires unexercised. Many exchange-traded options have automatic exercise rules for contracts that are in-the-money at expiry, unless the holder submits a contrary instruction. Here, the client is long a call with a 250p exercise price and the official settlement price is 258p, so the call is in-the-money. With no do-not-exercise instruction, the automatic exercise rule means the long call is exercised and, because the contract is physically settled, the client buys the shares at the exercise price.

• Treating the contract as lapsed ignores the stated automatic exercise rule for in-the-money contracts.
• Assignment applies to the short option writer, not to the long call holder.
• Expiry does not prevent settlement where an in-the-money option is exercised automatically at expiry.

The call is in-the-money at expiry and the contract rule applies automatic exercise because no do-not-exercise instruction was submitted.

Question 6

Topic: Derivatives: Delivery and Settlement

A derivatives operations analyst at a UK asset manager reviews a futures position one week before first notice day.

• Position: long 25 September aluminium futures on an exchange
• Contract: physically deliverable; open long positions in the delivery period may be matched to take warehouse delivery
• Portfolio manager’s aim: keep aluminium price exposure for another quarter
• Fund restriction: no authority to hold warehouse warrants or take physical delivery
• Risk team instruction: remove September delivery exposure before the delivery period

Which instruction should the analyst give?

• A. Submit a delivery notice on the September futures and buy December futures after receiving warehouse warrants.
• B. Buy 25 additional September futures and sell 25 December futures to create a calendar spread.
• C. Allow the September futures to expire because the exchange will cash settle the position and automatically maintain the exposure.
• D. Sell 25 September aluminium futures to close the current long position and buy 25 December aluminium futures to roll the exposure.

Best answer: D

What this tests: Derivatives: Delivery and Settlement

Explanation: A futures position is normally closed out before expiry by entering an equal and opposite trade in the same contract month. Rolling a position combines that close-out with opening a similar position in a later expiry, preserving market exposure while avoiding the operational consequences of the expiring contract. Here, the September aluminium future is physically deliverable and the fund cannot take warehouse delivery, so the September long must be closed before the delivery period. Buying December futures then keeps long aluminium price exposure for the next quarter. Cash settlement would be relevant for a cash-settled contract, such as many equity index futures, but it is not the stated settlement path for this aluminium contract.

• Letting the September contract expire ignores the stated physical delivery feature and would not maintain exposure automatically.
• Submitting a delivery notice conflicts with the fund restriction and is not the way a long position avoids delivery risk.
• Buying more September futures increases the nearby delivery exposure, while selling December would create the wrong directional exposure for maintaining a long hedge.

Closing the nearby long removes delivery risk, and buying the later contract maintains the desired aluminium exposure.

Question 7

Topic: Derivatives: Delivery and Settlement

A derivatives operations analyst is reviewing an expiry-day settlement note for a client’s position.

Which settlement outcome is best supported by the note?

• A. The calls expire worthless because the final settlement value is below the break-even level of 7,638.
• B. The holder must take delivery of FTSE 100 constituent shares because the calls are in the money.
• C. The calls are automatically exercised; the holder receives £6,500 in cash at expiry and has a net profit of £2,700 after the premium.
• D. The holder pays £6,500 because a long call loses when the final settlement value exceeds the strike.

Best answer: C

What this tests: Derivatives: Delivery and Settlement

Explanation: A cash-settled call with automatic exercise is exercised when the final settlement value is above the strike. Here, the call is in the money by 65 index points: 7,665 minus 7,600. The expiry cash settlement is therefore 65 × £10 × 10 contracts = £6,500 received by the long holder. The premium was 38 points per contract, so the premium cost was 38 × £10 × 10 = £3,800. After allowing for that premium, the overall profit is £6,500 minus £3,800 = £2,700. The break-even level affects total profit, not whether an in-the-money cash-settled call is exercised.

• Using the break-even level as the exercise test is incorrect; exercise depends on final settlement value versus strike.
• Physical delivery is inconsistent with the stated cash-settlement method.
• Reversing the long call payoff is incorrect; a long call benefits when the final settlement value exceeds the strike.

The final settlement value is 65 points above the strike, giving £6,500 intrinsic cash settlement and £2,700 net profit after the 38-point premium.

Question 8

Topic: Derivatives: Delivery and Settlement

A derivatives operations team is preparing expiry processing for two open positions. Review the contract summary.

Which interpretation is best supported?

• A. The equity index future requires a final cash payment only, while the government bond future requires transfer of an eligible bond against payment.
• B. Both contracts are physically delivered because all exchange-traded futures require the underlying asset to be transferred at expiry.
• C. Both contracts are cash-settled because futures positions are always closed through variation margin rather than delivery.
• D. The equity index future is physically delivered, while the government bond future is cash-settled because bonds cannot be delivered through a futures contract.

Best answer: A

What this tests: Derivatives: Delivery and Settlement

Explanation: A cash-settled derivative is settled by paying or receiving a cash amount based on the final settlement price or level. No underlying asset changes hands. This is common for index derivatives, where delivering the whole index portfolio would be impractical. A physically delivered derivative requires delivery of the specified underlying, or an eligible substitute defined by the contract, against the required payment. Here, the equity index future explicitly settles against the official index level through a clearing house cash debit or credit. The government bond future involves a seller’s delivery notice and transfer of an eligible bond against an invoice amount, so it is physically delivered.

• Treating both contracts as cash-settled ignores the delivery notice and invoice amount for the bond future.
• Treating both contracts as physically delivered ignores the stated cash-settlement term for the index future.
• Reversing the two treatments conflicts with the contract terms: the index future has no asset delivery, and the bond future has an eligible bond delivery process.

Cash settlement closes the index future through a money debit or credit, whereas the delivery notice on the bond future indicates physical delivery of the underlying bond.

Question 9

Topic: Derivatives: Delivery and Settlement

An operations analyst is reviewing an exception on an exchange-traded commodity futures position.

• Contract terms: The future is physically deliverable at expiry through exchange-approved warehouse warrants.
• Position: A corporate client is long 10 contracts.
• Status: The final opportunity to close or roll the position before delivery procedures has passed.
• Notice: The clearing member has received a delivery notice against the open long position.
• Client statement: “We expected only a cash credit or debit at expiry and have no arrangements to receive the commodity.”

Which classification best describes the settlement issue?

• A. Price: the main issue is identifying the final settlement price used to calculate a cash-settled profit or loss.
• B. Delivery obligation: the open long position must be prepared to take delivery under the contract’s physical-delivery rules.
• C. Position management: the main issue is adjusting the hedge ratio while the contract remains freely tradable.
• D. Timing: the main issue is that the settlement date has been booked in the wrong accounting period.

Best answer: B

What this tests: Derivatives: Delivery and Settlement

Explanation: A futures contract may be cash settled or physically delivered at expiry. In a cash-settled contract, the final settlement price determines the cash profit or loss and no underlying asset is delivered. In a physically delivered contract, an open position that enters the delivery process can create an obligation to deliver or receive the underlying, depending on whether the position is short or long. Here, the client is long, the close-or-roll deadline has passed, and the clearing member has received a delivery notice. The problem is therefore not mainly a price calculation, a booking-date error, or a hedge adjustment. It is the operational and contractual obligation to receive delivery under the exchange’s delivery rules.

• A final settlement price matters for cash-settled profit or loss, but the contract terms specify physical delivery.
• Timing is relevant because the close-or-roll deadline has passed, but the resulting issue is the delivery obligation.
• Position management would have involved closing or rolling the contract before delivery procedures began; that opportunity has already passed.

The decisive fact is that a delivery notice has been received on a physically deliverable futures contract left open into the delivery process.

Question 10

Topic: Derivatives: Delivery and Settlement

A derivatives operations team is processing an exchange-traded equity index option at expiry.

Facts:

• The client is long one cash-settled call option on an equity index.
• Strike price: 7,800.
• Official expiry settlement level: 7,860.
• Exchange rules automatically exercise in-the-money options at expiry unless the holder gives a contrary instruction before the cut-off.
• The client has given no contrary instruction.
• A clearing member that is short the same series receives a notice from the clearing house requiring settlement.

Which statement best describes the operational outcome?

• A. The long call is assigned by the clearing house because assignment applies to holders of profitable options.
• B. The long call is automatically exercised at expiry, and the short clearing member has been assigned the settlement obligation.
• C. The long call lapses because the client did not submit a manual exercise instruction before the cut-off.
• D. The short clearing member exercises the call and receives the cash settlement amount from the long holder.

Best answer: B

What this tests: Derivatives: Delivery and Settlement

Explanation: Exercise is the use of an option holder’s right. Assignment is the process by which a short option position is selected to meet the resulting obligation. At expiry, many exchange-traded options are automatically exercised if they are in-the-money, unless the holder gives a contrary instruction. Here, the call strike is 7,800 and the expiry settlement level is 7,860, so the call is in-the-money. Because no contrary instruction was given, the holder’s long call is automatically exercised. The short side does not exercise; it is assigned and must meet the cash-settlement obligation. Lapse would apply where the option expires without exercise, typically because it is out-of-the-money or because the holder validly chooses not to exercise.

• A missing manual instruction does not cause lapse where the exchange rule provides automatic exercise for in-the-money options.
• Assignment applies to short option positions, not to the holder of the long option.
• The short side has an obligation after assignment; it does not exercise the call or receive the intrinsic value.

The call is in-the-money at expiry and, with no contrary instruction, is automatically exercised while a short position is assigned by the clearing house.

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