Free CISI CMP Securities/Derivatives Practice Exam

CISI means Chartered Institute for Securities & Investment. CMP means Capital Markets Programme, and this page is for the Securities/Derivatives unit.

This free full-length CISI CMP Securities/Derivatives practice exam includes 100 original Finance Prep questions across the exam domains.

These are original Finance Prep practice questions aligned to the exam outline. 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 mixed sets, topic drills, and timed mock exams in Finance Prep.

Practice count note: exam sponsors can describe total questions, scored questions, duration, or administrative exam-day rules differently. Always confirm current exam-day rules with the sponsor.

Practice questions

Questions 1-25

Question 1

Topic: Securities: Primary Markets

A UK growth company is preparing to raise new ordinary share capital by an institutional placing and wants its shares admitted to AIM.

Issue facts:

• The shares will not be admitted to the Official List.
• The company needs an adviser to assess whether AIM admission is appropriate.
• The adviser must guide the directors on their responsibilities under the AIM Rules.
• The placing is not being fully underwritten.

Which appointment is most directly required for these responsibilities?

• A. Sponsor
• B. Underwriter
• C. Registrar
• D. Nominated adviser

Best answer: D

What this tests: Securities: Primary Markets

Explanation: For an AIM admission, the nominated adviser, often called the Nomad, has the central advisory and gatekeeper role. It assesses whether the company is appropriate for AIM and advises the issuer and directors on their AIM Rule obligations. A sponsor is associated with certain Main Market and Official List transactions, not an AIM admission. An underwriter takes issue risk by agreeing to buy or place securities not taken up by investors, which is expressly not the decisive need here. A registrar maintains the register of shareholders and supports share administration, but it does not assess admission suitability or advise on AIM Rules.

• A sponsor is linked to Official List/Main Market sponsor work, not the AIM admission role described.
• An underwriter would address the risk of unsold securities, but the placing is not fully underwritten.
• A registrar handles shareholder register and administrative records rather than admission suitability and AIM Rule guidance.

A nominated adviser assesses suitability for AIM and advises the company on compliance with AIM Rules.

Question 2

Topic: Securities: Secondary Markets

A dealer checks a client instruction against the current order book during continuous trading. Based only on the information shown, which interpretation is best supported?

• A. The order should execute for 2,000 shares at 253p, with the remaining 3,000 shares resting in the book.
• B. The order should execute immediately at 250p because the best bid is below the client’s limit.
• C. If entered unchanged, the order is expected to rest on the bid side at 252p until sell interest appears at 252p or lower.
• D. The order should execute immediately at 251p because the last traded price is below the client’s limit.

Best answer: C

What this tests: Securities: Secondary Markets

Explanation: A buy limit order states the maximum price the buyer is prepared to pay. It can execute only against available sell orders priced at or below that limit. Here, the visible best offer is 253p, which is above the 252p limit, so the order is not immediately marketable against the displayed sell liquidity. The last traded price is historical market data and does not prove that stock is currently available at that price. The best bid is other buying interest, not stock available for the client to buy. If accepted unchanged, the order would normally be posted to the book at 252p for the day and could execute if compatible sell interest appears before expiry.

• Treating the last traded price as an executable price confuses historical trade data with current available liquidity.
• Using the best bid as the execution price confuses other buyers’ orders with sell-side liquidity.
• Lifting the 253p offer would breach the client’s 252p buy limit.

A buy limit order cannot execute above its limit price, and the displayed best offer is 253p.

Question 3

Topic: Securities: Investment Management

A sterling income fund is considering a holding that must be marked to market each month.

Proposed holding:

• Instrument: 2.5% conventional UK Treasury gilt maturing in 2054
• Cash flows: fixed coupon, redemption at par
• Issuer: UK government; default risk is assessed as remote
• Currency: sterling, matching the fund’s reporting currency and liabilities
• Market: actively traded in the UK gilt market with a narrow bid-offer spread
• Manager’s concern: long-dated gilt yields may rise over the next six months

Which exposure is the single best description of the main market-price risk in this holding?

• A. Credit exposure, because the investor may not receive the fixed coupons and redemption amount
• B. Currency exposure, because the security’s return must be converted into sterling
• C. Liquidity exposure, because the investor may be unable to sell the security without a material price concession
• D. Interest-rate exposure, because the long-dated fixed-coupon price is sensitive to changes in market yields

Best answer: D

What this tests: Securities: Investment Management

Explanation: For a fixed-coupon bond, market value moves inversely with market yields. The longer the maturity and duration, the more sensitive the price is to changes in interest rates. Here, the gilt has fixed sterling cash flows and a long maturity, and the manager is specifically concerned about rising long-dated gilt yields. Credit risk is not the main driver because the issuer is the UK government and default risk is assessed as remote. Currency risk is not central because the instrument and the fund’s liabilities are both in sterling. Liquidity risk is also not the main driver because the gilt is actively traded with a narrow bid-offer spread.

• Credit exposure would be more prominent for a lower-quality corporate or sovereign issuer, not where default risk is assessed as remote.
• Currency exposure would matter if the bond’s cash flows were in a different currency from the investor’s base currency or liabilities.
• Liquidity exposure would be more important for a thinly traded security or one with a wide bid-offer spread.

A long-dated fixed-rate gilt’s market value is driven mainly by movements in long-term interest rates and yields.

Question 4

Topic: Securities: Secondary Markets

A dealer is asked to explain a sharp fall in a sterling corporate bond in the secondary market.

Bond facts:

• Fixed-rate investment-grade corporate bond, maturity 2034
• Modified duration: 7.8
• Normally traded OTC by RFQ against the 10-year gilt curve
• Quoted clean bid fell from 101.20 to 96.70
• The 10-year gilt yield rose by 20 basis points
• The issuer’s 10-year credit spread widened by 35 basis points after weaker guidance
• Dealer appetite is thin and the bid-offer spread has widened; there is no coupon, call, default, or settlement event

Which explanation best accounts for the price movement?

• A. The bond price fell mainly because its fixed coupon must be reduced after the rise in gilt yields.
• B. The fall is best explained by an exchange order-book imbalance because OTC RFQ corporate bonds are primarily priced through central limit order matching.
• C. The wider bid-offer spread is the only relevant factor because benchmark-rate and spread changes do not affect a corporate bond’s fair value.
• D. The required yield rose from both the gilt yield move and the credit-spread widening; the bond’s duration magnifies the price fall, and weaker liquidity adds pressure to the bid.

Best answer: D

What this tests: Securities: Secondary Markets

Explanation: A corporate bond’s required yield is normally viewed as the relevant benchmark government yield plus a credit spread, with an additional liquidity premium where trading conditions deteriorate. Here, the benchmark 10-year gilt yield rose by 20 basis points and the issuer’s spread widened by 35 basis points, giving a material rise in required yield. With a modified duration of 7.8, even a 55 basis point yield increase implies a price fall of roughly 4.3% before allowing for liquidity effects. Thin dealer appetite and a wider bid-offer spread make the quoted bid weaker still. The absence of a coupon, call, default, or settlement event points away from operational or corporate-action explanations.

• A fixed coupon does not get reduced when market yields rise; the market price adjusts instead.
• Liquidity matters, but it is not the only driver because benchmark yields and credit spreads directly affect required yield.
• An exchange order-book explanation conflicts with the stated OTC RFQ trading route for the corporate bond.

A fixed-rate bond’s price falls when required yield rises, and the combined benchmark-rate and spread move is amplified by its duration and poorer liquidity.

Question 5

Topic: Securities: Primary Markets

An issuer is completing a bookbuilt IPO. The institutional tranche is scaled back pro rata.

Ignoring rounding, the notice reflects the pro-rata scale-back. Which party is most relevant for a query about why the fund manager received this number of shares?

• A. The sponsor advising on admission to listing or trading
• B. The global coordinator or bookrunner managing the order book and allocations
• C. The issuer’s legal advisers responsible for transaction documentation
• D. The registrar or settlement agent processing registered holdings and settlement

Best answer: B

What this tests: Securities: Primary Markets

Explanation: In a bookbuilt primary-market issue, the bookrunner or global coordinator builds demand, advises on pricing, and manages investor allocations. Here, the available institutional shares are one quarter of valid institutional demand, so an 800,000 share order is scaled to 200,000 shares. That makes the issue an allocation matter rather than an admission, documentation, or settlement matter. Admission-related questions would be directed to the sponsor or similar adviser, documentation questions to legal advisers, and post-allotment registration or settlement processing to the registrar or settlement agent.

• The sponsor is relevant to admission and listing requirements, not the investor allocation calculation.
• Legal advisers are relevant to prospectuses, agreements, and other transaction documents, not the scale-back of the book.
• The registrar or settlement agent becomes more relevant once holdings and settlement processing are involved, not when the allocation itself is being queried.

The calculation shows a 25% scale-back, so the query concerns allocation, which is handled by the bookrunner or global coordinator.

Question 6

Topic: Derivatives: Introduction to Derivatives

A UK corporate treasurer is choosing how to hedge a foreign-currency receivable.

Hedge facts:

• Amount and date: €18.7 million receivable in 73 days.
• Hedge aim: match the exact cash flow rather than approximate it with rounded contract sizes.
• Dealing preference: negotiate directly with the bank under existing ISDA documentation.
• Board concern: understand transparency and counterparty-risk trade-offs.

Which route is most appropriate and why?

• A. Use an exchange-traded futures contract because standard contract terms are more flexible than OTC terms and require no clearing-house involvement.
• B. Use an exchange-traded futures contract because it can be privately negotiated for any notional and maturity while eliminating counterparty risk without margining.
• C. Use an OTC forward because it can be tailored to the exact notional and maturity, but it will have less market transparency and bilateral counterparty exposure than an exchange-traded contract.
• D. Use an OTC forward because it is exchange-standardised and publicly order-book traded, giving the treasurer the best price transparency.

Best answer: C

What this tests: Derivatives: Introduction to Derivatives

Explanation: Exchange-traded derivatives are normally standardised by the exchange, traded on transparent venues, and supported by a clearing house that reduces bilateral counterparty risk through novation, margining, and default-management arrangements. Their weakness for a corporate hedge is that contract size, expiry dates, and other terms may not precisely match the exposure. OTC derivatives are privately negotiated, so they can be tailored to the exact notional, maturity, underlying, and settlement needs. That flexibility is useful for a receivable of €18.7 million due in 73 days. The trade-off is that OTC trading is generally less transparent than exchange trading and leaves the parties focused on counterparty exposure, usually managed through documentation, collateral, credit limits, or central clearing where applicable.

• Private negotiation for any notional and maturity describes OTC dealing, not exchange-traded futures.
• Exchange-standardised and publicly order-book traded describes exchange-traded derivatives, not a bilateral OTC forward.
• Standard contract terms are less flexible than bespoke OTC terms, and exchange-traded derivatives typically involve clearing arrangements.

The exact amount, maturity, and bilateral ISDA dealing preference point to an OTC derivative, with the usual trade-off of lower transparency and higher counterparty-risk focus.

Question 7

Topic: Derivatives: Introduction to Derivatives

A portfolio manager is reviewing a proposed options trade for an equity income fund. Which interpretation of the derivative use is best supported by the portfolio note?

Portfolio note
Holding: 200,000 shares in Alpha plc, intended to remain a core holding.
Trade: Sell listed call options over part of the holding.
Strike: 8% above the current share price.
View: Share price expected to remain broadly range-bound over the next month.
Objective: Earn option premium; acceptable to deliver shares if the strike is reached.
No identified cash-and-derivatives mispricing is being exploited.

• A. Arbitrage between the shares and the listed options.
• B. Speculation on a sharp rise in Alpha plc shares using geared exposure.
• C. Risk transfer through downside protection using options.
• D. Income generation by writing covered calls against an existing shareholding.

Best answer: D

What this tests: Derivatives: Introduction to Derivatives

Explanation: Selling call options over shares already owned is a covered call strategy. Its main use here is income generation: the fund receives option premium and is willing to sell the shares if the call is exercised. The range-bound market view also supports this, because written calls benefit if the share price stays below the strike. This is different from speculation, where the main aim is to profit from a directional price move using derivative exposure. It is also different from arbitrage, which requires an identifiable pricing discrepancy between related instruments. Downside risk transfer would usually involve buying protection, such as a put option, rather than selling a call.

• Speculation on a sharp rise is inconsistent with selling calls, which limits upside beyond the strike.
• Arbitrage is not supported because the note says no cash-and-derivatives mispricing is being exploited.
• Downside protection is not provided by this trade; selling calls earns premium but leaves the shares exposed to a fall in price.

The note describes selling calls over shares already held to earn premium, with delivery acceptable if the share price rises above the strike.

Question 8

Topic: Derivatives: OTC Derivatives

An OTC derivatives operations analyst reviews the legal file for a new 5-year GBP fixed-for-floating interest rate swap before booking it.

Legal file extract:

Which interpretation is best supported?

• A. Assess exposure on a gross trade-by-trade basis; netting provisions are operational payment instructions rather than close-out protections.
• B. Complete and agree the confirmation; it records the swap economics, while the master agreement, schedule, credit support annex and netting terms cover the wider legal and exposure framework.
• C. Book the trade from the master agreement alone; it contains the standard legal framework and normally makes transaction confirmations unnecessary.
• D. Use the schedule as the collateral document; it customises margin mechanics and replaces credit support documentation for exposure control.

Best answer: B

What this tests: Derivatives: OTC Derivatives

Explanation: In OTC derivatives, a master agreement avoids negotiating a full legal contract for every trade. It sets standard legal terms, including events of default, termination mechanics and the basis for close-out netting. The schedule customises that master agreement through elections and amendments. A confirmation records the economic terms of a specific transaction, such as notional, rate, index and payment dates, so an unsigned draft should be completed and agreed before the trade is treated as fully documented. Credit support documentation, such as a credit support annex, sets collateral terms, eligible collateral, valuation and transfer mechanics. Netting provisions reduce counterparty exposure by allowing obligations to be combined, particularly on termination, rather than leaving multiple gross claims outstanding.

• A master agreement provides the standard legal framework, but it does not normally remove the need for a transaction confirmation.
• A schedule customises elections and amendments; it is not the same as credit support documentation.
• Credit support documentation covers collateral, not the core trade economics recorded in a confirmation.
• Netting is not merely administrative; it is central to reducing gross counterparty exposure.

The draft confirmation is still needed for the transaction-specific economics, while the other documents set the legal, amended, collateral and netting framework.

Question 9

Topic: Securities: Asset Classes

A treasury analyst is preparing a cash-management summary. The desk uses simple ACT/365 interest.

Instrument list:

• 60-day cash deposit: £1,000,000 at 4.38% per annum
• 91-day Treasury bill
• 180-day commercial paper
• 6-month negotiable certificate of deposit
• 14-day gilt repo
• 5-year corporate bond
• Ordinary shares in a listed company

Which statement correctly distinguishes the short-term instruments from longer-term securities and estimates the cash deposit interest?

• A. The cash deposit, Treasury bill, commercial paper, certificate of deposit and repo are short-term cash or money-market arrangements; the corporate bond and ordinary shares are longer-term securities; the deposit interest is £7,200.
• B. The corporate bond is a money-market instrument because it pays coupons; the short-term deposit earns £72,000 interest.
• C. Only the Treasury bill, commercial paper and certificate of deposit are short-term; the cash deposit and repo are longer-term securities; the deposit interest is £7,200.
• D. The ordinary shares and corporate bond are short-term instruments because they trade in secondary markets; the deposit earns £720 interest.

Best answer: A

What this tests: Securities: Asset Classes

Explanation: Cash deposits, Treasury bills, commercial paper, certificates of deposit and repo are commonly used in short-term cash and money markets. They are normally distinguished from capital-market securities such as longer-dated bonds and ordinary shares, which represent longer-term financing or ownership exposure. Here, the 60-day bank deposit is a short-term cash asset, the 91-day Treasury bill, 180-day commercial paper and 6-month CD are short-term money-market instruments, and the 14-day gilt repo is a short-term secured financing transaction. The 5-year corporate bond and ordinary shares are longer-term securities. The deposit interest is calculated on a simple ACT/365 basis: £1,000,000 × 4.38% × 60 ÷ 365 = £7,200.

• Treating the cash deposit and repo as longer-term securities confuses short-term cash financing with capital-market securities.
• A coupon-paying corporate bond may be tradable, but a 5-year maturity makes it a longer-term debt security, not a money-market instrument.
• Secondary-market trading does not make ordinary shares or longer-dated bonds short-term instruments.

The listed deposit, bill, CP, CD and repo are short-term cash or money-market items, and £1,000,000 × 4.38% × 60 ÷ 365 gives £7,200 interest.

Question 10

Topic: Derivatives: Principles of Clearing and Margin

Three dealers have standardised OTC interest rate swaps that are eligible for central clearing. Current replacement-value receivables are shown below.

Amounts are in £ millions and show the amount owed to the row member by the column member.

A CCP would novate the trades and multilateral net each member’s receivables and payables into a single balance with the CCP. For this estimate, compare total gross bilateral receivables before clearing with total net receivables owed by the CCP after clearing. Ignore margin and default fund amounts.

Which conclusion best explains why regulators and market participants use central clearing for these products?

• A. Gross bilateral receivables of £52 million become zero because novation removes all counterparty credit risk from the market.
• B. Gross bilateral receivables of £52 million become £26 million because central clearing only nets each bilateral pair separately.
• C. Gross bilateral receivables of £52 million become £11 million of net receivable exposure to the CCP, with risk controls applied centrally.
• D. Gross bilateral receivables of £52 million remain unchanged because the original dealers remain principal to each trade after clearing.

Best answer: C

What this tests: Derivatives: Principles of Clearing and Margin

Explanation: Central clearing is used for standardised OTC products because a CCP can step between counterparties through novation, apply multilateral netting, and manage exposures through common margin and default-management processes. Before clearing, the total gross receivables are £52 million. After multilateral netting, Dealer A is owed £11 million net, Dealer B owes £5 million net, and Dealer C owes £6 million net. The total net receivable owed by the CCP is therefore £11 million. Clearing does not make risk disappear, but it can reduce the web of bilateral exposures, improve operational efficiency, and place risk management in a supervised infrastructure.

• A zero-exposure conclusion is wrong because novation and netting reduce exposures; they do not eliminate market or counterparty risk.
• Keeping £52 million unchanged ignores novation, which replaces the original bilateral counterparty relationships with CCP-facing positions.
• £26 million reflects bilateral pair netting, not full multilateral netting across all cleared positions.

Dealer A is the only net receiver after multilateral netting, owed £11 million, showing how central clearing can reduce and centralise counterparty exposures.

Question 11

Topic: Derivatives: OTC Derivatives

A dealer’s operations team is reviewing an uncleared OTC equity swap with Counterparty X. The economics of the latest increase were agreed by recorded chat, but the related confirmation is still unsigned.

Review extract:

Which action best addresses the issue identified in the review?

• A. Issue a £2.1 million variation margin call under the CSA and separately chase the signed confirmation.
• B. Novate the swap to a central counterparty so that exchange margin replaces the bilateral CSA.
• C. Wait to issue any collateral call until the latest confirmation has been signed by both parties.
• D. Treat the exposure as fully controlled because the ISDA Master Agreement permits close-out netting.

Best answer: A

What this tests: Derivatives: OTC Derivatives

Explanation: For an uncleared OTC derivative, the ISDA Master Agreement provides the contractual framework, while the CSA is the collateral document used to control mark-to-market counterparty exposure. Here, the CSA is already signed, requires daily variation margin, has a zero threshold, and the dealer has a positive mark-to-market of £3.2 million. With only £1.1 million collateral held, the additional exposure is £2.1 million, which exceeds the £250,000 minimum transfer amount. The practical exposure-control action is therefore to call for the additional collateral. The unsigned confirmation is still important because confirmations evidence the detailed economic terms of the transaction, but it is a documentation exception to chase, not a reason to leave an undisputed exposure undercollateralised.

• Waiting for signature leaves an undisputed mark-to-market exposure uncollateralised despite a signed CSA.
• Close-out netting helps reduce exposure on default but does not replace day-to-day collateral calls.
• Central clearing is not a routine fix for a bilateral uncleared swap and is not supported by the review facts.

The signed CSA requires daily collateralisation, the uncollateralised exposure is £2.1 million, and the unsigned confirmation should be remediated separately.

Question 12

Topic: Derivatives: Trading, Hedging and Investment Strategies

A derivatives trader is reviewing a client’s instruction on an equity index position.

Trading note:

• Underlying index is currently at 7,800.
• Market view: moderate rise over the next three months.
• Risk constraint: maximum loss must be known at trade entry.
• Cost preference: reduce the net option premium by giving up gains above about 8,100.

Which strategy is most consistent with the trading note?

• A. Buy an index future at 7,800.
• B. Buy a 7,800 put and sell a 7,500 put with the same expiry.
• C. Sell a 7,800 call and buy an 8,100 call with the same expiry.
• D. Buy a 7,800 call and sell an 8,100 call with the same expiry.

Best answer: D

What this tests: Derivatives: Trading, Hedging and Investment Strategies

Explanation: A moderately bullish view with a desire to limit loss and reduce premium by capping upside points to a bull call spread. Buying the lower-strike call gives upside participation if the index rises. Selling the higher-strike call helps fund the purchase, but it also limits further profit above that strike. The maximum loss is the net premium paid, which is known at trade entry. This matches the client’s willingness to give up gains above about 8,100 in exchange for a lower initial option cost.

• A bear put spread is designed for a falling market, not a moderate rise.
• A short lower-strike call combined with a long higher-strike call is bearish to neutral and would lose if the index rises strongly.
• A long futures position benefits from a rise, but it does not provide an option-style known maximum loss at entry.

A bull call spread fits a moderately bullish view, limits the maximum loss to the net premium, and caps gains above the higher strike.

Question 13

Topic: Securities: Investment Management

A portfolio manager is reviewing four institutional mandates. Ignore investment income and fees.

Which client has the strongest immediate liquidity requirement to reflect in portfolio construction, based on next year’s estimated net cash flow as a percentage of assets?

• A. The permanent charity endowment, because its grant programme is 4% of assets.
• B. The university endowment, because its gross spending is 3% of assets.
• C. The closed defined benefit pension scheme, because its net outflow is 5% of assets.
• D. The life insurer annuity book, because its net outflow is 12% of assets.

Best answer: D

What this tests: Securities: Investment Management

Explanation: Institutional investment management starts with the nature and timing of the investor’s liabilities or spending commitments. Here, the relevant estimate is net cash flow as a percentage of invested assets. The life insurer expects £80m of claims and annuity payments and £20m of premiums, giving a £60m net outflow. Against £500m of assets, that is 12%. This is higher than the closed pension scheme’s 5% net outflow and the university endowment’s 2% net outflow. The charity endowment has a net inflow, not an outflow. A life insurer with significant predictable payments normally gives high priority to liquidity, asset-liability matching, credit quality and regulatory capital constraints.

• The pension scheme has a meaningful net outflow, but £40m on £800m is only 5%.
• The charity’s grants should be assessed net of donations; it has a £1m net inflow.
• The university endowment’s gross spending is not the best measure; net outflow is £5m, or 2% of assets.

The insurer has the largest net cash outflow relative to assets, so liquidity and liability cash-flow matching are the most pressing considerations.

Question 14

Topic: Securities: Markets

An exchange is used for an issue of new shares and then for secondary trading in the same company’s shares.

Market data:

• New ordinary shares issued by the company: 8,000,000 at 375p per share
• Existing shares traded between investors on the first day: 2,000,000 at an average price of 390p
• Closing auction price published by the exchange: 392p

Ignoring fees and taxes, which statement correctly describes what the market has done?

• A. The company raises £30.0 million; the £7.8 million of secondary turnover supports liquidity, price discovery, and transfer of share-price risk between investors.
• B. The company raises £31.36 million because the closing auction price should be applied to the new shares instead of the issue price.
• C. The company raises £30.0 million, and the first-day trading creates no market purpose because it does not issue new shares.
• D. The company raises £37.8 million because both the new issue and first-day trading provide capital to the issuer.

Best answer: A

What this tests: Securities: Markets

Explanation: Capital formation occurs when the company issues new securities and receives the proceeds. Here, 8,000,000 shares at 375p, or £3.75, raise £30.0 million before costs. The later trading of existing shares is secondary-market activity, so it does not add more capital to the company. It still has important market purposes: it gives investors liquidity, helps establish observable prices through trading and the closing auction, and transfers share-price risk from sellers to buyers. The average traded value of the secondary activity is 2,000,000 shares at £3.90, or £7.8 million of turnover between investors.

• Adding secondary turnover to issue proceeds confuses primary-market funding with investor-to-investor trading.
• Saying secondary trading has no purpose overlooks liquidity, price discovery, and the transfer of ownership risk.
• Repricing the new issue at the closing auction price ignores the actual issue price at which the company sold the new shares.

Only the new shares raise issuer capital, while secondary trading gives investors a tradable price and transfers ownership risk.

Question 15

Topic: Securities: Clearing and Settlement

A settlements analyst is reviewing a failed DVP settlement in a UK equity trade. The exception extract shows:

What is the best supported interpretation of the cause of the failed settlement?

• A. The buyer has insufficient sterling cash to fund the DVP purchase.
• B. The trade has been instructed for the wrong settlement date under the stated settlement cycle.
• C. The seller is short of the shares needed to complete delivery.
• D. The settlement instructions have not matched because the counterparty CREST member IDs differ.

Best answer: D

What this tests: Securities: Clearing and Settlement

Explanation: A failed or unsettled transaction should be diagnosed by checking the essential settlement inputs: agreed trade terms, matching instructions, available cash, available securities, and timing. In a DVP settlement, both the cash leg and securities leg must be capable of settling, but the settlement system also needs matching instructions from both sides. Here, the buyer has more cash than the settlement value, the seller has the full stock quantity, and the intended settlement date is consistent with the stated T+2 convention. The decisive fact is the settlement status: the counterparty CREST member IDs do not match. That points to an instruction or static-data error rather than a funding, stock, or settlement-cycle issue.

• A cash shortfall is not supported because £250,000 is available against a £190,000 settlement value.
• A stock shortage is not supported because the seller has the full 50,000 shares available.
• A timing error is not supported because Monday to Wednesday is T+2 and the exhibit states there is no market holiday.

The cash, stock, and timing facts support settlement, while the system status identifies an instruction mismatch.

Question 16

Topic: Securities: Primary Markets

An issuer is choosing how to structure a proposed equity issue to finance an acquisition. The finance director reviews this extract from the issue summary:

Which interpretation is best supported by the issue summary?

• A. The underwriting shifts unsold-share risk to the syndicate, increasing proceeds certainty for the issuer but adding an issue cost.
• B. The underwriting lowers issue costs because the syndicate receives unsold shares instead of a fee.
• C. The underwriting leaves placement risk with the issuer because the syndicate acts only as a placing agent.
• D. The underwriting removes all pricing risk because investors must buy the shares at the offer price.

Best answer: A

What this tests: Securities: Primary Markets

Explanation: Underwriting is used in primary markets to give an issuer greater certainty that a securities issue will raise the intended funds. In a firm underwriting, the underwriter or syndicate commits to take up securities that investors do not buy. That commitment transfers issue-placement risk away from the issuer and onto the underwriters. The trade-off is cost: the issuer pays an underwriting fee or accepts pricing terms that compensate the underwriters for taking that risk. Underwriting does not force investors to buy the securities, nor does it guarantee the aftermarket price. It mainly supports the issuer’s funding certainty at the point of issue.

• Investor demand is not guaranteed; the syndicate, not investors, stands behind the unsold amount.
• Receiving unsold shares is a risk for the syndicate, not a substitute for charging the issuer.
• A placing agent would not normally take firm placement risk, but the summary states that the syndicate buys shares not placed.

The syndicate’s commitment to buy shares not placed with investors transfers placement risk from the issuer in return for an underwriting fee.

Question 17

Topic: Derivatives: Trading, Hedging and Investment Strategies

A derivatives trader reviews a client’s proposed exchange-traded option position. Premiums are paid upfront and commissions are ignored.

Which interpretation of the strategy is best supported?

• A. The client has bought a straddle: the £5 net premium is the maximum loss at expiry, profit starts below £45 or above £55, and upside reward is theoretically unlimited.
• B. The client has bought a strangle: the loss is limited to the higher individual premium, and breakevens are calculated from two different strikes.
• C. The client has created a covered call: the main risk is a fall in the existing shareholding, partly offset by the call premium received.
• D. The client has sold a straddle: the £5 net premium is the maximum gain, and losses start below £45 or above £55.

Best answer: A

What this tests: Derivatives: Trading, Hedging and Investment Strategies

Explanation: A long straddle is created by buying a call and buying a put on the same underlying, with the same strike and expiry. The trader pays both premiums, so the total upfront premium is £3 + £2 = £5. At expiry, if ABC is exactly £50, both options expire worthless and the £5 premium is the maximum loss. The upper breakeven is £50 + £5 = £55. The lower breakeven is £50 - £5 = £45. The position benefits from a large move in either direction. Upside profit can continue to grow as the share price rises, while downside profit grows as the share price falls, subject to the share price not falling below zero.

• Selling a straddle would involve receiving, not paying, the combined premium and would create potentially large loss exposure.
• A strangle uses different strikes; here both options have the same £50 strike.
• A covered call requires an existing long share position and a written call, neither of which appears in the trading note.

Buying a call and a put with the same strike and expiry creates a long straddle, with breakevens at the strike plus and minus the total premium.

Question 18

Topic: Securities: Accounting Analysis

A UK equity analyst is preparing a relative valuation table for Northbridge Retail plc using P/E and operating margin from the latest annual accounts.

Northbridge Retail plc:

• UK-listed, store-based homeware retailer
• Reports in GBP under IFRS
• Market capitalisation of about £750m
• Owns and operates most stores
• Latest operating profit includes a one-off £42m gain on selling a warehouse

Potential peers:

Which proposed use of a peer would be most likely to produce a misleading comparison unless adjusted or heavily caveated?

• A. Using Homebarn plc as a direct peer solely because its sales growth is weaker.
• B. Using Allen Home plc as a direct P/E and operating-margin peer.
• C. Using ClickHome Inc. as a direct P/E and operating-margin peer.
• D. Using Casa Retail SA after translating its EUR figures and noting the currency effect.

Best answer: C

What this tests: Securities: Accounting Analysis

Explanation: Peer comparison is most useful when companies have similar activities, accounting policies, scale, currencies, and earnings quality. A direct comparison between Northbridge and ClickHome would be especially weak. Northbridge is an owned-store retailer, while ClickHome is an online marketplace earning commission revenue, which can make operating margins structurally different. ClickHome also reports in USD under US GAAP, is far larger, and has a one-off litigation gain in profit. Northbridge itself also has a one-off warehouse gain, so earnings should be normalised before using P/E or operating-margin ratios. Differences in trading performance, such as weaker sales growth, do not by themselves make a company an unsuitable peer if the business model and accounting basis are otherwise comparable.

• A similar UK IFRS retailer of comparable size is a natural starting point, though Northbridge’s one-off gain still needs adjustment.
• Weaker sales growth reflects business performance, not necessarily a peer-comparison flaw.
• A EUR peer requires currency care, but the same IFRS basis, similar scale, and similar operating model make it less problematic than the marketplace comparison.

ClickHome differs in business model, accounting basis, reporting currency, scale, and one-off profit effects, so unadjusted ratios are weakly comparable.

Question 19

Topic: Derivatives: Introduction to Derivatives

A company has a £50 million bank facility with interest charged at SONIA plus a margin. Management wants more predictable interest costs and is reviewing the following derivatives contract summary:

Which interpretation is best supported?

• A. The company would exchange £50 million principal at the start and end of the contract to obtain funding in another currency.
• B. The company would take a leveraged position in an underlying asset, with profit or loss based only on the asset price movement.
• C. The company would buy protection against rising rates while retaining the choice not to exercise if rates fall.
• D. The company would exchange fixed and floating interest cash flows on a notional amount, helping offset floating-rate borrowing exposure.

Best answer: D

What this tests: Derivatives: Introduction to Derivatives

Explanation: A swap is an agreement to exchange specified cash flows, usually calculated by reference to a notional amount. In a plain vanilla interest rate swap, one party pays a fixed rate and receives a floating rate, or vice versa. Here, the company has floating-rate borrowing linked to SONIA. By receiving a SONIA-based amount under the swap and paying a fixed rate, it can reduce uncertainty in its overall interest cash flows. The notional amount is used to calculate payments, but it is not normally exchanged in a standard single-currency interest rate swap. Swaps are commonly used to manage interest-rate exposure or, in currency swaps, to manage currency and interest cash-flow exposure.

• The right-but-not-obligation description is characteristic of an option, not a swap.
• The principal-exchange description may fit some currency swaps, but the contract summary states that no principal is exchanged and only sterling interest cash flows are shown.
• The leveraged price-difference description is closer to a CFD than to an interest rate swap used to manage borrowing cash flows.

The swap converts the company’s SONIA-linked cash-flow exposure into a more fixed interest cost without exchanging principal.

Question 20

Topic: Securities: Secondary Markets

A sales trader is asked why a client’s screen shows sudden weakness in a sterling corporate bond during the afternoon.

Market notes:

• Bond: 5-year investment-grade corporate bond, £150m outstanding, mainly dealt OTC through market makers.
• No issuer announcement, rating action, covenant news, or adverse trading update has been released.
• Comparable gilt yields and sector credit spreads are little changed.
• A fund tried to sell £20m at once after a mandate redemption, while dealers were reluctant to add inventory.
• A matched purchase is delayed because the seller’s custodian has not delivered the bonds for settlement.
• Dealer quotes moved from 101.10/101.40 to 100.00/101.00 and quoted sizes became much smaller.

Which is the single best explanation for the apparent weakness?

• A. Liquidity and settlement pressure: a large sale in a small OTC issue and a delivery delay reduced executable bids.
• B. Exchange order-book volatility: the bond is repricing because algorithmic orders are sweeping a central limit order book.
• C. Issuer credit deterioration: the bond is repricing because new negative information has emerged about the issuer.
• D. Interest-rate risk: the bond is repricing because benchmark gilt yields have moved adversely.

Best answer: A

What this tests: Securities: Secondary Markets

Explanation: A bond price move in the secondary market is not always caused by issuer fundamentals. Small or less actively traded corporate bonds can have wide bid-offer spreads, limited dealer inventory, and poor depth. A large sell order may push executable bids down even when the issuer’s credit position is unchanged. Settlement problems can add pressure because dealers and buyers may be unwilling to commit balance sheet or take on delivery risk until the position can settle. Here, the absence of issuer news, stable comparable yields and spreads, a large forced sale, reduced quote sizes, and a custody delivery delay all support a liquidity and settlement explanation.

• Issuer credit deterioration fails because there is no issuer news, rating action, covenant issue, or adverse trading update.
• Interest-rate risk fails because comparable gilt yields are stated to be little changed.
• Exchange order-book volatility fails because the bond is mainly dealt OTC through market makers, not through a central limit order book.

The facts point to secondary-market frictions, not a change in the issuer’s credit or business fundamentals.

Question 21

Topic: Securities: Secondary Markets

An institutional bond trader is reviewing a sterling corporate bond that sold off during the afternoon. Which interpretation is best supported by the market-data snapshot?

Market-data snapshot:

• A. The move is most likely due to coupon accrual between settlement dates.
• B. The price fell mainly because the benchmark gilt yield rose sharply across the market.
• C. The spread move is best explained by a broad repricing of investment-grade sector risk.
• D. The sell-off was mainly an issuer-specific credit-spread widening rather than a benchmark-rate move.

Best answer: D

What this tests: Securities: Secondary Markets

Explanation: For a corporate bond, a price fall can be driven by a rise in the risk-free benchmark yield, a widening credit spread, or both. Here, the benchmark gilt yield increased by only 2 bp, while the bond yield rose by 33 bp and the G-spread widened from 20 bp to 51 bp. The issuer’s CDS also widened materially, and the issuer had negative credit news. These facts point to a deterioration in perceived issuer credit risk, not a general rates move. The small move in the sector spread index supports the same conclusion: the market did not broadly reprice the whole sector by enough to explain this bond’s move.

• A benchmark-rate explanation is weak because the gilt yield moved only slightly.
• A broad sector repricing is not enough because the sector index widened only 4 bp.
• Coupon accrual may affect dirty price, but it would not explain wider G-spread and CDS levels.

The bond yield rose far more than the gilt yield, while both the G-spread and issuer CDS widened after negative issuer-specific news.

Question 22

Topic: Securities: Primary Markets

An issuer plans a fully underwritten share issue.

Issue terms:

• New shares: 20 million
• Issue price: £5.00 per share
• Underwriting commission: 2% of the total issue value, payable by the issuer
• Investor subscriptions received: 16 million shares
• Underwriter’s commitment: subscribe for any shares not taken by investors at the issue price

Ignoring other costs, which statement best describes the result?

• A. The issuer receives £98 million net before other costs; the underwriter must take £20 million of shares, transferring placement risk to the underwriter for a fee.
• B. The issuer receives £78.4 million net because the underwriting commission is deducted only from the shares subscribed for by investors.
• C. The issuer receives £100 million net because the underwriting commitment removes both the placement risk and the cost of the issue.
• D. The issuer receives £80 million net because only 16 million shares were taken by investors, and the underwriter is paid only for arranging the issue.

Best answer: A

What this tests: Securities: Primary Markets

Explanation: In a firm underwriting, the underwriter commits to take up securities that investors do not buy. That gives the issuer greater certainty that the planned capital will be raised, even if market demand is weaker than expected. Here, the total issue is 20 million shares at £5.00, giving gross proceeds of £100 million. Investors take 16 million shares, leaving 4 million shares. The underwriter must subscribe for those 4 million shares at £5.00, a £20 million placement obligation. The issuer pays a 2% underwriting commission on the total issue value, which is £2 million, so net proceeds before other costs are £98 million. The fee is the price of transferring the issue-placement risk to the underwriter.

• Treating the issue as raising only £80 million ignores the underwriter’s obligation to subscribe for the 4 million-share shortfall.
• Treating the issuer as receiving £100 million net ignores the underwriting commission, which is the cost of the risk transfer.
• Deducting commission only from investor subscriptions misapplies the stated fee basis, which is the total issue value.

The gross issue value is £100 million, the 2% fee is £2 million, and the underwriter must buy the 4 million-share shortfall for £20 million.

Question 23

Topic: Securities: Asset Classes

A bank treasury desk owns short-dated gilts but needs cash for two weeks to cover a temporary liquidity requirement. It enters this transaction:

Assume no fees and use an actual/365 annualisation. From the bank’s perspective, which description best identifies the structure and the estimated annualised financing rate?

• A. An outright sale of gilts to improve liquidity; a realised trading gain of £14,000.
• B. A securities-lending transaction to borrow gilts for settlement cover; a 0.14% lending fee.
• C. A repo used to raise short-term cash against securities collateral; about 3.65% per annum.
• D. A reverse repo used to invest surplus cash and obtain securities collateral; about 3.65% per annum.

Best answer: C

What this tests: Securities: Asset Classes

Explanation: A repo is a securities-financing transaction in which one party sells securities for cash and agrees to repurchase them later at a higher price. From the cash receiver’s perspective, it is a way to manage liquidity by borrowing cash secured against securities collateral. Here, the bank receives £10,000,000 and will pay £10,014,000 after 14 days, so the financing cost is £14,000. The 14-day rate is 0.14%, and annualising on an actual/365 basis gives approximately 0.14% × 365 / 14 = 3.65% per annum. The economic substance is secured short-term cash funding, not an outright disposal of the gilts.

• Treating the trade as a reverse repo confuses perspectives; the cash provider is doing the reverse repo, not the bank receiving cash.
• An outright sale would not include an agreed repurchase price and date.
• Securities lending usually focuses on borrowing or lending securities, often against collateral, rather than raising cash through a sale and repurchase agreement.

The bank sells securities and agrees to repurchase them later, so it is using a repo to obtain cash, with £14,000 interest annualised over 14 days.

Question 24

Topic: Securities: Corporate Actions

A custody operations analyst is reviewing a bond repayment notice for a nominee client.

Client holding: £200,000 nominal of Oakfield Rail plc 3.75% bonds due 2032.

Notice excerpt:

Full early redemption under issuer call option. Redemption date: 30 June. Redemption price: 100.50% of nominal, plus accrued interest to but excluding 30 June. No holder election is required.

The client bought the bonds last year at a clean price of 97.80. Which is the single best interpretation of the notice?

• A. The client should receive the next coupon only and continue holding the bonds until the stated 2032 maturity date.
• B. The client should receive £201,000 plus accrued interest, and the nominee holding should be reduced to nil on redemption.
• C. The client may elect either to receive £201,000 now or to keep the bonds outstanding until maturity.
• D. The client should receive £195,600 plus accrued interest because repayment is based on the clean purchase price paid last year.

Best answer: B

What this tests: Securities: Corporate Actions

Explanation: A bond redemption notice tells the holder how and when principal will be repaid. Here the issuer is exercising a call option for a full early redemption, and the notice says no holder election is required. The redemption price is stated as a percentage of nominal value, not as a percentage of the investor’s original purchase price or the current market price. Therefore £200,000 nominal at 100.50% gives a principal repayment of £201,000. Accrued interest is also payable up to, but excluding, the redemption date. Once the full redemption is processed, the nominee position is cancelled or reduced to zero and no further coupons accrue after the redemption date.

• Treating the event as an ordinary coupon ignores that the notice is a full early redemption.
• Treating the event as elective ignores the stated absence of any holder election.
• Using the investor’s clean purchase price confuses secondary-market trade pricing with the issuer’s redemption price.

A full mandatory redemption at 100.50% of £200,000 nominal repays £201,000 plus accrued interest and extinguishes the holding.

Question 25

Topic: Derivatives: Underlying Markets

A UK corporate treasury team asks a derivatives broker how to hedge a future funding cost.

Facts:

• The company will refinance £40 million of short-term borrowing in three months.
• The borrowing cost will reset with sterling money-market interest rates.
• The treasurer wants to consider a forward-style hedge, a swap, or an option.
• There is no planned purchase or sale of gilts, equities, commodities, or foreign currency.

Which underlying is the single best fit for the hedge?

• A. The FTSE 100 equity index level
• B. A short-term sterling interest-rate benchmark used for money-market funding resets
• C. The GBP/USD spot exchange rate
• D. A UK gilt delivery basket based on long-dated government bonds

Best answer: B

What this tests: Derivatives: Underlying Markets

Explanation: Money-market and interest-rate derivatives are commonly based on short-term reference rates or funding rates, rather than on ownership of the cash instrument itself. A company that will refinance short-term borrowing has exposure to the rate at which that borrowing resets. Futures, forward-rate agreements, swaps, caps, floors, and options can all be structured around interest-rate underlyings to manage that exposure. A gilt-based contract may also be interest-rate sensitive, but it is primarily linked to government bond prices or yields and may involve bond delivery conventions. FX and equity index underlyings do not match a sterling funding-rate risk.

• A gilt delivery basket is more relevant to government bond futures than to a short-term money-market funding reset.
• GBP/USD would hedge currency exposure, not the sterling interest rate on borrowing.
• The FTSE 100 index would introduce equity market exposure, which is unrelated to the stated funding cost.

The exposure is to the future level of short-term sterling interest rates, which is a money-market underlying used in forwards, swaps, futures, and options.

Questions 26-50

Question 26

Topic: Securities: Secondary Markets

A bond trader is reviewing why a client’s sale order in a corporate bond is receiving poor executable prices despite no adverse issuer announcement.

Trading note:

• Security: 4.25% 2031 senior unsecured sterling note; issue size £250m; mostly held by long-only investors.
• Market colour: only two dealers are quoting, both subject to locate; bid-offer has widened sharply.
• Issuer information: rating unchanged; no regulatory announcement; comparable liquid sector bonds are broadly unchanged.
• Operations note: the client’s previous purchase is still pending because the settlement instruction used the wrong place of settlement.
• Client order: sell £5m today.

What is the best supported interpretation or action?

• A. Treat the poor execution mainly as a liquidity and settlement problem, and confirm deliverability before changing the credit view.
• B. Use an aggressive algorithmic order because unchanged issuer news means the market-impact and settlement risks are negligible.
• C. Mark the bond down for issuer credit deterioration because a wider bid-offer spread is direct evidence of weaker fundamentals.
• D. Price the bond solely against newly issued sector bonds because settlement problems do not affect secondary-market execution.

Best answer: A

What this tests: Securities: Secondary Markets

Explanation: In secondary bond markets, a poor executable price is not always a signal that the issuer’s credit quality has deteriorated. Thin trading, small issue size, long-only holders, dealer quotes given only subject to locate, and a pending settlement fail all point to marketability and deliverability problems. The unchanged rating, absence of issuer news, and stable comparable liquid bonds weaken the case for an issuer-fundamentals explanation. The practical response is to resolve the settlement instruction issue and confirm that the bond can be delivered before treating the price as a credit-driven move.

• A wider bid-offer spread can reflect poor liquidity, not necessarily weaker issuer fundamentals.
• Algorithmic execution does not remove the need to locate securities or manage settlement risk.
• New-issue sector pricing may help context, but it does not override a visible settlement fail in the bond being sold.

The trading note points to limited dealer liquidity and a pending settlement fail, while issuer fundamentals and comparable bonds show no adverse signal.

Question 27

Topic: Derivatives: Delivery and Settlement

A fund’s operations team queries a debit posted on expiry of an exchange-traded equity index future. The trader says no shares were delivered, so there should not be a settlement charge.

Contract summary:

What is the best supported interpretation of the issue?

• A. It is a timing issue: the fund must wait until the delivery day for the charge to be reversed.
• B. It is a position management issue only: an open long at expiry creates no settlement entry if no roll was executed.
• C. It is a price-based final cash settlement loss: the lower final settlement price gives a debit of £8,000.
• D. It is a delivery obligation issue: the long must arrange to receive the basket of index shares.

Best answer: C

What this tests: Derivatives: Delivery and Settlement

Explanation: A cash-settled derivative does not require delivery of the underlying asset. At expiry, the position is settled by comparing the trade price, or relevant previous settlement basis, with the final settlement price. Here the fund is long, so a fall from 7,850 to 7,690 produces a loss of 160 index points. With a £10 multiplier and 5 contracts, the debit is £8,000. The absence of share delivery is consistent with the contract terms and does not mean there should be no expiry settlement. The issue is therefore about final settlement price and resulting cash profit or loss, not physical delivery, timing, or an unprocessed roll.

• Physical delivery is not applicable because the contract terms specify cash settlement only.
• Waiting for delivery day is not supported because no delivery process exists for this contract.
• Failure to roll may explain why the position reached expiry, but the posted debit is still the cash-settlement loss.

The cash-settled future is closed against the final settlement price, creating a loss of 160 points times £10 times 5 contracts.

Question 28

Topic: Securities: Investment Management

An investment committee is reviewing how to invest a £20 million long-term allocation.

Mandate facts:

• Objective: obtain broad UK equity market exposure in line with the FTSE All-Share over at least five years.
• Risk profile: willing to accept equity market risk, but wants to avoid concentrated manager-specific risk.
• Constraint: no gearing and no derivatives in the portfolio mandate.
• Evidence reviewed: recent active UK equity mandates have underperformed the benchmark after fees, and the committee has a tight ongoing cost budget.

Which investment approach is the single best fit?

• A. Use leveraged FTSE equity futures to create enhanced market exposure with lower initial cash outlay.
• B. Invest through a low-cost physical UK equity index fund benchmarked to the FTSE All-Share.
• C. Appoint a concentrated active UK equity manager with a performance-fee structure.
• D. Switch the allocation to an investment-grade sterling corporate bond fund for lower volatility and income.

Best answer: B

What this tests: Securities: Investment Management

Explanation: An investment approach should be judged against the mandate’s objective, permitted risk, constraints, and supporting evidence. Here, the stated aim is broad UK equity exposure against a specific equity benchmark, not income generation or benchmark outperformance. A low-cost physical index fund provides diversified exposure close to the FTSE All-Share while reducing stock-selection and manager-style risk. It also aligns with the evidence that active mandates have struggled after fees and with the committee’s tight cost budget. Because the mandate prohibits derivatives and gearing, approaches using futures or leveraged instruments are unsuitable even if they could create equity exposure.

• A concentrated active manager conflicts with the desire to avoid manager-specific risk and is hard to justify given the after-fee underperformance evidence.
• Leveraged futures breach the no-gearing and no-derivatives constraints.
• A sterling corporate bond fund may reduce volatility, but it does not meet the objective of broad UK equity market exposure.

A physical index fund matches the benchmark-led objective, avoids leverage and derivatives, limits manager-specific risk, and supports the cost constraint.

Question 29

Topic: Derivatives: Underlying Markets

A derivatives analyst is asked why four positions moved differently during the same trading session. Review the market-data snapshot and select the best supported interpretation.

Which interpretation best explains the different price responses?

• A. The contracts are reacting to direct ownership rights, because coupons, voting rights, dividends and warehouse title pass through automatically to all derivative holders.
• B. The contracts reflect different dominant inputs: yields for bond futures, implied volatility for the equity option, cash index and carry for the index future, and spot supply-demand plus carry for crude oil futures.
• C. The contracts are being marked primarily from exchange margin, because daily margin changes normally drive the market price of listed derivatives.
• D. The contracts mainly reflect one common rate driver, so higher yields should lower every futures and option value regardless of the underlying market facts.

Best answer: B

What this tests: Derivatives: Underlying Markets

Explanation: Different derivative contracts respond to the economic drivers of their own underlying markets. A bond future is sensitive to bond prices and yields; when yields rise, bond prices and bond futures normally fall. An equity option is affected not only by the share price but also by implied volatility, time to expiry, dividends and rates; with the share price flat, a fall in implied volatility can reduce the option premium. An equity index future is closely linked to the cash index, adjusted for cost of carry such as financing and expected dividends. A commodity future is influenced by spot supply and demand as well as storage costs, financing and convenience yield. The session facts therefore support a product-specific interpretation, not a single universal driver.

• A single rate-driver explanation ignores the flat short-term rates for the index future and the volatility effect on the equity option.
• Exchange margin affects collateral and cash flows, but it is not the underlying reason market prices move.
• Derivative holders do not automatically receive the same ownership rights as holders of the underlying asset.

Each movement is consistent with the main pricing drivers of that derivative’s own underlying market.

Question 30

Topic: Securities: Corporate Actions

An investor holds shares in a UK listed company that is making a rights issue. The shares are still trading cum-rights.

Terms:

• Cum-rights market price: 240p per share
• Rights issue: 1 new share for every 4 existing shares held
• Subscription price: 180p per new share
• Existing holding: 800 shares
• Ignore costs, taxes, and rounding
• Assume the shares move to the theoretical ex-rights price and nil-paid rights can be sold at their theoretical value.

If the investor sells all the nil-paid rights rather than subscribing, what sale proceeds should the investor expect?

• A. £24
• B. £120
• C. £96
• D. £360

Best answer: C

What this tests: Securities: Corporate Actions

Explanation: In a rights issue, the entitlement is calculated from the existing holding. A 1-for-4 issue gives the investor 800 ÷ 4 = 200 rights. The theoretical ex-rights price is based on four existing shares at 240p plus one new share at 180p: 1,140p for five shares, or 228p per share. A nil-paid right is theoretically worth the difference between the ex-rights value of the share and the subscription price: 228p - 180p = 48p. Selling 200 rights at 48p gives 9,600p, which is £96.

• £24 applies the 12p fall per existing share to the 200 rights, rather than valuing each nil-paid right.
• £120 compares the cum-rights price with the subscription price, ignoring the dilution effect reflected in the theoretical ex-rights price.
• £360 is the cash needed to subscribe for 200 new shares at 180p, not the proceeds from selling the rights.

The investor receives 200 rights, each theoretically worth 48p, giving sale proceeds of 200 × 48p = £96.

Question 31

Topic: Derivatives: Principles of Pricing and Valuation

A derivatives dealer is checking a junior trader’s notes for a long call option on a UK-listed share. The desk quotes the premium and Greeks on a per-share basis and treats the listed sensitivities as all-else-equal estimates.

Which interpretation is best supported by the pricing snapshot?

• A. If the share price rises by £1, the call’s delta is expected to rise from 0.62 to about 0.66, before other inputs change.
• B. If interest rates rise by 1 percentage point, the call’s delta is expected to increase by about 0.05.
• C. If one day passes, the call’s premium is expected to increase by about £0.03 from time decay alone.
• D. If implied volatility rises by 1 percentage point, the call’s premium is expected to fall by about £0.18.

Best answer: A

What this tests: Derivatives: Principles of Pricing and Valuation

Explanation: Delta estimates how much an option premium changes for a small move in the underlying. Gamma estimates how much delta changes when the underlying moves. A gamma of 0.04 per £1 share-price move means a £1 increase would make delta about 0.66, calculated as 0.62 plus 0.04, all else equal. Theta measures time decay; the negative value indicates an expected loss of £0.03 per day from time passing. Vega measures sensitivity to implied volatility, and positive vega means the premium rises if implied volatility rises. Rho measures premium sensitivity to interest-rate changes, not a direct change in delta.

• Gamma changes delta; it is not the first-order premium change for a share-price move.
• Negative theta means time passing reduces, not increases, the premium of the long call.
• Positive vega means a rise in implied volatility supports a higher premium, not a lower one.
• Rho is sensitivity of the premium to interest rates, not a direct change in delta.

Gamma of 0.04 shows the expected change in delta for a £1 move in the underlying share price.

Question 32

Topic: Derivatives: Introduction to Derivatives

A UK asset manager wants temporary exposure reduction before month-end client flows are known.

Trade details:

• It sells a one-month exchange-traded FTSE 100 index futures contract.
• The contract is cash settled in GBP at expiry using the official FTSE 100 index level.
• No shares in the index constituents are delivered.
• Daily variation margin reflects changes in the futures settlement price.
• A clearing house stands between the buyer and seller.

Which statement best explains why this contract is a derivative?

• A. Its value and profit or loss are derived from movements in the FTSE 100 index, rather than from direct ownership or delivery of the underlying shares.
• B. Its value is derived from the asset manager’s investment objective, because the trade is being used to reduce portfolio risk.
• C. Its value is derived from the cash settlement process, because no physical securities are transferred at expiry.
• D. Its value is derived mainly from the clearing house guarantee, because the clearing house becomes the counterparty to both sides of the trade.

Best answer: A

What this tests: Derivatives: Introduction to Derivatives

Explanation: A derivative is a contract whose value depends on an underlying asset, rate, index, commodity, credit event, or other reference variable. In this case, the futures contract references the FTSE 100 index. The asset manager does not buy or sell the underlying shares through the contract, and the cash settlement mechanism simply converts the change in the index-linked futures price into a cash gain or loss. Clearing and margin reduce counterparty and performance risk, but they do not create the economic exposure. The essential point is that the contract’s value is derived from movements in the referenced index.

• The clearing house helps manage counterparty risk, but it is not the source of the contract’s value.
• The asset manager’s hedge objective explains why the trade was entered into, not how the contract is valued.
• Cash settlement affects the settlement method, but a physically delivered contract can also be a derivative.
• Direct ownership of index shares is not required for a derivative exposure.

The contract payoff is linked to the underlying index level, which is the defining feature of a derivative.

Question 33

Topic: Derivatives: Underlying Markets

A trader enters a calendar futures position in a commodity underlying.

• Long 10 September copper futures at USD 8,200 per tonne
• Short 10 December copper futures at USD 8,320 per tonne
• Contract size: 25 tonnes
• Fees and financing are ignored

One week later, both legs are closed:

Which assessment of the exposure and result is most accurate?

• A. Directional long exposure; the September futures price rose by USD 60 per tonne, producing a USD 15,000 profit.
• B. Spread-based exposure; the December-over-September spread narrowed by USD 80 per tonne, producing a USD 20,000 profit.
• C. Volatility-sensitive exposure; the position gained because implied volatility in copper increased during the week.
• D. Basis-sensitive exposure; the gain came from convergence between spot copper and the September futures price.

Best answer: B

What this tests: Derivatives: Underlying Markets

Explanation: With one long futures contract month and one short futures contract month in the same underlying, the key exposure is the spread between the two delivery months. The long September leg gains USD 60 per tonne. The short December leg gains USD 20 per tonne because that futures price falls. Across 10 contracts of 25 tonnes, the total gain is USD 80 × 250 tonnes = USD 20,000. This matches the narrowing of the December-over-September spread from USD 120 to USD 40 per tonne. A directional position would mainly depend on an outright move in copper. A volatility-sensitive position would normally involve options and changes in implied volatility. A basis-sensitive position would involve a mismatch between a cash or spot exposure and a futures hedge.

• Treating the trade as outright long copper ignores the short December futures leg and understates the total result.
• Volatility sensitivity is not supported because no option premium, strike, expiry payoff, or implied volatility input is present.
• Basis sensitivity is not supported because no spot copper position or cash-versus-futures hedge is described.

The equal long and short futures legs make the result depend on the relative movement between delivery months, and the spread narrowed in the trader’s favour.

Question 34

Topic: Derivatives: Underlying Markets

A derivatives desk is reviewing whether a proposed cryptoasset-linked transaction adds risks beyond holding the coins directly. Review the following derivatives contract summary:

Derivatives contract summary

Which interpretation is best supported?

• A. The basket’s price volatility, exchange liquidity and fork or regulatory sensitivity are underlying-market risks; leverage, margining, reference-rate fallback and dealer exposure are derivative-structure risks.
• B. The reference-rate fallback is an underlying-market risk because it relates to exchange price feeds rather than to the contract terms.
• C. The daily margin calls and 2x exposure are underlying-market risks because they change only when bitcoin and ether prices move.
• D. The swap has no material derivative-structure risk because it is cash-settled and does not require custody of bitcoin or ether.

Best answer: A

What this tests: Derivatives: Underlying Markets

Explanation: A derivative on cryptoassets contains two layers of risk. The first layer comes from the underlying market: cryptoasset price volatility, fragmented exchange liquidity, operational disruption at trading venues, forks, and regulatory news that may affect bitcoin or ether prices. The second layer comes from the derivative structure: the 2x economic exposure creates gearing, daily variation margin can create liquidity pressure, the fallback pricing mechanism can affect valuation and settlement, and the single bank dealer creates counterparty exposure. Cash settlement removes the need to deliver or custody the coins, but it does not remove either the underlying price risk or the contract-specific risks created by the swap terms.

• Treating margin and leverage as underlying-market risks confuses price movement with the contractual mechanism that magnifies exposure and creates collateral calls.
• Treating the fallback price source as underlying-market risk overlooks that fallback selection is a term of the OTC confirmation and affects valuation under the contract.
• Cash settlement avoids physical delivery of cryptoassets, but it does not eliminate gearing, margin, valuation-method or counterparty risks.

The cryptoassets create market-specific exposure, while the swap terms add gearing, collateral, valuation and counterparty features that would not arise in the same way from direct ownership.

Question 35

Topic: Securities: Accounting Analysis

An analyst is reviewing the following compact extract for a listed manufacturing company. Assume the figures are comparable between years. No cash-flow statement, share price, dividend information, accounting-policy notes, sector benchmark, or management commentary is provided.

Which conclusion is supported by the extract alone?

• A. Liquidity deteriorated because the current ratio fell from 1.50 to 1.33.
• B. Financial risk clearly reduced because borrowings-to-equity fell from 63.6% to 50.0%.
• C. Operating margin increased from 12.0% to 12.5%, but the extract does not show that the shares are good value.
• D. The shares are attractive because both revenue and operating profit increased in Year 2.

Best answer: C

What this tests: Securities: Accounting Analysis

Explanation: A financial-statement extract can support calculated observations, but it should not be stretched into an investment-quality conclusion. Operating margin is operating profit divided by revenue. In Year 1 it was £12m / £100m = 12.0%; in Year 2 it was £15m / £120m = 12.5%, a slight improvement. Other ratios give different signals: gross margin fell from 32.0% to 25.0%, the current ratio improved from about 1.33 to 1.50, and borrowings-to-equity rose from 50.0% to about 63.6%. Without share price, cash-flow data, peer comparisons, accounting notes, dividend policy, and risk context, the extract does not establish whether the shares are an attractive investment.

• Higher revenue and operating profit do not by themselves prove that shares are attractive; valuation and risk evidence is missing.
• The current ratio did not fall; it rose from about 1.33 to 1.50.
• Borrowings-to-equity did not fall; it rose from 50.0% to about 63.6%, so reduced financial risk is not supported.

Operating profit divided by revenue increased slightly, while valuation quality cannot be concluded from this extract alone.

Question 36

Topic: Securities: Accounting Analysis

An analyst is reviewing a proposal to fund an expansion with additional bank borrowing. Gearing is measured as debt divided by shareholders’ equity, and interest cover is measured as operating profit before interest divided by annual interest cost. Ignore tax.

Financial-statement extract (figures in £m):

Which interpretation is best supported by the extract?

• A. Shareholder returns would necessarily fall because any increase in borrowing reduces profit before tax, even when operating profit also increases.
• B. Gearing would rise from 40% to 70%, interest cover would fall from 7.5 times to about 4.7 times, and shareholder returns could improve if the extra profit is achieved despite higher financial risk.
• C. Gearing would remain unchanged because equity is unchanged, while interest cover would be unaffected because interest is a financing item.
• D. Gearing would fall because the extra funds increase assets, interest cover would improve because operating profit rises, and shareholder returns would become less volatile.

Best answer: B

What this tests: Securities: Accounting Analysis

Explanation: Higher borrowing normally increases financial gearing because debt rises relative to shareholders’ equity. Here, debt increases from £40m to £70m while equity stays at £100m, so gearing rises from 40% to 70%. Interest cover deteriorates because interest grows faster than operating profit: £15m / £2m = 7.5 times, while £18m / £3.8m is about 4.7 times. The expansion could still improve shareholder returns because profit before tax increases from £13m to £14.2m if the forecast operating profit is achieved. However, the higher fixed interest burden makes returns more sensitive to a fall in operating profit, increasing financial risk for ordinary shareholders.

• Treating asset growth as reducing gearing confuses balance sheet expansion with the debt-to-equity ratio used here.
• Leaving gearing or interest cover unchanged ignores the direct effect of additional debt and the higher interest charge.
• Assuming shareholder returns must fall overlooks that the forecast extra operating profit exceeds the extra interest cost.

The added debt increases debt-to-equity gearing, the larger interest charge reduces interest cover, and pre-tax profit rises only because the expected extra operating profit exceeds the extra interest.

Question 37

Topic: Derivatives: Principles of Pricing and Valuation

A derivatives trader is reviewing a three-month equity index futures contract. Assume simple annual rates, proportionate accrual for three months, and no transaction costs, taxes, or margining effect.

Market-data snapshot:

Which is the best supported interpretation?

• A. The fair futures price is about 3,990, so the quoted futures price is rich because financing should be subtracted and income added.
• B. The fair futures price is about 4,010, so the quoted futures price is rich and a trader could consider selling the futures against buying the underlying basket.
• C. The fair futures price is about 4,050, so the quoted futures price is cheap because expected income should be ignored.
• D. The quoted futures price is at fair value because financing cost and expected income offset exactly over the three-month period.

Best answer: B

What this tests: Derivatives: Principles of Pricing and Valuation

Explanation: For a simple forward or futures fair value, start with the spot price, add the financing cost of holding the underlying to expiry, and deduct income expected to be received before expiry. Over three months, the financing cost is 5.0% × 3/12 × 4,000 = 50. Expected income is 1.0% × 4,000 = 40. The fair value is therefore 4,000 + 50 - 40 = 4,010. A quoted futures price of 4,040 is above this fair value, so it is rich relative to the cash-and-carry value. In principle, a trader who can finance and hold the underlying could buy the underlying basket and sell the futures, subject to practical costs and execution risks.

• Ignoring expected income overstates fair value because income reduces the cost of carrying the underlying.
• Subtracting financing and adding income reverses the cost-of-carry logic.
• Financing and income do not offset: the three-month financing cost is 50, while expected income is 40.

The fair price is spot plus financing cost less expected income: 4,000 + 50 - 40 = 4,010, making the quoted price of 4,040 above fair value.

Question 38

Topic: Securities: Asset Classes

An investor pays £10,000 for a 5-year product issued by a bank. It is documented as an unsecured note, not as units in a fund. The issuer is solvent at maturity.

Payoff at maturity:

• If the equity index final level is at least the initial level, pay £10,000 plus 30% of index growth.
• If the final level is below the initial level but at least 70% of the initial level, pay £10,000.
• If the final level is below 70% of the initial level, pay £10,000 reduced in line with the full fall in the index.
• There is no dividend entitlement. Ignore fees and tax.

Which classification and estimated maturity payment is most accurate?

• A. An open-ended collective investment with direct equity ownership through a fund wrapper and market risk in segregated assets; £6,500.
• B. A capital-protected bank deposit with equity-index participation and guaranteed repayment of principal; £10,000.
• C. A bank-issued structured note with equity-index exposure, a barrier-based capital-at-risk payoff, and issuer credit risk; £6,500.
• D. An equity warrant with dividend exposure and an exchange-traded payoff based only on positive index growth; £0.

Best answer: C

What this tests: Securities: Asset Classes

Explanation: A structured product may give exposure to an index without the investor owning the underlying shares or units in a collective investment. Here, the wrapper is an unsecured bank-issued note. The investor’s economic exposure is linked to an equity index, but the payoff is contractual and depends on the issuer remaining able to pay. The final index level is 5,200 / 8,000 = 65% of the initial level, which is below the 70% barrier. Once that barrier condition is failed, the product does not repay full principal. It repays in line with the full index fall, so the estimated payment is 65% of £10,000, or £6,500. There is also issuer credit risk because the note is an unsecured obligation of the bank.

• Treating the product as an open-ended collective investment is wrong because the investor holds a bank note, not fund units backed by segregated portfolio assets.
• Calling it capital-protected ignores the 70% barrier condition and the capital-at-risk wording.
• Describing it as an equity warrant is wrong because the product has a note wrapper and a defined barrier repayment structure, not a simple positive-growth payoff.

The final index level is 65% of the initial level, so the breached barrier makes the note repay £10,000 × 65% = £6,500, subject to the bank issuer’s credit risk.

Question 39

Topic: Securities: Asset Classes

A UK investor wants exposure to an overseas company’s ordinary shares without buying the shares directly in the local market. Four London-traded securities are being reviewed.

Sakura Motors ordinary shares trade in Tokyo at ¥800. The spot exchange rate is £1 = ¥200. The Sakura Motors GDR trades in London at about £20.

Which security provides access to foreign shares rather than a separate underlying business?

• A. Baltic Property REIT shares
• B. BlueRiver plc ordinary shares
• C. Andes Mining warrant
• D. Sakura Motors GDR

Best answer: D

What this tests: Securities: Asset Classes

Explanation: A depositary receipt is not a separate operating business. It is a negotiable certificate issued by a depositary that represents a specified number of an overseas company’s shares held in custody. Here, the Sakura Motors GDR’s value is consistent with that structure: five Tokyo ordinary shares at ¥800 each equal ¥4,000, which converts to about £20 at £1 = ¥200. That matches the London GDR price, indicating access to Sakura Motors foreign shares through the receipt. By contrast, overseas revenues, overseas property ownership, or a warrant over shares do not make an instrument a depositary receipt.

• A UK company with overseas revenues is still an ordinary share in that UK company, not a receipt over foreign shares.
• A warrant gives a right to subscribe for or buy shares; it does not itself represent deposited shares held by a depositary.
• A property company or REIT gives exposure to a property-owning business, not direct access to foreign ordinary shares through a receipt.

The GDR represents deposited Sakura Motors ordinary shares, and 5 × ¥800 ÷ ¥200 gives an underlying value of about £20.

Question 40

Topic: Derivatives: Delivery and Settlement

A clearing member’s client is short 20 exchange-traded FTSE 100 index call options at expiry.

Contract terms and expiry facts:

• Exercise style: European
• Settlement: cash-settled against the exchange delivery settlement price (EDSP)
• Automatic exercise: in-the-money options are exercised automatically unless the long holder submits a contrary instruction
• Strike: 7,500
• EDSP: 7,580
• Contract multiplier: £10 per index point
• No contrary instruction was submitted

Which interpretation is correct?

• A. The long calls are automatically exercised, and the short client may be assigned to pay £16,000 in cash with no delivery of shares.
• B. The long holder must buy the underlying FTSE 100 shares from the short client at 7,500.
• C. The calls expire worthless because European-style options cannot be exercised at expiry without a manual instruction.
• D. The short client exercises the calls and receives £16,000 in cash from the clearing house.

Best answer: A

What this tests: Derivatives: Delivery and Settlement

Explanation: For an option, the long holder has the exercise right and the short writer has the obligation if assigned. European-style means exercise is permitted at expiry, not before expiry. Here the call is in the money because the EDSP of 7,580 is above the 7,500 strike. The contract also states that in-the-money options are automatically exercised unless the long holder submits a contrary instruction. Because no contrary instruction was submitted, the long call is exercised automatically. As the contract is cash-settled, the assigned short pays the intrinsic value rather than delivering any underlying securities. The cash amount is 80 index points × £10 × 20 contracts = £16,000.

• The short side does not exercise the option; it is assigned and must meet the resulting obligation.
• European-style options can be exercised at expiry, and the contract terms specify automatic exercise for in-the-money options.
• Cash-settled index options settle by cash payment, not by delivery of constituent shares.

The calls are in the money by 80 index points, so automatic exercise leads to cash settlement of 80 × £10 × 20 = £16,000 payable by the assigned short.

Question 41

Topic: Derivatives: Market Structure

A derivatives trader is reviewing the exchange feed for Euro Stoxx 50 index futures on Wednesday. The front-month contract expires on Friday.

Market data:

Several large trades are reported as June-September calendar spreads. What is the single best interpretation of these signals?

• A. New bearish positioning is building in June because the June price is down and trading volume is higher than normal.
• B. The June contract is becoming illiquid because high volume and a one-tick spread indicate poor market depth.
• C. A volatility breakout is confirmed because both contracts have high volume and small price movements.
• D. Positions are being rolled from the expiring June contract into September, creating expiry-related pressure rather than a new outright directional view.

Best answer: D

What this tests: Derivatives: Market Structure

Explanation: Volume shows trading activity, but open interest helps distinguish new positioning from closing or transferring positions. Around expiry, a common pattern is heavy volume in both the expiring and next contract, falling open interest in the expiring contract, and rising open interest in the deferred contract. Calendar spread trades reinforce that the activity is a roll rather than a fresh outright bet. The one-tick bid-offer spread also suggests the market remains liquid, not impaired. Small price moves make a volatility-breakout interpretation weak on the facts given.

• High volume alone does not prove new bearish positioning; the June open interest is falling, which is more consistent with positions being closed or rolled.
• A one-tick bid-offer spread is a sign of good liquidity, not poor liquidity, especially when volume is high.
• High volume with only small price changes does not, by itself, confirm a volatility breakout.

Falling open interest in the expiring contract, rising open interest in the next contract, heavy spread volume, and tight spreads point to a rollover around expiry.

Question 42

Topic: Derivatives: OTC Derivatives

A fund manager asks whether a proposed OTC derivative can be used for a reserve that may be needed at short notice. The operations analyst reviews the following note.

Trading note:

• Product: Five-year bespoke OTC equity basket return swap
• Underlying: Liquid FTSE 100 shares
• Payoff: One-for-one basket return, no barriers or leverage
• Collateral: Daily cash CSA; current calls met
• Transfer: Client may not assign without dealer consent
• Early exit: Dealer may quote an unwind price but has no obligation to bid

Which risk should be highlighted as the main concern before using the product for the short-notice reserve?

• A. Complexity risk, because the payoff contains embedded barriers and leveraged features.
• B. Counterparty risk, because the dealer’s exposure is unsecured and not collateralised.
• C. Liquidity risk, because exit depends on the dealer’s discretionary unwind quote rather than an active secondary market.
• D. Market risk, because the FTSE 100 shares may move against the client before maturity.

Best answer: C

What this tests: Derivatives: OTC Derivatives

Explanation: Liquidity risk is the risk that a position cannot be sold, transferred, or unwound quickly at a reliable price. In an OTC derivative, this is often important where the contract is bespoke and the client depends on the original dealer for an unwind price. Here, the underlying shares are liquid, but the swap itself is not freely transferable and the dealer is not obliged to make a firm bid. That makes it unsuitable for a reserve that may be needed at short notice. Market risk still exists because the equity basket can move, but the facts most directly point to difficulty converting the position into cash. Counterparty risk is reduced by the daily cash collateral arrangement, and complexity risk is not supported because the payoff is linear with no barriers or leverage.

• Market risk is relevant to value movements, but the immediate issue is whether the position can be exited when cash is needed.
• Counterparty risk is not the strongest concern because the note states that daily cash collateral calls are current.
• Complexity risk is not supported because the payoff is described as one-for-one with no barriers or leverage.

The note shows that the client cannot freely transfer the swap and has no assured early exit, which is a liquidity concern.

Question 43

Topic: Derivatives: Principles of Pricing and Valuation

A trader is estimating fair values for two 6-month equity index futures contracts. Use simple carry and assume no transaction costs or margin funding effect.

The fair value estimate for Alpha is about 4,070, while the fair value estimate for Beta is about 4,010.

Which pricing input most directly explains the 60-point difference between the two futures values?

• A. Historical volatility of the underlying index
• B. Initial margin required by the clearing house
• C. Expected dividend points on the underlying index
• D. Open interest in the futures contract

Best answer: C

What this tests: Derivatives: Principles of Pricing and Valuation

Explanation: For an equity index future, fair value is driven by the spot index level plus financing cost less the value of expected dividends or other income paid before expiry. Here the spot level and financing cost are the same for both contracts. The only pricing input that differs is expected dividend points: Beta has 90 expected dividend points and Alpha has 30. That 60-point dividend difference directly reduces Beta’s fair value relative to Alpha. Volatility is central to option pricing but is not the direct fair-value driver for a straightforward futures carry estimate. Margin and open interest may affect trading, liquidity, or cash management, but they do not explain this arbitrage-free pricing difference under the stated assumptions.

• Initial margin is a collateral requirement, not the carry input causing the stated fair-value gap.
• Historical volatility matters more for option premiums than for this simple futures fair-value estimate.
• Open interest may indicate market participation, but it does not change the carry calculation shown.

Higher expected dividends reduce the fair futures value because futures holders do not receive the cash distributions paid before expiry.

Question 44

Topic: Derivatives: Principles of Pricing and Valuation

An equity derivatives desk is checking whether listed European options on a UK share are aligned with put-call parity.

Facts:

• The call and put are on the same underlying share.
• Both options have the same strike price and expiry date.
• The share pays no dividends before expiry.
• Ignore transaction costs, taxes, and bid-offer spreads.
• The desk can lend or borrow at the relevant risk-free rate.

Which package should have the same economic exposure as buying the underlying share today?

• A. Buy the call, buy the put, and lend the present value of the strike price until expiry.
• B. Buy the call, sell the put, and lend the present value of the strike price until expiry.
• C. Buy the call, sell the put, and borrow the present value of the strike price until expiry.
• D. Sell the call, buy the put, and lend the present value of the strike price until expiry.

Best answer: B

What this tests: Derivatives: Principles of Pricing and Valuation

Explanation: Put-call parity links the prices and payoffs of European calls, European puts, the underlying asset, and financing when the options have the same strike and expiry. For a non-dividend-paying share, the relationship can be expressed as: long call minus short put plus a risk-free asset that pays the strike at expiry equals owning the share. The long call and short put together create a synthetic forward purchase of the share at the strike price. Lending the present value of the strike provides the cash needed at expiry, making the combined position economically equivalent to holding the share today.

• Borrowing the present value of the strike reverses the financing leg needed to fund the expiry payment.
• Selling the call and buying the put creates synthetic short exposure, not long share exposure.
• Buying both the call and the put creates a straddle, giving volatility exposure rather than simple ownership of the share.

For a non-dividend-paying share, put-call parity gives long share exposure as long call plus short put plus a risk-free asset equal to the present value of the strike.

Question 45

Topic: Derivatives: Trading, Hedging and Investment Strategies

A derivatives desk holds £25 million of UK mid-cap equities during a five-day client transition. It proposes a temporary hedge using listed equity index futures. Review the hedge memo excerpt.

Hedge memo excerpt:

• Objective: Reduce broad equity market exposure for five trading days.
• Hedge: Sell FTSE 100 index futures with notional close to the portfolio market value.
• Portfolio: UK mid-cap shares; historical beta to the FTSE 100 is 0.82 and sector weights differ materially from the index.
• Liquidity and cash: Futures are exchange-traded and liquid, but variation margin must be paid in cash each morning if the short futures position moves against the desk.
• Process: Contract expiry falls during the transition; the roll is to be instructed manually by one operations analyst.

Which interpretation is best supported by the memo?

• A. The main new risk is bilateral counterparty credit risk because the futures contract is an OTC derivative.
• B. The futures position can reduce broad equity exposure, but it introduces basis risk, cash funding pressure from variation margin and operational risk around the manual roll.
• C. The hedge eliminates equity price risk because the futures notional is close to the portfolio market value.
• D. The hedge should be rejected because a futures hedge cannot reduce risk unless the index exactly matches every share in the portfolio.

Best answer: B

What this tests: Derivatives: Trading, Hedging and Investment Strategies

Explanation: A hedge can reduce one exposure while creating or revealing other risks. Selling equity index futures is likely to reduce broad equity market exposure during the transition, but the hedge is imperfect because the portfolio is made up of mid-cap shares with different sector weights and a beta that is not one-for-one with the FTSE 100. That mismatch creates basis risk: the portfolio and the futures may not move together. Listed futures are usually liquid, but daily variation margin can create cash funding pressure if the futures position loses money before the cash portfolio is sold. The expiry and manual roll also add operational risk, because an instruction error or missed roll could leave the desk under-hedged or over-hedged.

• Matching notional value does not eliminate risk when the hedge instrument tracks a different index and beta.
• Bilateral OTC counterparty credit risk is not the main issue shown because the hedge uses listed equity index futures.
• An exact share-by-share match is not required for a hedge to reduce risk; imperfect hedges can still lower broad market exposure while leaving residual risk.

The memo supports a partial market hedge, while the index mismatch, daily cash margining and manual roll create basis, funding/liquidity and operational risks.

Question 46

Topic: Derivatives: Trading, Hedging and Investment Strategies

A futures trader enters the following same-day positions on one derivatives exchange:

• Buys 10 May wheat futures at 620 cents per bushel.
• Sells 10 May corn futures at 470 cents per bushel.
• Both contracts have the same delivery month.
• Ignore contract-size differences.

The trader quotes the spread as wheat futures price minus corn futures price. Which description correctly identifies the position and opening spread level?

• A. Calendar spread; long May wheat and short a later wheat delivery at +150 cents per bushel
• B. Intermarket spread; long wheat on one exchange and short wheat on another exchange at -150 cents per bushel
• C. Intra-commodity spread; long May wheat and short another wheat month at +150 cents per bushel
• D. Intercommodity spread; long wheat and short corn at +150 cents per bushel

Best answer: D

What this tests: Derivatives: Trading, Hedging and Investment Strategies

Explanation: A spread position compares the relative price movement between two linked futures positions. Here the trader is long wheat futures and short corn futures, both for May delivery and on the same exchange. Because wheat and corn are different commodities, the position is an intercommodity spread. The opening spread is calculated using the quoted convention: wheat minus corn, or 620 cents less 470 cents, which equals +150 cents per bushel. It is not a calendar or intra-commodity spread because those involve different delivery months of the same commodity. It is not an intermarket spread because the facts do not involve the same commodity traded on different exchanges.

• Calendar and intra-commodity descriptions fail because the facts do not show different delivery months of the same commodity.
• Intermarket treatment fails because both positions are on one exchange and involve different commodities.
• A negative spread would reverse the stated quote convention; wheat minus corn is positive here.

The position is between two different but related commodities with the same delivery month, and the quoted spread is 620 minus 470.

Question 47

Topic: Securities: Accounting Analysis

A listed company has the following year-end figures. There are no preference shares or minority interests.

Which interpretation of these figures is correct?

• A. EPS is 40p, DPS is 10p, dividend yield is 2.5%, P/E is 10 times, and NAV is 300p per share.
• B. EPS is 300p, DPS is 10p, dividend yield is 2.5%, P/E is 1.33 times, and NAV is 40p per share.
• C. EPS is 40p, DPS is 10p, dividend yield is 10%, P/E is 2.5 times, and NAV is 400p per share.
• D. EPS is 10p, DPS is 40p, dividend yield is 10%, P/E is 40 times, and NAV is 300p per share.

Best answer: A

What this tests: Securities: Accounting Analysis

Explanation: Earnings per share measures profit attributable to ordinary shareholders divided by the number of ordinary shares. Here, £20 million across 50 million shares gives EPS of 40p. Dividend per share is £5 million across 50 million shares, giving 10p. Dividend yield compares the dividend with the current share price, so 10p divided by 400p is 2.5%. The price-earnings ratio compares the market price with earnings per share, so 400p divided by 40p gives a P/E of 10 times. Net asset value per share is net assets divided by shares in issue, so £150 million across 50 million shares is £3, or 300p, per share.

• Swapping EPS and DPS reverses earnings and dividends; profit is £20 million, not £5 million.
• Dividend yield must use dividend per share divided by market price, not earnings per share divided by price.
• NAV per share uses net assets, while EPS uses annual profit; mixing these produces misleading valuation figures.

Dividing earnings, dividends, and net assets by 50 million shares gives 40p EPS, 10p DPS, and 300p NAV per share; 10p divided by 400p is 2.5%, and 400p divided by 40p is 10.

Question 48

Topic: Derivatives: Underlying Markets

A derivatives dealer is reviewing an OTC EUR/USD forward quote prepared for a corporate hedge. The pair is quoted as USD per EUR, and the desk uses simple-interest covered interest parity.

Which action is best supported by the data?

• A. Set the 3-month forward rate at approximately 1.1016 USD per EUR.
• B. Set the 3-month forward rate at approximately 1.0854 USD per EUR.
• C. Leave the 3-month forward rate at 1.0800 USD per EUR.
• D. Set the 3-month forward rate at approximately 1.0747 USD per EUR.

Best answer: B

What this tests: Derivatives: Underlying Markets

Explanation: For a forward FX rate, the spot rate is adjusted for the interest-rate differential over the forward period. For EUR/USD, EUR is the base currency and USD is the quote currency, so covered interest parity uses \( F = S \times \frac{1+r_{\text{quote}}t}{1+r_{\text{base}}t} \). The time fraction is \(90/360 = 0.25\). Therefore, \( F = 1.0800 \times \frac{1+0.05 \times 0.25}{1+0.03 \times 0.25} \), which is approximately 1.0854. Because the USD interest rate is higher than the EUR rate, the EUR/USD forward rate is above the spot rate.

• A lower rate around 1.0747 reverses the interest-rate adjustment.
• Leaving the rate at spot ignores the 3-month interest-rate differential.
• A rate around 1.1016 applies the annual differential for a full year rather than for 90 days.

EUR/USD is adjusted by the quote-currency rate over the base-currency rate, giving about 1.0854 for the 90-day tenor.

Question 49

Topic: Derivatives: Trading, Hedging and Investment Strategies

A derivatives desk is asked to create a synthetic position for a fund that must match the economic payoff of owning one share at the option expiry date. The fund does not need dividends or voting rights during the period.

Facts:

• The share pays no dividends before expiry.
• European calls and puts are available on the same share.
• The call and put can be traded with the same strike and same expiry.
• PV(K) is the cash amount that will grow to the strike price K by expiry.
• Transaction costs and margin effects are ignored.

Which position best creates the required synthetic long share exposure?

• A. Buy both the call and the put with the same strike and expiry.
• B. Buy the call, sell the put, and borrow PV(K) until expiry.
• C. Buy the call, sell the put, and lend PV(K) until expiry.
• D. Sell the call, buy the put, and lend PV(K) until expiry.

Best answer: C

What this tests: Derivatives: Trading, Hedging and Investment Strategies

Explanation: For European options on the same non-dividend-paying underlying with the same strike and expiry, put-call parity links options, cash and the underlying. A long call combined with a short put creates a synthetic long forward: its expiry payoff is the share price at expiry less the strike price. To convert that forward payoff into the payoff from owning the share, the desk must also lend the present value of the strike. That cash grows to the strike by expiry, so the combined payoff becomes the share price at expiry. This matches the required economic exposure, although it does not provide shareholder rights during the period.

• Borrowing PV(K) creates a future repayment rather than cash available at expiry, so it does not replicate ownership of the share.
• Selling the call and buying the put gives the opposite directional exposure, similar to a synthetic short forward.
• Buying both the call and the put creates a straddle, which is mainly a volatility position rather than a linear long share exposure.

Long call plus short put creates a synthetic long forward, and lending PV(K) supplies the strike cash at expiry to replicate the share payoff.

Question 50

Topic: Derivatives: Market Structure

A derivatives execution desk receives the following instruction for an exchange-traded equity index futures order. Which trading instruction best matches the client’s constraints?

Trading note:

• Side: Buy

• Quantity: 120 contracts

• Price constraint: Do not pay more than 6,825

• Execution constraint: Execute the whole order immediately or do not trade

• Residual quantity: Do not leave any balance resting on the order book

• A. Enter an immediate-or-cancel limit order with the maximum purchase price set at 6,825.

• B. Enter a good-till-cancelled limit order with the maximum purchase price set at 6,825.

• C. Enter a fill-or-kill limit order with the maximum purchase price set at 6,825.

• D. Enter a market order for the full 120 contracts.

Best answer: C

What this tests: Derivatives: Market Structure

Explanation: The client has given two key constraints: a maximum purchase price and an all-or-nothing immediate execution requirement. A limit instruction is needed because the desk must not buy above 6,825. A fill-or-kill time-in-force condition is needed because the client will accept only a full execution at once; if the whole 120 contracts cannot be filled immediately within the limit, the order should be cancelled. This differs from other immediate or resting instructions because the client expressly rejects both partial execution and leaving an unfilled balance on the order book.

• An immediate-or-cancel limit order gives price protection but can allow a partial fill, which conflicts with the whole-order requirement.
• A market order may achieve fast execution but gives no protection against paying above 6,825.
• A good-till-cancelled limit order gives price protection but can remain on the book, which conflicts with the instruction not to leave a residual quantity resting.

A fill-or-kill limit order provides both the stated price cap and the requirement for complete immediate execution or cancellation.

Questions 51-75

Question 51

Topic: Securities: Asset Classes

A sterling-reporting fund buys a U.S. corporate bond and does not hedge currency risk.

Trade facts:

• Investor reporting currency: GBP
• Bond currency: USD; price and principal are in USD
• Settlement currency: EUR, used only for same-day cash settlement through the custodian
• Bond value at purchase and at month-end: USD100,000
• GBP/USD rate at purchase: 1.2500, quoted as USD per GBP
• GBP/USD rate at month-end: 1.2000, quoted as USD per GBP
• No EUR cash balance is held after settlement; ignore income, fees and tax.

Which statement correctly identifies the FX exposure and the approximate GBP reporting effect at month-end?

• A. A loss of about £3,333 from translating the USD asset into GBP, because GBP/USD fell.
• B. No FX effect, because the USD bond price did not change and the EUR settlement was completed.
• C. A gain or loss based on EUR rates, because the settlement currency determines the continuing exposure.
• D. A gain of about £3,333 from translating the USD asset into GBP; the same-day EUR settlement leaves no continuing exposure.

Best answer: D

What this tests: Securities: Asset Classes

Explanation: Foreign-exchange risk arises when the currency of the asset or cash flow differs from the investor’s reporting currency. Here, the bond remains worth USD100,000, but the fund reports in GBP. At purchase, USD100,000 translated at 1.2500 USD per GBP is £80,000. At month-end, USD100,000 translated at 1.2000 is about £83,333. The weaker pound increases the sterling value of the unchanged USD asset, creating an approximate £3,333 reporting gain. The EUR settlement currency would create FX risk only if the fund had an open EUR cash balance or liability. The facts state that EUR was used only for same-day settlement and no EUR balance remained, so the continuing exposure is USD versus GBP.

• An unchanged USD price does not mean no FX effect when performance is reported in GBP.
• A fall in GBP/USD, quoted as USD per GBP, means GBP has weakened against USD, increasing the GBP value of the USD asset.
• Settlement currency matters for open settlement cash or liabilities, but it does not determine the continuing exposure once no EUR balance remains.

The USD asset is worth £80,000 at purchase and about £83,333 at month-end, so the GBP reporting gain is about £3,333.

Question 52

Topic: Securities: the Financial Services Industry

A securities market transaction is being arranged as follows:

Ignoring other costs, which statement correctly identifies the main roles and estimates the net proceeds to the company?

• A. The company is the issuer, the exchange is the investor, the depository is the intermediary, and net proceeds are £30.00 million.
• B. The investment bank is the issuer, the pension fund is the intermediary, the exchange settles title, and net proceeds are £30.45 million.
• C. The pension fund is the issuer, the company is the investor, the investment bank is infrastructure, and net proceeds are £29.55 million.
• D. The company is the issuer, the pension fund is an investor, the investment bank is an intermediary, the exchange is a trading venue, the depository is infrastructure, and net proceeds are £29.55 million.

Best answer: D

What this tests: Securities: the Financial Services Industry

Explanation: In a primary securities issue, the issuer is the entity raising capital by selling securities. Here, the company sells new shares, so it is the issuer. The pension fund subscribes for shares as an investor. The investment bank arranges and places the issue, so it acts as an intermediary. The stock exchange provides the venue for admission and trading, while the central securities depository is part of the post-trade market infrastructure supporting settlement and record-keeping. The calculation is gross proceeds of 12 million shares times £2.50, which is £30.00 million. A 1.5% fee on £30.00 million is £0.45 million, so net proceeds to the company are £29.55 million.

• Treating the pension fund as the issuer reverses the capital-raising role with the capital-providing role.
• Treating the exchange as the investor confuses a trading venue with a participant buying securities.
• Treating the investment bank as the issuer confuses the arranger or placing agent with the company raising funds.

Gross proceeds are £30.00 million and the 1.5% placing fee is £0.45 million, leaving £29.55 million for the issuer.

Question 53

Topic: Securities: Clearing and Settlement

An operations team is reviewing a settlement problem for a UK equity trade.

Settlement issue summary:

• A broker-dealer sold 80,000 shares of a FTSE 250 company for a client.
• The trade is matched and contractual settlement is due tomorrow.
• The client’s incoming custody transfer of the same shares will not complete for two more business days.
• The desk needs temporary access to equivalent shares to make delivery on time.
• The issue is not a need for cash funding or FX payment-versus-payment settlement.

Which post-trade arrangement is best supported by the summary?

• A. Route the trade through CLS to reduce principal risk on the sterling settlement leg.
• B. Enter into a repo using other securities as collateral to raise short-term sterling cash.
• C. Move the client’s position into a pooled nominee account to simplify safekeeping records.
• D. Arrange a stock borrowing and lending transaction so equivalent shares can be delivered against collateral and returned later.

Best answer: D

What this tests: Securities: Clearing and Settlement

Explanation: A temporary shortage of securities for delivery is typically addressed through stock borrowing and lending. The borrower receives equivalent securities in time to settle its delivery obligation and provides collateral to the lender. When the delayed transfer arrives, the borrower can return equivalent securities under the lending arrangement. A repo is mainly a cash financing tool secured by securities, so it does not solve a lack of the specific equity for settlement. CLS is relevant to foreign exchange settlement risk, not delivery of listed shares. A pooled nominee structure may improve custody administration, but it does not create immediate access to securities that have not yet arrived.

• Repo is tempting because it is short-term and collateralised, but the problem is missing stock, not missing cash.
• CLS is used for FX settlement risk and is not the mechanism for delivering UK equities.
• Pooled nominee custody supports safekeeping and administration, but it does not cure a near-term delivery shortfall.

Stock borrowing and lending directly addresses the temporary securities shortfall needed to prevent an equity settlement fail.

Question 54

Topic: Securities: Investment Management

A UK pension scheme has an investment policy with a long-term benchmark of 50% global equities, 35% investment-grade bonds, 10% property, and 5% cash.

The investment committee notes the following:

• The scheme’s liabilities, risk appetite, and long-term return objective have not changed.
• The current portfolio is close to the policy benchmark weights.
• The committee expects government bond yields to fall over the next six months.
• It proposes a temporary overweight to longer-duration bonds funded from cash, within the permitted active-risk limits.

What is the single best classification of the committee’s proposal?

• A. Security selection
• B. Tactical asset allocation
• C. Portfolio rebalancing
• D. Strategic asset allocation

Best answer: B

What this tests: Securities: Investment Management

Explanation: Strategic asset allocation sets the long-term policy mix between broad asset classes, normally based on objectives, constraints, liabilities, and risk appetite. Tactical asset allocation is a shorter-term departure from that policy mix to exploit a market view, while remaining within permitted limits. Here, the pension scheme’s long-term objective and benchmark are unchanged, but the committee wants a temporary overweight to longer-duration bonds because it expects yields to fall. That makes the action tactical asset allocation. Security selection would involve choosing particular bonds, shares, or funds within an asset class. Portfolio rebalancing would involve restoring weights back to target after market movements or cash flows, not deliberately moving away from target for a market view.

• Changing the long-term benchmark would indicate strategic asset allocation, but the policy benchmark is unchanged.
• Choosing individual gilts, corporate bonds, equities, or managers would indicate security selection, but the proposal is at asset-class level.
• Restoring the portfolio to target weights would indicate portfolio rebalancing, but the portfolio is already close to benchmark and the shift is intentional.

The proposal is a short-term, market-view-driven shift between asset classes while leaving the long-term benchmark unchanged.

Question 55

Topic: Securities: Primary Markets

A UK listed company wants to raise new ordinary share capital after announcing an acquisition.

Issue terms:

• New shares are offered first to existing shareholders in proportion to their current holdings.
• The subscription price is below the current market price.
• Shareholders may take up the entitlement, sell the nil-paid rights in the market, or allow the entitlement to lapse.
• Any shares not taken up may be placed by the underwriter.

Which equity issue method is the best description?

• A. Placing
• B. Introduction
• C. Rights issue
• D. Open offer

Best answer: C

What this tests: Securities: Primary Markets

Explanation: A rights issue is a pre-emptive offer of new shares to existing shareholders, usually in proportion to their current shareholding and normally at a discount to the market price. A key feature is that the shareholder has a valuable right: they can subscribe, sell the nil-paid rights, or let the rights lapse. The presence of tradable nil-paid rights distinguishes it from an open offer, which can also be made to existing shareholders but does not normally create a separately tradable entitlement. The underwriter placing any shares not taken up does not change the character of the main route; it is still a rights issue.

• An open offer may be pro rata to existing shareholders, but the entitlement is not normally sold as nil-paid rights.
• A placing targets selected investors rather than giving all existing shareholders a tradable pro rata entitlement.
• An introduction admits existing securities to trading without raising new capital from an offer of new shares.

A rights issue gives existing shareholders a pro rata entitlement that can usually be traded as nil-paid rights if they do not subscribe.

Question 56

Topic: Securities: Secondary Markets

An asset manager needs to sell £8 million of a liquid UK-listed equity for a fund.

Execution facts:

• The shares are admitted to trading on a regulated exchange.
• The order is not entered into the exchange’s central order book.
• A bank provides a firm bid to the asset manager from its own book.
• The bank regularly executes client orders in this way outside a trading venue.
• No facility is bringing together multiple third-party buying and selling interests.

Which classification is the single best description of the bank’s role in this execution?

• A. Systematic internaliser
• B. Agency broker
• C. Multilateral trading facility
• D. Exchange order-book market maker

Best answer: A

What this tests: Securities: Secondary Markets

Explanation: A systematic internaliser is an investment firm that executes client orders against its own book outside a trading venue on an organised, frequent and systematic basis. The decisive facts are that the trade is bilateral, the bank is using its own capital, and no multilateral system is matching multiple third-party interests. An MTF or exchange order book would involve a trading venue with rules for bringing together buying and selling interests. An agency broker would normally act on behalf of the client without taking the other side as principal.

• A multilateral trading facility requires multiple third-party buying and selling interests to interact under venue rules, which is absent here.
• An agency broker would arrange or execute for the client as agent, not provide a firm principal bid from its own book.
• An exchange order-book market maker may quote on a regulated exchange, but the facts state that execution is outside the exchange order book.

The bank is dealing on own account with clients on an organised, frequent basis outside a regulated market or MTF.

Question 57

Topic: Securities: Asset Classes

A client is comparing listed instruments linked to Helix plc and UK property. Helix ordinary shares are trading at 520p.

Terms under review:

• Ordinary shares: variable dividends, voting rights, and last ranking in insolvency.
• Preference shares: fixed preference dividend, normally limited voting, and priority ahead of ordinary shares for income and capital.
• Depositary receipts: receipts representing deposited ordinary shares, with economic exposure to the underlying shares and relevant custody or FX risks.
• Warrants: each warrant gives the right, not the obligation, to subscribe for one new ordinary share at 480p; no dividends or votes before exercise.
• Property-linked shares: listed company shares backed by property assets; price may diverge from property net asset value.

The client wants geared upside to Helix with no obligation to buy the shares and no shareholder rights unless the instrument is exercised. Which conclusion is correct?

• A. The depositary receipt fits; it is a subscription right rather than economic exposure to deposited ordinary shares.
• B. The preference share fits; its fixed dividend gives the same upside and voting rights as the ordinary share.
• C. The property-linked share fits; it gives direct title to properties and removes quoted share-price risk.
• D. The warrant fits; its intrinsic value is 40p and the holder has no dividends or votes before exercise.

Best answer: D

What this tests: Securities: Asset Classes

Explanation: A warrant is the instrument that matches the client’s objective. It gives the holder a right, not an obligation, to subscribe for shares at a fixed exercise price. With the ordinary share at 520p and the exercise price at 480p, the warrant is 40p in-the-money before considering time value or market premium. Until exercise, the warrant holder is not an ordinary shareholder and does not receive dividends or voting rights. Ordinary shares carry ownership rights but full downside equity risk. Preference shares usually provide a fixed preferential dividend and priority over ordinary shares, but they do not provide the same upside as ordinary shares. Depositary receipts represent deposited shares rather than a right to subscribe for new shares. Property-linked shares give exposure to property assets through a listed security, so both property risk and quoted share-price risk can remain.

• A fixed-dividend preference share does not provide the same voting rights or variable upside as an ordinary share.
• A depositary receipt represents underlying shares held through a depositary arrangement; it is not a warrant-style subscription right.
• Property-linked shares do not give direct legal title to buildings and do not remove quoted market-price risk.

The warrant’s intrinsic value is 520p less 480p, and it gives a subscription right without ordinary shareholder rights before exercise.

Question 58

Topic: Derivatives: Regulatory Requirements

A London-based derivatives desk trades a US broad-based equity index futures contract for a fund. Compliance wants a board note that separates the trade economics from the regulatory status of the venue.

Trade facts:

• Venue: US designated contract market regulated by the CFTC for this futures contract
• Position: long 4 contracts
• Entry price: 5,120.00
• Expiry settlement price: 5,185.50
• Contract multiplier: USD 50 per index point
• Ignore fees, tax, FX movements and margin interest.

Which statement correctly combines the expiry result with the regulatory point?

• A. The position has a USD 13,100 gain; CFTC-regulated venue status means the hedge is automatically suitable for the fund.
• B. The position has a USD 13,100 loss; CFTC-regulated venue status indicates market oversight, not valuation or suitability.
• C. The position has a USD 3,275 gain; SEC recognition determines whether the futures price was fair at trade entry.
• D. The position has a USD 13,100 gain; CFTC-regulated venue status indicates market oversight, not that the strategy was suitable or the entry price was fair.

Best answer: D

What this tests: Derivatives: Regulatory Requirements

Explanation: For a long futures position, profit or loss equals the price movement multiplied by the contract multiplier and the number of contracts. The index rises by 65.50 points, so the gain is 65.50 × USD 50 × 4 = USD 13,100. That economic result is distinct from the regulatory status of the market. A US designated contract market regulated by the CFTC is subject to regulatory oversight and market-conduct rules for that futures contract. This does not certify that the trade was suitable for the fund, nor does it prove that the entry price was fair value. Suitability depends on the fund’s mandate and risk profile; valuation depends on pricing inputs and market conditions.

• Treating CFTC venue status as automatic suitability confuses regulatory oversight with a client or mandate-specific assessment.
• Calling the result a loss reverses the economics of a long futures position when the settlement price rises.
• Using only USD 3,275 ignores the four contracts, and SEC recognition is not what determines fair value for this futures trade.

A long futures position gains from the 65.50-point rise, and regulatory status is separate from valuation and suitability.

Question 59

Topic: Securities: Secondary Markets

A trader must buy 40,000 shares for an institutional client. The current mid-price is £10.00. Assume displayed quantities are immediately executable, and ignore commission, taxes, and rebates.

Which venue choice gives the lowest expected execution cost versus the current mid-price?

• A. Use dealer RFQ; expected cost £1,400.
• B. Use lit order book X; expected cost £1,200.
• C. Use lit order book Y; expected cost £2,850.
• D. Use dark venue Z plus residual routing; expected cost £900.

Best answer: D

What this tests: Securities: Secondary Markets

Explanation: Execution quality is not just the quoted spread. For a buy order, compare the volume-weighted execution cost against the current mid-price. Lit order book X costs 20,000 × 2p plus 20,000 × 4p, or £1,200. Lit order book Y has a narrow first level, but depth is thin, so most of the order executes 8p above mid, costing £2,850. The dealer RFQ gives certainty for the full size, but at 3.5p above mid, costing £1,400. Dark venue Z fills 25,000 shares at mid and exposes only the residual 15,000 shares to the expected 6p volatility cost, giving £900. It therefore has the lowest expected cost.

• Lit order book X has enough depth at two levels, but sweeping the book creates a higher cost than the dark-plus-residual route.
• The dealer RFQ removes residual execution risk, but its full-size price is still 3.5p above mid.
• Lit order book Y shows why a narrow top-of-book spread can be misleading when available depth is too thin for the order size.

The route costs £900 because 25,000 shares execute at the mid-price and only 15,000 shares incur the expected 6p volatility cost.

Question 60

Topic: Derivatives: Trading, Hedging and Investment Strategies

A derivatives desk at a UK asset manager hedges an £80 million sterling corporate bond portfolio for the next three months.

Hedge facts:

• The portfolio is long fixed-rate BBB corporate bonds with an average maturity of about eight years.
• The main concern is that sterling yields will rise.
• The desk sells long gilt futures, whose deliverable basket is based on UK government bonds.
• The hedge notional is set using modified duration to broadly offset a parallel move in government yields.
• During the month, government yields rise and the short futures position gains, but corporate credit spreads also widen and the portfolio loss is larger than the futures gain.

What is the single best explanation for the remaining loss?

• A. The hedge failed because futures contracts cannot be used to hedge a cash bond portfolio.
• B. The hedge failed because a short futures position loses value when market yields rise.
• C. The hedge reduced the broad interest-rate direction, but basis risk remained because the corporate bonds and gilt futures did not move in a stable one-for-one relationship.
• D. The hedge would have removed the loss if the desk had posted more initial margin at the clearing house.

Best answer: C

What this tests: Derivatives: Trading, Hedging and Investment Strategies

Explanation: Basis risk is the risk that the hedging instrument and the exposure being hedged do not change in value by the same amount. Here, selling gilt futures is directionally sensible for a long fixed-rate bond portfolio exposed to rising yields: if yields rise, gilt futures prices should fall and the short futures position should gain. However, the portfolio consists of BBB corporate bonds, while the futures contract is linked to government bonds and a deliverable basket. Corporate credit spreads widened, and the maturity and deliverable-bond characteristics may also differ from the portfolio. Those differences mean the hedge can reduce the broad interest-rate exposure without eliminating the loss.

• A short futures position normally gains when the futures price falls as yields rise, so the direction of the futures hedge is not the problem.
• Futures can be used to hedge cash bond portfolios, but the hedge may be imperfect when the instruments differ.
• Initial margin supports clearing-house risk management; posting more margin does not remove economic basis risk in the hedge.

The short gilt futures offset part of the rate exposure, but spread, maturity and deliverable-bond differences created residual basis risk.

Question 61

Topic: Derivatives: Introduction to Derivatives

A corporate treasury desk is choosing between listed derivatives and a bilateral transaction for an FX hedge. Review the trading note:

Which action is best supported by the note?

• A. Avoid derivatives and transact only in the spot FX market on each payment date.
• B. Use listed futures because their standardisation will automatically match the hedge profile.
• C. Negotiate an OTC derivative tailored to the notional, dates, basket, and payoff profile.
• D. Use only exchange-traded linear contracts because capped participation cannot be created bilaterally.

Best answer: C

What this tests: Derivatives: Introduction to Derivatives

Explanation: OTC derivatives are often preferred when the required economic exposure does not fit the standard terms of exchange-traded contracts. Listed futures and exchange-traded contracts offer standardisation, transparency, central clearing, and liquidity, but they usually have fixed contract sizes, set expiries, and standard payoff profiles. The trading note requires an amortising notional, non-standard dates, a currency basket, and a protected but capped payoff. Those features point towards a negotiated bilateral structure, subject to normal counterparty credit, collateral, documentation, and pricing considerations. Listed contracts might still be used for a partial hedge, but they would leave basis, timing, notional, or payoff mismatches unless adjusted with further trades.

• Listed futures are standardised and liquid, but the note does not show that their fixed sizes, expiries, and linear payoff match the required hedge.
• Spot FX would deal with each payment when due, but it would not provide the requested derivative protection and participation profile.
• Bilateral OTC transactions can be structured with customised payoffs, although they introduce counterparty and documentation considerations.

The note identifies bespoke economic terms that standard listed contracts are unlikely to match precisely.

Question 62

Topic: Derivatives: Introduction to Derivatives

A UK asset manager holds a diversified equity portfolio that closely tracks the FTSE 100. It wants to reduce market exposure for about two months while client redemptions are processed.

Operational constraints:

• The hedge notional can be rounded to standard contract sizes without material concern.
• The firm already has access to a broker and clearing member.
• It can meet daily variation margin calls.
• Its mandate requires transparent regulated-venue execution and avoids bilateral counterparty exposure to a bank.
• The desk wants rapid execution rather than negotiating bespoke terms.

Which trading mechanism is the single best fit?

• A. Enter a bespoke OTC equity forward with an investment bank under an ISDA agreement.
• B. Buy a bespoke OTC equity index put from an investment bank with negotiated strike and expiry.
• C. Open a CFD short position with a market maker on the index using the provider’s margin account.
• D. Sell standardised exchange-traded equity index futures through the exchange order book, cleared by a central counterparty.

Best answer: D

What this tests: Derivatives: Introduction to Derivatives

Explanation: For a long equity portfolio that tracks a major index, selling index futures is a common way to reduce market exposure without selling the underlying shares. The operational facts point strongly to the exchange-traded mechanism: standard contract sizes are acceptable, the firm can use its broker and clearing member, and daily variation margin is manageable. Exchange trading also provides transparent prices and standardised terms, while central counterparty clearing reduces bilateral counterparty exposure. OTC mechanisms are more useful when the hedge needs a bespoke notional, maturity, payoff, or reference asset that exchange contracts cannot match. Here, the need is rapid, standardised execution with venue transparency and CCP clearing.

• Bespoke OTC forwards can match exact dates and notionals, but they require bilateral documentation and expose the fund to a bank counterparty rather than the required venue/CCP route.
• An OTC index put may provide downside protection, but it adds negotiated contract terms and bilateral exposure when the stated aim is a rapid linear hedge.
• A CFD short position can create index exposure, but it is typically a bilateral margin product with the provider, not a regulated-exchange, centrally cleared mechanism.

A short exchange-traded index future gives a standardised, rapidly executable hedge with exchange transparency and central counterparty clearing.

Question 63

Topic: Securities: Accounting Analysis

An equity analyst is comparing two listed manufacturers with similar products and sales cycles. Review the following financial-statement extract:

Which interpretation is best supported by the extract?

• A. Company A is clearly more operationally efficient because its operating margin is higher.
• B. Company B is clearly the lower-risk business because its return on assets is higher.
• C. The figures are directly comparable because both companies disclose their accounting treatments.
• D. The analyst should adjust or qualify the comparison because accounting policies and estimates affect reported profit, assets, and ratios.

Best answer: D

What this tests: Securities: Accounting Analysis

Explanation: Accounting policies and estimates affect how transactions are recognised and measured. A longer estimated useful life reduces annual depreciation compared with a shorter life, increasing reported profit and the carrying amount of assets in the near term. Capitalising development expenditure also tends to increase current profit and assets compared with expensing the same expenditure immediately. These choices do not necessarily make either company better or worse, but they can distort direct comparisons of operating margin, return on assets, gearing, and asset intensity. Disclosure helps the analyst understand the basis of preparation, but it does not by itself remove the comparability issue. The sound interpretation is to normalise the figures where possible or clearly qualify any conclusion drawn from the reported ratios.

• Treating Company A’s higher margin as proof of efficiency ignores the profit effect of longer depreciation and capitalised expenditure.
• Treating Company B’s higher return on assets as proof of lower risk adds a conclusion not supported by the extract.
• Disclosure improves transparency, but the analyst still needs to assess or adjust for different measurement bases.

Different depreciation lives and development-cost treatments can make reported performance and asset ratios less directly comparable.

Question 64

Topic: Derivatives: Underlying Markets

A metals dealer is estimating the fair value of a 3-month futures contract on a commodity.

Assumptions:

• Spot price: $100 per unit
• Risk-free financing rate: 4% per annum
• Storage cost: 2% per annum of spot value
• Convenience yield: 1% per annum of spot value
• Use simple annual rates, a 3-month period, and ignore compounding and transaction costs.

What is the estimated fair futures price per unit?

• A. $106.00
• B. $100.75
• C. $98.75
• D. $101.25

Best answer: D

What this tests: Derivatives: Underlying Markets

Explanation: For a commodity future, fair value reflects the cost of carrying the underlying asset to delivery. Financing costs and storage costs normally increase the futures price because they are costs incurred by holding the asset. A convenience yield reduces the futures price because it represents the benefit of physically holding the commodity rather than holding the derivative. Here, the net annual carry is 4% + 2% - 1% = 5%. For 3 months, the time fraction is 3/12, so the price uplift is 5% × 3/12 = 1.25%. Applied to a $100 spot price, the fair futures price is $101.25.

• $98.75 treats the net carry as a reduction rather than an increase.
• $100.75 leaves out part of the positive carry from financing and storage.
• $106.00 applies the annual carry for a full year rather than only 3 months.

Financing and storage increase fair value, while the convenience yield reduces it, giving $100 × [1 + (4% + 2% - 1%) × 3/12] = $101.25.

Question 65

Topic: Securities: Investment Management

An equity portfolio is built using a rules-based screen rather than analyst forecasts.

• Universe: four shares from a benchmark index.
• Monthly rule: calculate a composite score for each share as dividend yield plus earnings yield.
• Portfolio construction: if only one share can be selected this month, buy the highest-scoring share; do not hold benchmark market-cap weights.
• No manager override is allowed.

Which result and investment approach best fit the rule?

• A. Gamma; passive index-tracking approach.
• B. Delta; growth-focused investment approach.
• C. Alpha; factor-based investment approach.
• D. Beta; income-focused investment approach.

Best answer: C

What this tests: Securities: Investment Management

Explanation: A factor-based approach selects securities using measurable characteristics, such as yield, value, momentum, quality, or size, often through a repeatable rule. Here the scores are Alpha 10%, Beta 8%, Gamma 9%, and Delta 7%, so Alpha is selected. The portfolio is not passive because it does not replicate benchmark market-cap weights. It is not simply income-focused because the rule combines dividend yield with earnings yield rather than choosing only the highest dividend payer. It is not growth-focused because no revenue or earnings growth forecast is used. The absence of manager override also points away from discretionary active stock picking, even though the result will differ from the benchmark.

• Beta has the highest dividend yield, but the rule uses a combined score, so it is not a pure income approach.
• Gamma is in the benchmark universe, but selecting it would not replicate benchmark weights, so it is not passive index tracking.
• Delta has the lowest composite score and no supplied growth metric supports a growth-focused classification.

Alpha has the highest composite score at 10%, and the mechanical use of defined share characteristics is a factor-based approach.

Question 66

Topic: Derivatives: Principles of Clearing and Margin

A derivatives asset manager buys 300 Euro Stoxx 50 futures for a fund.

Post-trade facts:

• The trade was matched on a regulated derivatives exchange.
• The fund is not a member of the clearing house.
• The order was executed by a trading participant that does not clear client business.
• The fund has an agreement with a bank that is a general clearing member.
• The clearing house will calculate initial margin and daily variation margin once the trade is registered.

Which participant or process is the single best fit for completing the post-trade clearing route?

• A. The prime broker novates the contract directly with the exchange and replaces the clearing house as central counterparty.
• B. The general clearing member accepts the give-up, faces the clearing house, and collects margin from the fund.
• C. The executing broker remains the clearing counterparty and settles variation margin directly with the clearing house.
• D. A bilateral ISDA credit support process leaves the trade outside central clearing and collateralises exposure between the original counterparties.

Best answer: B

What this tests: Derivatives: Principles of Clearing and Margin

Explanation: For an exchange-traded futures contract, the clearing house sits at the centre of the post-trade process, but clients normally access it through clearing members. Here, the fund is not a clearing-house member and the executing participant does not clear client business. The practical route is therefore a give-up to the fund’s appointed general clearing member. Once accepted for clearing, the clearing member is responsible to the clearing house for obligations such as initial margin, variation margin, and settlement. The clearing member then manages the client-facing margin relationship with the fund under its client clearing agreement.

• The executing broker carried out the trade, but the facts state it does not clear client business.
• A prime broker may provide financing or intermediation services, but it does not replace the clearing house as central counterparty.
• Bilateral ISDA collateral arrangements are relevant to OTC derivatives, not the central clearing route for a listed futures trade matched on an exchange.

A non-clearing client’s exchange-traded derivative is typically given up to its appointed clearing member, which is responsible to the clearing house for margin and settlement.

Question 67

Topic: Derivatives: Principles of Clearing and Margin

An exchange-traded futures trade has been matched and accepted for clearing by a CCP. The clearing member is approved for this product, the position is recorded in a segregated client account, and no default notice has been issued.

End-of-day margin data:

The CCP requires the initial margin amount plus any variation margin debit to be funded by the deadline. Which type of clearing problem is indicated?

• A. An account-structure problem requiring reallocation out of the client account
• B. A membership eligibility problem with the clearing member
• C. A collateral shortfall of £12,500
• D. A trade acceptance failure requiring the trade to be rejected

Best answer: C

What this tests: Derivatives: Principles of Clearing and Margin

Explanation: In cleared derivatives, the type of problem depends on which part of the clearing process has failed. Here, the trade has already been matched and accepted for clearing, the clearing member is approved for the product, and the position is already in a segregated client account. The remaining issue is funding the CCP’s margin requirement. Initial margin is 75 contracts × £3,200 = £240,000. Adding the £22,500 variation margin debit gives £262,500 due. Only £250,000 of eligible collateral has been lodged, so there is a £12,500 collateral shortfall. If that shortfall were not met by the deadline, it could later escalate into default management, but the facts given point first to collateral.

• Matched and accepted for clearing rules out a trade acceptance failure.
• Product approval for the clearing member rules out a membership eligibility issue.
• The segregated client account is already in use, so the issue is not account structure.
• Default management would require a failure to meet obligations or a formal default process, which is not shown.

The account requires £262,500 and has £250,000 of eligible collateral, leaving a £12,500 collateral shortfall.

Question 68

Topic: Derivatives: Principles of Clearing and Margin

A derivatives operations analyst is reviewing whether a proposed OTC trade can be booked.

Margin-control note:

• Product: bespoke five-year equity swap between two financial counterparties.
• Clearing status: the clearing broker says the trade is not eligible for central clearing because of its customised terms.
• Documentation: an ISDA master agreement is signed, but the collateral support annex has not been agreed.
• Current process: exposures are checked weekly, no collateral calls are made, and valuation disputes are handled informally.

Which action is best supported by the note?

• A. Proceed under the ISDA master agreement alone because uncleared OTC trades do not require margin controls if both parties are financial counterparties.
• B. Book the trade through the clearing broker so that the central counterparty calculates margin and guarantees settlement.
• C. Replace margin calls with weekly exposure reporting, since bespoke OTC trades are controlled mainly through management information rather than collateral.
• D. Agree bilateral collateral terms covering initial and variation margin, eligible collateral, valuation reconciliation, dispute handling, and collateral custody or segregation.

Best answer: D

What this tests: Derivatives: Principles of Clearing and Margin

Explanation: For an uncleared OTC derivative, counterparty credit exposure remains between the two original parties. The absence of central clearing means there is no central counterparty to novate the trade, collect clearing-house margin, or operate default management. High-level controls therefore focus on bilateral collateral arrangements: agreeing a collateral support annex, defining initial and variation margin processes, specifying eligible collateral and haircuts, reconciling valuations, escalating disputes, and controlling custody or segregation of collateral. The issue is not memorising detailed thresholds; it is recognising that a customised, uncleared OTC trade needs documented bilateral margin controls before trading.

• Central clearing is not available under the stated facts, so relying on a clearing house is unsupported.
• An ISDA master agreement is important, but without collateral terms it does not by itself provide the required margin process.
• Weekly exposure reporting is useful monitoring, but it is not a substitute for margin calls, collateral terms, reconciliation, and dispute controls.

An uncleared OTC derivative needs bilateral margin and collateral controls because no clearing house is novating the trade or running margin calls.

Question 69

Topic: Securities: Primary Markets

A corporate broker is reviewing an equity offer before launch. Which action is best supported by the draft issue summary?

Draft issue summary:

• Issuer: listed manufacturing company raising new ordinary share capital

• Method: public offer to retail investors alongside an institutional placing

• Use of proceeds: construction of a new production facility

• Draft prospectus wording: “All material planning and environmental approvals for the facility have been obtained.”

• Late update: the key environmental permit has been delayed for at least six months and may require redesign of part of the facility

• Launch plan: open applications tomorrow and update investors only if the delay becomes permanent

• A. Delay launch until the prospectus is corrected or supplemented to disclose the permit delay and its possible effect on the project.

• B. Proceed with launch because the offer includes an institutional placing, and institutional demand can validate the issue for retail investors.

• C. Continue taking applications but reduce the issue price to compensate investors for the undisclosed project risk.

• D. Disclose the permit delay only to the underwriting syndicate because they bear the financial risk if the offer is undersubscribed.

Best answer: A

What this tests: Securities: Primary Markets

Explanation: In a primary equity offer, investor protection depends heavily on clear, accurate, and complete disclosure before investors commit funds. The permit delay directly affects the stated use of proceeds and the risk profile of the new issue. A prospectus or offer document that says all material approvals have been obtained would be misleading if a key approval is delayed and may require redesign. The appropriate action is to correct or supplement the disclosure before opening applications. Pricing, underwriting, or institutional participation cannot cure a material omission in documents used by investors to decide whether to subscribe.

• Institutional demand may help price or distribute an issue, but it does not validate misleading disclosure for retail investors.
• A lower issue price does not remove the need to disclose a material project risk before subscriptions are accepted.
• Underwriters face subscription risk, but disclosure duties are aimed at investors who rely on the offer document.

The permit delay is material to the purpose and risk of the fundraising, so investors need accurate disclosure before applying.

Question 70

Topic: Securities: Accounting Analysis

A listed UK company is being compared with other ordinary-share investments. The analyst has the following figures for the latest year:

• Market price: 250p per ordinary share
• Profit attributable to ordinary shareholders: £20 million
• Weighted average ordinary shares for EPS: 80 million
• Dividend declared for the year: 10p per ordinary share
• Net assets attributable to ordinary shareholders: £180 million
• Ordinary shares in issue at year end: 90 million

Which is the single best interpretation of these figures?

• A. EPS is 25p, dividend yield is 4.0%, P/E is 10 times, and NAV per share is 200p, so the share trades at a 25% premium to NAV.
• B. EPS is 25p, dividend yield is 4.0%, P/E is 10 times, and NAV per share is 200p, so the share trades at a 20% premium to NAV.
• C. EPS is 22.2p, dividend yield is 4.0%, P/E is 11.3 times, and NAV per share is 225p, so the share trades at an 11.1% premium to NAV.
• D. EPS is 25p, dividend yield is 10.0%, P/E is 4 times, and NAV per share is 200p, so the share trades at a 25% premium to NAV.

Best answer: A

What this tests: Securities: Accounting Analysis

Explanation: Earnings per share is profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares: £20 million / 80 million = £0.25, or 25p. Dividend yield compares the dividend per share with the current market price: 10p / 250p = 4.0%. The price-earnings ratio uses market price divided by EPS: 250p / 25p = 10 times. Net asset value per share uses net assets attributable to ordinary shareholders divided by shares in issue at the relevant date: £180 million / 90 million = £2.00, or 200p. A share price of 250p is 50p above NAV per share, which is 25% of 200p, so it is trading at a premium to NAV.

• Using 90 million shares for EPS and 80 million for NAV per share reverses the appropriate denominators.
• Treating the 10p dividend as a 10% yield ignores that yield is measured against the 250p market price.
• Measuring the NAV premium as 50p divided by the market price gives 20%, but a premium to NAV is normally measured against NAV.

Profit divided by weighted average shares gives 25p EPS, which supports the 10 times P/E and the comparison of a 250p price with 200p NAV per share.

Question 71

Topic: Securities: Accounting Analysis

An equity analyst is reviewing a listed company’s March management accounts. The company uses accrual accounting.

Depreciation on the equipment is ignored for March. What is the March accrual-based profit?

• A. £80,000
• B. £33,000
• C. £100,000
• D. £30,000

Best answer: A

What this tests: Securities: Accounting Analysis

Explanation: Accrual accounting records income when it is earned and expenses when they are incurred, not simply when cash moves. March income is the cash received for March sales of £120,000 plus credit sales of £35,000, making £155,000. The £20,000 received for April work is not March income; it is a liability until the work is performed. March expenses are rent of £12,000, staff costs of £45,000, and the unpaid supplier invoice of £18,000, making £75,000. The equipment purchase is capitalised as an asset, so it is not a March expense when depreciation is ignored. Accrual-based profit is therefore £155,000 less £75,000, or £80,000.

• £33,000 reflects cash received less cash paid, not accrual-based profit.
• £100,000 incorrectly treats the advance receipt for April work as March income.
• £30,000 incorrectly treats the capitalised equipment purchase as an immediate March expense.

March profit recognises March income of £155,000 and March expenses of £75,000, giving £80,000.

Question 72

Topic: Derivatives: Introduction to Derivatives

A trading supervisor reviews a product label that has been omitted from a client deal note. Which interpretation is best supported by the terms?

• A. It is a call warrant: an issuer-created right to subscribe for shares at an exercise price.
• B. It is a forward purchase: a commitment to buy the shares for delivery at a fixed future price.
• C. It is a listed futures contract: a standardised exchange obligation settled through daily variation margin.
• D. It is a contract for difference: cash-settled, linear share-price exposure without ownership of the shares.

Best answer: D

What this tests: Derivatives: Introduction to Derivatives

Explanation: A contract for difference gives economic exposure to movements in an underlying asset without ownership or delivery of that asset. The parties settle the difference between an opening level and a closing level, so the payoff is linear: a long position gains when the price rises and loses when it falls. Margin may be required, but there is no option-style premium and no right simply to walk away from losses beyond the margin arrangements. Options and warrants give a right, not an obligation, and have asymmetric payoff for the buyer. Forwards and futures also have linear payoff, but they are framed as future delivery or standardised exchange contracts rather than a cash difference trade with no ownership rights.

• A listed futures contract would normally be identified by standardised exchange terms and daily variation margin, which are not the decisive terms shown here.
• A forward purchase would involve a fixed future purchase or settlement price, not simply the difference between opening and closing levels.
• A call warrant would give a holder an issuer-created exercise right; the note instead shows no premium and point-for-point losses as well as gains.

The terms match a CFD because the client settles only the price difference, posts margin, and has linear gains or losses without share ownership.

Question 73

Topic: Derivatives: Principles of Clearing and Margin

An operations analyst is reviewing an intraday statement from a clearing broker for an exchange-cleared derivatives account.

Margin statement excerpt:

• Method: portfolio scanning model; stress scenarios include price moves and volatility changes.
• Recognised offset: approved spread offset between June and September gilt futures.
• New exposure since the previous run: short FTSE 100 index calls; the volatility-up scenario gives the largest loss.
• Offset limit: spread offsets may be capped when correlation or liquidity assumptions weaken.

Which interpretation is best supported by the statement?

• A. The £970,000 is better read as variation margin, because initial margin is not affected by stress scenarios after trades are cleared.
• B. The margin increase is consistent because the gilt spread offset reduced one risk component, but the short-option stress charge more than offset that saving.
• C. The broker should ignore the short FTSE option charge when margining the gilt spread, because offsets are determined only by the larger notional position.
• D. The statement is inconsistent because a portfolio margin offset should always lower total initial margin once it is recognised.

Best answer: B

What this tests: Derivatives: Principles of Clearing and Margin

Explanation: Initial margin is designed to cover potential future exposure, so a risk-based model looks at the portfolio under stress scenarios rather than simply adding fixed charges trade by trade. Offsets and portfolio margining can reduce the requirement when positions are related and genuinely reduce net risk, such as a recognised spread between two gilt futures maturities. They do not guarantee a lower total requirement. A short option can create large losses under price and volatility shocks, and offset credits may be limited when correlation, basis, concentration or liquidity risk weakens the hedge. Here, the £310,000 spread credit reduces the gilt futures component, but the £460,000 short-option stress charge is larger, so revised initial margin rises to £970,000.

• Expecting every offset to lower total margin ignores that the model margins the whole portfolio, not one spread in isolation.
• Treating the revised amount as variation margin conflicts with the initial margin label and the use of stress scenarios.
• Using only notional size ignores correlation, basis, volatility, liquidity and approved offset rules in risk-based models.

Risk-based portfolio margin can give offset credit for related positions while still increasing total initial margin when other stress losses dominate.

Question 74

Topic: Derivatives: Introduction to Derivatives

A corporate treasurer is reviewing two possible contracts to hedge a forecast USD receipt due in six months. The dealing note summarises the instruments as follows:

Which interpretation is best supported by the dealing note?

• A. Instrument A is a future and Instrument B is a forward; A is more standardised, exchange traded, margined daily and generally more liquid, while B has greater bilateral counterparty exposure.
• B. Instrument A is a forward and Instrument B is a future; A avoids margin because it is exchange traded, while B is standardised by the bank.
• C. Instrument B is likely to be more liquid than Instrument A because bespoke settlement dates make positions easier to trade out.
• D. Both instruments should have similar counterparty exposure because all derivatives are cleared through a central counterparty and margined daily.

Best answer: A

What this tests: Derivatives: Introduction to Derivatives

Explanation: Futures are normally standardised contracts traded on a regulated derivatives exchange. They are cleared through a central counterparty and supported by initial margin and daily variation margin, which reduces bilateral counterparty exposure. Because futures have listed terms and an exchange order book, they are usually more liquid than a bespoke contract. Forwards are OTC agreements negotiated directly between parties, often through a bank. They can match the exact notional and settlement date required by the hedger, but they are usually less easy to trade out and leave the client exposed to the bilateral counterparty, subject to any collateral terms agreed.

• Treating the exchange-traded contract as a forward reverses the normal classification; listed contracts with fixed terms and daily margin are futures.
• Bespoke settlement can improve hedge matching, but it does not usually improve secondary-market liquidity.
• Central clearing and daily variation margin are features of futures, not a universal feature of all derivative contracts.

The features of Instrument A match an exchange-traded futures contract, while Instrument B matches a bespoke OTC forward.

Question 75

Topic: Derivatives: Regulatory Requirements

A London derivatives desk is onboarding a professional client that wants access to a US equity-index futures contract. A junior analyst has prepared the following review note.

Which interpretation is best supported?

• A. CFTC registration is a regulatory recognition point for the venue; pricing and hedge suitability require separate analysis.
• B. CFTC registration means the regulator has confirmed the contract is fairly priced for all market users.
• C. The venue status is irrelevant because international derivatives orders can only be routed to UK-regulated exchanges.
• D. CFTC registration proves the contract is appropriate for the client’s hedge because it is cash-settled.

Best answer: A

What this tests: Derivatives: Regulatory Requirements

Explanation: Regulatory recognition in a cross-border derivatives setting concerns the status of the market, exchange, or infrastructure under the relevant regulatory framework. A US futures exchange registered with the CFTC may satisfy a venue-status check for routing or access purposes, subject to the firm’s own procedures. That status does not mean the regulator has certified the contract’s fair value, forecast its performance, or confirmed that the client’s proposed hedge is suitable. Product valuation depends on market inputs and pricing analysis. Strategy suitability or appropriateness depends on the client’s risk objective, exposure, mandate, and understanding of the derivative’s risks.

• Fair pricing is a valuation matter, not a conclusion created by exchange registration.
• Cash settlement affects delivery and settlement risk, but it does not prove that a hedge is appropriate.
• Cross-border venue recognition can be relevant; it is not automatically displaced simply because the client or desk is in the UK.

Regulatory recognition supports the venue-access control but does not validate the product’s value or the client’s strategy.

Questions 76-100

Question 76

Topic: Derivatives: Principles of Pricing and Valuation

A derivatives trader is monitoring a short hedge using an exchange-traded equity index future.

Market facts:

• Cash-market level of the underlying index: 7,840
• Near-month futures price: 7,875
• The desk defines basis as cash price - futures price
• The contract is cash settled and expires shortly

Which statement is the single best description of the basis relationship?

• A. The basis is 7,875 index points; it measures the absolute futures price rather than the spread to cash.
• B. The basis is -35 index points; the futures price is above the cash-market level and should converge towards it as expiry approaches.
• C. The basis is +35 index points; the cash-market level is above the futures price and should converge downwards.
• D. The basis is zero because a cash-settled futures contract cannot have a price difference from the underlying index before expiry.

Best answer: B

What this tests: Derivatives: Principles of Pricing and Valuation

Explanation: Basis measures the relationship between the cash-market price of an asset and the related futures price. Under the convention given here, basis equals cash price minus futures price. The calculation is 7,840 - 7,875 = -35 index points. A negative basis means the futures price is above the current cash-market level. For a deliverable or cash-settled future, the futures price and the relevant cash or settlement value are expected to converge as expiry approaches, although basis can move before then because of carry, income, funding costs, market expectations, and hedge imperfections.

• A positive 35-point basis reverses the stated convention and misreads which market is higher.
• Treating the futures price itself as the basis ignores that basis is a price difference, not an outright price.
• Cash settlement does not force basis to be zero before expiry; convergence occurs as the contract approaches final settlement.

Using the stated convention, basis is 7,840 minus 7,875, so it is -35 and reflects futures trading above the cash market.

Question 77

Topic: Securities: Asset Classes

An operations analyst is checking a short-term money-market purchase before settlement. Which interpretation is best supported by the trading note?

• A. The investor’s return is zero because the instrument has no coupon.
• B. The investor’s simple cash return before costs is £1,250 if the bill is held to maturity.
• C. The investor will receive £1,250 as an interim coupon before maturity.
• D. The investor makes a £1,250 loss because the purchase price is below the redemption value.

Best answer: B

What this tests: Securities: Asset Classes

Explanation: Short-term money-market instruments such as Treasury bills are often issued or traded at a discount to their face value rather than paying periodic interest. The investor’s basic cash gain is the difference between the purchase price and the redemption amount, assuming the bill is held to maturity and ignoring costs or tax. Here, the investor pays £98,750 and receives £100,000 after 91 days, giving a simple return of £1,250. The absence of a coupon does not mean there is no return; the return is embedded in the discounted purchase price. No annualisation is needed unless specifically requested.

• Treating £1,250 as an interim coupon is incorrect because the note states that the bill has no coupon.
• Saying the return is zero confuses no coupon with no return; the discount provides the return.
• Calling the discount a loss reverses the economics, because redemption at a higher amount than cost creates a gain if held to maturity.

A Treasury bill is bought at a discount and redeemed at par, so the simple return is £100,000 less £98,750.

Question 78

Topic: Derivatives: Principles of Clearing and Margin

A clearing member is reconciling a client’s exchange-traded Brent crude oil futures account after the daily settlement run.

Position and settlement facts:

• Client position: short 12 futures contracts
• Previous settlement price: $82.10 per barrel
• Today’s settlement price: $82.65 per barrel
• Contract size: 1,000 barrels per contract
• Variation margin is settled in cash based on the daily price movement
• Ignore initial margin, fees, and commissions

What is the single best interpretation of the variation margin flow for the client?

• A. The client must pay $6,600 variation margin.
• B. The client will receive $660 variation margin.
• C. The client must pay $660 variation margin.
• D. The client will receive $6,600 variation margin.

Best answer: A

What this tests: Derivatives: Principles of Clearing and Margin

Explanation: Variation margin reflects the daily mark-to-market profit or loss on a futures position. The price increased from $82.10 to $82.65, a rise of $0.55 per barrel. Each contract covers 1,000 barrels, so the loss per contract for a short position is $550. For 12 contracts, the total loss is $6,600. Because the client is short, a price rise is adverse and results in a cash payment rather than a receipt. Initial margin is separate collateral and does not change the variation margin calculation here.

• Receiving $6,600 reverses the position direction; a short position benefits from a price fall, not a price rise.
• Paying $660 uses the correct direction but misses the full contract exposure of 12 contracts and 1,000 barrels per contract.
• Receiving $660 combines the wrong direction with an understated contract exposure.

A short futures position loses when the settlement price rises, so 12 × 1,000 × $0.55 gives a $6,600 payment due.

Question 79

Topic: Securities: Secondary Markets

A trainee is comparing secondary-market dealing in bonds with equity execution.

Bond trade:

• Client buys £2,000,000 nominal of a UK government bond from a bond dealer.
• Clean offer price: 97.80 per £100 nominal.
• Accrued interest: 0.65 per £100 nominal.

Equity trade:

• Client buys 50,000 listed shares through an exchange order book at 212p per share.

Ignore fees, taxes, and stamp duty. For the bond, the payable price per £100 nominal is the clean price plus accrued interest.

Which comparison is correct?

• A. Government and corporate bond trades are normally executed on the same central equity order book as listed shares, so the dealer quote does not affect the bond cash paid of about £1,969,000.
• B. The bond trade is consistent with dealer/quote-driven secondary dealing used for government and corporate bonds, and the bond cash paid is about £1,969,000.
• C. The bond trade is dealer/quote-driven, but accrued interest is deducted from the clean price, so the bond cash paid is about £1,943,000.
• D. The bond trade should be treated like an exchange order-book equity trade, and the bond cash paid is about £1,956,000 because accrued interest is ignored.

Best answer: B

What this tests: Securities: Secondary Markets

Explanation: Secondary trading in government and corporate bonds is commonly dealer-led or quote-driven, often by nominal amount, rather than being executed in the same way as listed shares on an exchange order book. Bond prices are usually quoted per £100 nominal. A clean price excludes accrued interest, but the buyer normally pays the dirty price, which is clean price plus accrued interest. Here, 97.80 + 0.65 = 98.45 per £100 nominal, giving £1,969,000 on £2,000,000 nominal. Listed equity dealing is different: shares are bought by number of shares at a price per share, so 50,000 shares at 212p would cost £106,000 before costs.

• Using £1,956,000 ignores accrued interest and treats the clean price as the full settlement price.
• Deducting accrued interest reverses the usual treatment; the buyer pays it to compensate the seller for coupon earned.
• Treating government and corporate bonds as normally dealt on the same central equity order book misses the dealer-led nature of much bond secondary trading.

The dirty price is 98.45 per £100 nominal, so £2,000,000 × 98.45% = £1,969,000.

Question 80

Topic: Securities: Asset Classes

A sterling corporate bond fund is reviewing four fixed-rate issues. Prices are close to par, and the quoted yield is the relevant market yield for comparison.

Which interpretation is best supported?

• A. Bond C is the lowest-risk holding for a sterling fund because it is senior secured and has no embedded option, making currency exposure irrelevant.
• B. Bond B carries the greatest overall risk: its BB subordinated status and high yield signal greater credit risk, and its long callable structure adds adverse call risk despite the high coupon.
• C. Bond A should offer the highest yield because a short maturity creates the greatest bond-price sensitivity to interest-rate changes.
• D. Bond D is riskier than Bond B because its lower coupon and longer maturity always outweigh credit quality, seniority and the investor put.

Best answer: B

What this tests: Securities: Asset Classes

Explanation: Bond risk depends on several interacting features. Lower credit quality and subordinated status increase the chance of loss if the issuer weakens or defaults, so investors normally require a higher yield. Longer maturity generally increases sensitivity to yield changes, although a higher coupon can reduce duration compared with an otherwise similar lower-coupon bond. Embedded options also matter: an issuer call can cap upside and create reinvestment risk when conditions improve for the issuer, while an investor put is generally protective. Currency is a separate risk for a sterling fund; a USD bond can expose returns to exchange-rate movements even if its credit quality is good. On these facts, Bond B has the clearest combination of adverse features.

• Treating currency as irrelevant ignores that a sterling fund holding a USD bond faces exchange-rate risk.
• Saying Bond D is always riskier overstates the effect of coupon and maturity and ignores its stronger credit quality and investor put.
• Short maturity usually reduces, rather than increases, bond-price sensitivity to changes in yields.
• A high yield is not automatically attractive; it may compensate investors for credit, subordination, maturity or option risk.

Bond B combines lower credit quality, subordinated ranking, a higher market yield, longer maturity and an issuer call, all of which support a higher-risk interpretation.

Question 81

Topic: Derivatives: Underlying Markets

A sterling treasury desk is reviewing an immediate 100 basis point rise in short-term interest rates and gilt yields. Assume credit spreads are unchanged.

• Borrowing: £40 million bank facility pays three-month SONIA + 90bp and resets next week.
• Lending: £8 million surplus cash is placed on overnight deposit.
• Bond holding: £10 million nominal five-year fixed-coupon gilt is held in the trading book.
• Derivative: A pay-fixed, receive-three-month SONIA interest rate swap hedges half of the facility.

Which statement is the single best assessment of the rate rise?

• A. The facility becomes more expensive and the deposit earns more, but the fixed-coupon gilt price should rise because its coupon is fixed, and the swap removes the benefit of receiving higher floating rates.
• B. The facility becomes more expensive at reset, the overnight deposit should earn more, the fixed-coupon gilt price should fall, and the swap helps offset higher floating interest on the hedged amount.
• C. The facility becomes cheaper at reset, the overnight deposit should earn less, the fixed-coupon gilt price should rise, and the swap increases exposure to higher floating interest.
• D. The facility cost and deposit return are unchanged until maturity, while the gilt price falls only if credit spreads widen, and the swap has no cash-flow effect before final maturity.

Best answer: B

What this tests: Derivatives: Underlying Markets

Explanation: A rise in interest rates normally hurts floating-rate borrowers because their next reset occurs at a higher reference rate. It benefits lenders or depositors whose return resets quickly, such as an overnight deposit. For a fixed-coupon bond, higher market yields reduce the present value of its fixed cash flows, so the trading price falls if credit risk is unchanged. The interest rate swap depends on which side the user has taken. Here the treasury desk pays a fixed rate and receives three-month SONIA, so the floating receipts rise when SONIA resets higher. Those receipts help offset the increased interest cost on the hedged portion of the floating-rate loan.

• Saying the floating-rate facility becomes cheaper reverses the effect of a higher SONIA reset.
• Treating the loan and deposit as unchanged until maturity ignores their reset and overnight features.
• A fixed coupon does not protect the gilt’s market price from higher yields; the existing cash flows are discounted at a higher rate.

Rising rates increase floating borrowing costs and variable cash returns, reduce fixed-rate bond prices, and benefit a pay-fixed, receive-floating hedge.

Question 82

Topic: Securities: Corporate Actions

A UK-listed company wants to raise fresh equity from its existing ordinary shareholders.

The circular states:

• Each shareholder may subscribe for new shares in proportion to their existing holding.
• The subscription price is below the current market price.
• Shareholders who do not subscribe cannot sell their entitlement in the market.
• Entitlements will not be traded nil paid.
• No dividend alternative or free capitalisation shares are being offered.

Which corporate action best describes the proposal?

• A. Bonus issue
• B. Scrip dividend
• C. Open offer
• D. Rights issue

Best answer: C

What this tests: Securities: Corporate Actions

Explanation: A pro rata offer of new shares to existing shareholders may be either a rights issue or an open offer. The decisive feature here is that the entitlement cannot be sold and will not trade nil paid. That points to an open offer. A rights issue is normally renounceable, allowing shareholders to sell their rights if they do not wish to subscribe. A bonus issue gives free additional shares by capitalising reserves and does not raise new cash. A scrip dividend gives shareholders shares instead of a cash dividend, rather than inviting them to subscribe for new shares at a set price.

• Rights issue is tempting because the offer is pro rata and discounted, but rights are normally renounceable and may trade nil paid.
• Bonus issue fails because the company is raising cash and shareholders must subscribe for new shares.
• Scrip dividend fails because there is no choice between cash dividend and shares.

An open offer is a non-renounceable pro rata offer to existing shareholders, so shareholders may subscribe but cannot sell the entitlement.

Question 83

Topic: Securities: Asset Classes

A UK asset manager is considering how to give a small institutional portfolio exposure to commercial property.

Client requirements:

• Allocation size is £300,000.
• The holding must be tradable on a recognised stock exchange.
• The client wants diversified property exposure rather than a single building.
• The client accepts that market sentiment may move the price in the short term.
• The client does not want direct responsibility for tenants, maintenance, conveyancing, or stamp duty on a building purchase.

Which approach is the single best fit?

• A. Buy shares in a listed property company or REIT, accepting equity-market volatility in return for exchange liquidity and diversified property exposure.
• B. Buy ordinary shares in a non-property industrial company, because any listed equity gives direct exposure to commercial property values.
• C. Buy one commercial property directly, because direct property normally offers rapid exchange trading and low transaction costs.
• D. Buy a short-dated government Treasury bill, because it gives property-market exposure without tenant or maintenance risk.

Best answer: A

What this tests: Securities: Asset Classes

Explanation: Direct property exposure means owning the physical property interest, so the investor is exposed directly to rents, occupancy, maintenance, legal transfer costs, valuation uncertainty, and the difficulty of selling a large indivisible asset quickly. Listed property securities, such as shares in a property company or a REIT, are traded like equities and can give exposure to a portfolio of property assets. They are usually more liquid and divisible than direct ownership, but they are not identical to owning a building. Their prices can be affected by stock-market sentiment, management decisions, borrowing levels, and company-specific factors as well as underlying property values. The client’s need for exchange trading, diversification, and no direct property administration points to listed property securities rather than direct ownership.

• Direct ownership of one building fails the liquidity, diversification, and administration requirements.
• Treasury bills are money-market instruments and do not provide commercial property exposure.
• Non-property industrial shares may be listed equities, but they do not give targeted property-market exposure.

Listed property securities can provide diversified property-market exposure with exchange trading, but their prices also reflect equity-market, gearing, and management factors.

Question 84

Topic: Derivatives: Principles of Clearing and Margin

A clearing member recalculates an exchange-cleared client’s initial margin using the CCP’s risk-based portfolio margin model.

Facts:

• The model scans possible price and yield moves and charges margin based on the estimated portfolio loss.
• It gives offset credit for recognised spread positions, but not for unrelated or same-direction risk.
• Before today, the client held long 50 March gilt futures and short 48 June gilt futures, which the model accepted as a calendar spread.
• Today, the client bought back the short June futures and bought 50 additional March gilt futures.
• No variation margin loss remains unpaid and collateral eligibility has not changed.

Which is the single best explanation for the increase in initial margin?

• A. The requirement should have fallen because risk-based models normally charge only on the net number of contracts across all gilt futures expiries.
• B. The offset should have eliminated margin before and after the trade because all positions are in gilt futures on the same exchange.
• C. Initial margin increased because variation margin is calculated contract by contract before any portfolio offsets are applied.
• D. Portfolio margining reduced the requirement while the futures formed an offsetting calendar spread, but closing the short leg and adding March futures left a larger directional exposure with a higher modelled loss.

Best answer: D

What this tests: Derivatives: Principles of Clearing and Margin

Explanation: Risk-based margin models estimate the potential loss on a portfolio under specified market scenarios. Portfolio margining can reduce initial margin when positions genuinely offset one another, such as a recognised calendar spread where gains on one leg are expected to partly offset losses on the other. The offset is not a free netting rule. If a hedge is removed or the portfolio becomes more directionally exposed, the modelled worst-case loss can increase and the initial margin requirement can rise. In this case, the client moved from a largely offsetting gilt futures spread to a larger long exposure in March gilt futures. Since variation margin and collateral eligibility are unchanged, the increase is best explained by the loss of offset credit and higher directional risk.

• Variation margin settles realised daily mark-to-market gains and losses; it does not explain a higher initial margin requirement when no unpaid variation loss exists.
• Netting all gilt futures expiries mechanically would ignore basis and calendar-spread risk, which a risk-based model is designed to capture.
• Same exchange and same product family do not guarantee a full offset; the model grants credit only where the positions reduce estimated portfolio loss.

The recognised offset reduced spread risk before the trade, while the new concentrated long March position increases the portfolio’s stress-loss exposure.

Question 85

Topic: Securities: Asset Classes

A UK securities firm has £12 million of sterling operational cash to place before a scheduled settlement pay-out.

Requirements:

• Cash must be available in 42 days.
• The firm wants very low credit risk.
• The instrument should be readily saleable before maturity if the settlement date changes.
• The firm does not want equity exposure, currency exposure, or a derivative payoff.

Which instrument is the single best fit?

• A. Ordinary shares in a FTSE 100 company
• B. Commercial paper issued by a large company
• C. Five-year conventional gilt
• D. UK Treasury bill

Best answer: D

What this tests: Securities: Asset Classes

Explanation: Treasury bills are short-term government securities issued at a discount and redeemed at par. They are commonly used in money markets for short-term cash management where preservation of capital, low credit risk, and liquidity are important. In this case, the 42-day horizon, sterling requirement, need for very low credit risk, and possible need to sell before maturity all point to a short-dated government money-market instrument. Commercial paper may be short term and liquid, but it carries corporate issuer credit risk. A five-year gilt has low issuer risk but creates unnecessary maturity and price risk for a 42-day need. Ordinary shares do not match a cash-management objective because they carry equity market risk and no fixed redemption date.

• Commercial paper can suit short-term funding markets, but it is unsecured corporate debt rather than very low-risk government paper.
• A five-year conventional gilt is government debt, but its long maturity exposes the firm to market-price movements before the 42-day cash need.
• Ordinary shares are capital-market instruments with equity risk and no fixed maturity, so they are unsuitable for a known short-term liquidity need.

A UK Treasury bill is a short-term sterling government money-market instrument with very low credit risk and good liquidity.

Question 86

Topic: Securities: Asset Classes

A corporate treasurer is deciding where to place surplus cash for a short period. The dealing desk has prepared this note:

Portfolio note:

• Amount: £8 million
• Investment horizon: about 10 weeks
• Liquidity need: can be sold readily before maturity if cash is needed early
• Credit-risk preference: UK government exposure rather than bank or corporate issuer risk
• Priority: capital preservation over extra yield

Which instrument best fits the note?

• A. A 90-day commercial paper issue from a highly rated company
• B. An overnight bank deposit rolled daily for 10 weeks
• C. A UK Treasury bill maturing in about 10 weeks
• D. A six-month certificate of deposit issued by a bank

Best answer: C

What this tests: Securities: Asset Classes

Explanation: Treasury bills are short-term government debt instruments and are commonly used for cash management where capital preservation, short maturity, and liquidity are important. The note specifies UK government exposure, a roughly 10-week horizon, and the ability to sell before maturity. A UK Treasury bill with a matching maturity best fits those needs. Bank certificates of deposit and bank deposits introduce bank credit exposure, while commercial paper introduces corporate issuer exposure. Rolling an overnight deposit may provide daily liquidity, but it does not lock in the 10-week maturity profile and still depends on bank credit quality.

• A bank certificate of deposit may be a money-market instrument, but a six-month bank issue does not match the stated horizon or government credit preference.
• Commercial paper can suit short-term funding markets, but it is corporate issuer exposure rather than UK government exposure.
• Rolling overnight deposits gives operational liquidity, but it creates reinvestment exposure and relies on bank credit rather than a government instrument.

A Treasury bill is a short-term government money-market instrument that matches the maturity, liquidity, and low credit-risk requirements.

Question 87

Topic: Securities: the Financial Services Industry

A trainee in a wholesale markets team reviews the following desk note. What is the best supported interpretation of the activity recorded?

• A. Primary-market activity
• B. Investment-management activity
• C. Market-infrastructure activity
• D. Secondary-market activity

Best answer: D

What this tests: Securities: the Financial Services Industry

Explanation: The classification depends on the economic role of the transaction. Secondary-market activity is trading in securities that have already been issued, normally between investors, dealers, brokers, or other market participants. Here, the bond is existing, the price is agreed with another dealer, and the seller receives the cash proceeds. The issuer receives no funds and no new securities are created, so the transaction is not a capital-raising issue. The presence of a pension scheme and investment manager does not change the classification, because the note records execution of a market trade rather than portfolio construction or advice. Clearing and settlement are involved after the trade, but they support completion of the transaction rather than define its main activity.

• Primary-market activity would involve issuing new securities and raising funds for the issuer.
• Investment-management activity would centre on portfolio allocation, mandate management, or investment decisions rather than the execution classification.
• Market-infrastructure activity covers systems such as clearing and settlement, but those are only supporting post-trade processes here.

The note records a purchase of an already-issued bond between market participants, with no new capital raised for the issuer.

Question 88

Topic: Derivatives: Trading, Hedging and Investment Strategies

A derivatives trader is reviewing a hedge memo for a UK equity portfolio. The portfolio manager wants to reduce broad market exposure over the next month using index futures. Ignore transaction costs and round to the nearest whole contract.

Which action is best supported by the memo?

• A. Sell 160 index futures contracts.
• B. Buy 136 index futures contracts.
• C. Sell 116 index futures contracts.
• D. Sell 136 index futures contracts.

Best answer: D

What this tests: Derivatives: Trading, Hedging and Investment Strategies

Explanation: For a futures hedge, the required number of contracts is based on the exposure to be hedged divided by the contract value. The hedge ratio adjusts the portfolio value to the amount of index exposure being hedged: £12,000,000 × 0.85 = £10,200,000. Each futures contract has a value of 7,500 × £10 = £75,000. Dividing £10,200,000 by £75,000 gives 136 contracts. Because the portfolio is long equities and the manager wants protection against a falling market, the hedge should be short index futures. A short futures position should gain when the index falls, offsetting some of the loss on the equity portfolio.

• Buying 136 futures would increase market exposure rather than reduce the risk of a falling equity market.
• Selling 160 futures ignores the supplied hedge ratio and hedges the full portfolio value.
• Selling 116 futures understates the hedge after applying the stated contract value and hedge ratio.

The adjusted hedge notional is £10,200,000 and each futures contract represents £75,000, so the hedge requires selling 136 contracts.

Question 89

Topic: Derivatives: Market Structure

A UK asset manager buys listed equity index futures through an executing broker and clears through its separate clearing broker under a give-up arrangement.

Trade details:

• Contract: June FTSE 100 Index futures
• Order: buy 120 contracts as an average-price block at 7,840.5
• Intended allocation: Fund Alpha 70 contracts, Fund Beta 50 contracts
• Give-up instruction: all contracts to clearing broker code CB01

Operations review before close:

• The executing broker registered 80 contracts to CB01 and 40 contracts to its own house clearing code.
• The custodian has not yet updated cash collateral payment instructions.
• Fund Alpha’s internal benchmark is being changed in the performance system.
• The exchange price-feed vendor corrected an intraday volume statistic.

Which issue is the single best example of a matter that affects the derivative trade record?

• A. Fund Alpha’s internal benchmark change in the performance system
• B. The 40 contracts registered to the executing broker’s house clearing code instead of the agreed give-up clearing code
• C. The vendor correction to an intraday exchange volume statistic
• D. The custodian’s delay in updating cash collateral payment instructions

Best answer: B

What this tests: Derivatives: Market Structure

Explanation: A derivative trade record captures the contract, buy/sell direction, quantity, price, trade date, account or allocation details, and the clearing member or counterparty responsible for the position. In a give-up, the executing broker arranges the trade but the position is intended to be accepted by the nominated clearing broker. If part of the trade is registered to the wrong clearing code, the trade record is wrong because the position, margin, and clearing responsibility may sit with the wrong party. That is different from collateral payment instructions, performance benchmarks, or market-data corrections, which may affect operations, reporting, or analysis but do not change the registered trade itself.

• Collateral payment instructions affect cash or collateral movements, not the contract registration fields of the futures trade.
• An internal benchmark change affects performance measurement, not the derivative position recorded at the clearing house.
• A corrected volume statistic affects market data, not the firm’s registered contract, allocation, or give-up details.

The clearing member code is part of the registered futures trade record and determines where the position and margin obligation are carried.

Question 90

Topic: Securities: Clearing and Settlement

A broker is reviewing same-day DVP settlement obligations in one UK equity before the settlement cut-off.

Settlement obligations:

Available before cut-off:

• Securities in depot: 55,000 shares
• Cash balance: £120,000
• The purchase receipt will not be available early enough to support the sale delivery.
• The sale cash will not be received unless the sale settles.

The firm’s procedure is to arrange stock borrowing for a securities shortfall and same-day funding for a cash shortfall. What is the best next step?

• A. Arrange same-day cash funding of £93,000.
• B. Arrange same-day stock borrowing of 25,000 shares.
• C. Settle the purchase first and use the 30,000 received shares for the sale delivery.
• D. Take no action because the sale proceeds exceed the purchase payment.

Best answer: B

What this tests: Securities: Clearing and Settlement

Explanation: In DVP settlement, the required securities and cash must be available when the settlement instruction is due to complete. The broker must deliver 80,000 shares for the sale, but only 55,000 shares are available before the cut-off. The 30,000 shares from the purchase cannot be relied on because they will not arrive early enough. That leaves a delivery shortfall of 25,000 shares, so the correct operational response is to arrange stock borrowing for that shortfall. Cash is not the problem here: the purchase payment is £93,000 and the broker already has £120,000 available. The sale proceeds should not be treated as available cash unless the sale itself settles.

• Cash funding is unnecessary because the available £120,000 covers the £93,000 purchase payment.
• Using the purchase receipt for the sale is unsupported because the shares will not be available before the delivery cut-off.
• Relying on sale proceeds ignores DVP mechanics: the cash receipt depends on delivering the shares successfully.

The sale requires 80,000 shares and only 55,000 are available before cut-off, creating a 25,000-share delivery shortfall.

Question 91

Topic: Securities: Asset Classes

An analyst is reviewing a security added to a UK client’s international equities watchlist.

Issue summary:

Which interpretation is best supported by the issue summary?

• A. The receipt gives exposure to Sakura Robotics’ foreign ordinary shares through a tradable certificate.
• B. The receipt is a debt instrument of the depositary bank with returns unrelated to Sakura Robotics’ shares.
• C. The receipt is a warrant giving a right to buy Sakura Robotics’ shares at a fixed exercise price.
• D. The receipt is an ordinary share in a separate London-incorporated business.

Best answer: A

What this tests: Securities: Asset Classes

Explanation: A depositary receipt is a negotiable certificate, typically issued by a depositary bank, that represents a specified number of shares in a foreign company. The underlying shares are held by a custodian in the home market, while the receipts can trade in another market and currency. Here, the receipt ratio and the custody note show that the London-traded security provides access to Sakura Robotics’ Tokyo-listed ordinary shares. It does not indicate a separate operating company, bank debt, or a warrant with an exercise price and expiry.

• A separate London company would issue its own shares; the summary identifies receipts representing Tokyo-listed ordinary shares.
• Bank debt would create creditor exposure to the bank; the bank’s role in a depositary receipt structure is to facilitate the receipt programme.
• A warrant would specify exercise terms such as a strike price and expiry; the summary gives a receipt ratio instead.

The receipt ratio and custody note show that the instrument represents foreign ordinary shares held for the depositary receipt programme.

Question 92

Topic: Derivatives: Market Structure

An analyst reviews the public exchange feed for a listed equity index futures contract after a volatile session.

Market data observed:

Other facts:

• The order book and trade reports are anonymised.
• The contract is used by both asset managers hedging portfolios and proprietary traders taking directional positions.
• The analyst has no access to client allocations, existing position records, or trader communications.

Which is the single best conclusion from these facts?

• A. The data show increased trading and a rise in outstanding contracts, but they do not by themselves prove whether traders were hedging or speculating.
• B. The higher volume proves that most trades were closing transactions by existing holders.
• C. The rise in price and open interest proves that new speculative long positions caused the move.
• D. The anonymised order book is sufficient to identify whether asset managers or proprietary traders initiated the buying.

Best answer: A

What this tests: Derivatives: Market Structure

Explanation: Public market data can be useful, but it has limits. Price changes show where the market cleared, volume shows how many contracts traded, and open interest shows the number of outstanding contracts after opening and closing activity is netted. An increase in open interest indicates that more contracts remain open, but it does not identify who opened them or why. The same futures trade may be part of a hedge, a speculative strategy, an arbitrage, or a spread. To assess intention, additional evidence such as account classification, existing positions, allocations, hedge documentation, or trader instructions would be needed.

• A price rise with higher open interest may be consistent with new buying interest, but it does not prove speculative intention.
• High volume alone does not show whether trades opened or closed positions; open interest must also be considered, and even then intention remains unknown.
• An anonymised order book shows orders and trades, not beneficial-owner identity or trading purpose.

Price, volume, and open interest can show market activity and changes in outstanding positions, but not the intention behind individual trades without further position or client information.

Question 93

Topic: Securities: Corporate Actions

A portfolio manager holds £2 million nominal of a sterling corporate bond. Review the custodian notice and identify the best supported interpretation.

Corporate-action notice:

• Security: ABC plc 4.75% fixed-rate notes, scheduled maturity 30 September 2032

• Event: Issuer has exercised its optional call right for all outstanding notes

• Redemption date: 30 September 2026

• Payment: 100% of nominal plus accrued interest to the redemption date

• Coupons after the redemption date: None

• A. Cash-flow timing is delayed because coupons stop after 2026 while principal remains due in 2032.

• B. Maturity exposure is unchanged because the bond’s original legal maturity date remains 30 September 2032.

• C. Credit risk increases because the issuer has failed to make the scheduled 2032 principal repayment.

• D. Principal is returned earlier than scheduled, shortening maturity exposure and creating reinvestment risk on the proceeds.

Best answer: D

What this tests: Securities: Corporate Actions

Explanation: A full call redemption is a bond repayment event. The issuer repays the bond before its scheduled maturity, usually at the stated call price plus accrued interest. For the holder, the main effect is accelerated cash-flow timing: principal arrives on the call date rather than at final maturity. That shortens the investor’s exposure to the issuer and removes future coupon cash flows after redemption. It also creates reinvestment risk, because the investor must redeploy the proceeds, possibly at lower yields or into securities with different risk characteristics. The notice does not indicate default or missed payment; it shows a contractual early redemption at 100% of nominal plus accrued interest.

• Treating the call as a credit failure confuses a contractual redemption with default.
• Relying on the original 2032 maturity ignores that the issuer has called all outstanding notes in 2026.
• Saying principal remains due in 2032 contradicts the notice, which states full redemption on the 2026 redemption date.

A full issuer call accelerates the final cash flow, ends the bond holding before scheduled maturity, and leaves the investor needing to reinvest the redemption proceeds.

Question 94

Topic: Securities: Asset Classes

A money-market fund has £40 million of cash to place for two days. It wants secured exposure rather than an unsecured bank deposit.

Proposed transaction:

• The fund pays £40 million cash to a dealer today.
• The dealer delivers UK gilts with a slightly higher market value.
• The dealer agrees to buy back equivalent gilts in two business days at a pre-agreed higher price.
• The price difference represents the fund’s return for the two-day period.

Which is the single best description of the transaction?

• A. A stock-lending transaction designed to cover a short equity sale
• B. A purchase of commercial paper issued by the dealer
• C. An outright gilt purchase for the fund’s investment portfolio
• D. A reverse repo used to place short-term cash against securities collateral

Best answer: D

What this tests: Securities: Asset Classes

Explanation: In a repo, one party sells securities and agrees to repurchase equivalent securities later at a pre-agreed price. From the cash provider’s perspective, the same transaction is a reverse repo: it places cash and receives securities as collateral. This structure is commonly used to manage short-term cash, collateral and liquidity because the cash exposure is secured by marketable securities rather than being purely unsecured. Here, the money-market fund pays cash, receives gilts, and earns the difference between the start and end prices over two days, so it is using a reverse repo to invest short-term cash on a collateralised basis.

• Commercial paper would be an unsecured short-term debt instrument issued by the dealer, not a sale and repurchase of gilts.
• An outright gilt purchase would not include the dealer’s agreement to buy back equivalent securities at a fixed future price.
• Stock lending to cover a short equity sale focuses on borrowing securities, usually equities, rather than placing surplus cash against gilt collateral.

The fund is providing cash and receiving gilts as collateral under an agreement for the dealer to repurchase equivalent securities.

Question 95

Topic: Securities: Asset Classes

An investor holds 8,000 ordinary shares in a listed company.

Company details:

• Ordinary shares in issue: 2,000,000
• Voting rights: one vote per ordinary share
• Expected ordinary dividend: 12p per share, subject to being declared
• Estimated cash available on winding up: £5,200,000
• External creditors’ claims: £3,600,000
• Preference shareholders’ fixed capital claim: £1,100,000

Ignoring tax and costs, which statement best describes the investor’s position?

• A. Expected dividend income is £96 if declared, voting power is 0.04%, and the estimated residual capital claim is £200.
• B. Expected dividend income is £960 if declared, voting power is 0.4%, and the estimated residual capital claim is £2,000.
• C. Expected dividend income is £960 as a fixed entitlement, voting power is nil, and the estimated capital claim is £2,000 before creditors are paid.
• D. Expected dividend income is £960 if declared, voting power is 4.0%, and the estimated residual capital claim is £20,000.

Best answer: B

What this tests: Securities: Asset Classes

Explanation: Ordinary shareholders are owners of the company, so their voting power and economic exposure are normally proportional to their shareholding. Here, 8,000 shares out of 2,000,000 gives 0.4% of the votes. The expected dividend is 12p per share, so the cash income would be £960 if the dividend is declared. Unlike a bond coupon, an ordinary dividend is not a fixed contractual payment. On winding up, ordinary shareholders rank last after creditors and any prior-ranking share capital. The residual amount is £5,200,000 less £3,600,000 less £1,100,000, leaving £500,000 for ordinary shareholders. A 0.4% holding gives £2,000 of that residual amount, illustrating the residual risk borne by equity investors.

• Treating the expected dividend as a fixed entitlement confuses ordinary shares with contractual debt interest or a fixed preference claim.
• Reducing the holding to 0.04% creates a decimal-place error; 8,000 out of 2,000,000 is 0.4%.
• Using 4.0% overstates both voting influence and residual capital by a factor of ten.

The investor owns 0.4% of the ordinary shares, expects 8,000 × 12p = £960 if a dividend is declared, and receives 0.4% of the £500,000 residual after prior claims.

Question 96

Topic: Securities: Clearing and Settlement

A broker’s equity operations manager reviews the following trading note before the market opens. Which action or interpretation is best supported?

Trading note:

• A client has sold 80,000 shares in a liquid UK-listed company for settlement on T+2, but an incoming transfer of the same stock may not arrive until T+4.

• The securities lending desk can borrow 80,000 equivalent shares from a pension-fund lender, against collateral and a lending fee, and return equivalent shares when the transfer arrives.

• Market makers report that when borrow is available in this stock, they are prepared to quote tighter two-way prices; when borrow is scarce, spreads widen.

• A. Use the loan to transfer the lender’s investment exposure permanently to the borrower, avoiding any need to return equivalent shares.

• B. Decline the loan because stock lending is only a financing tool and cannot be used to prevent a failed equity settlement.

• C. Borrow the shares temporarily so the sale can settle on time; the same stock-lending mechanism also supports short-sale delivery and tighter secondary-market liquidity.

• D. Wait for the incoming transfer and treat any settlement delay as unrelated to market liquidity or short-selling capacity.

Best answer: C

What this tests: Securities: Clearing and Settlement

Explanation: Stock borrowing and lending allows a borrower to obtain securities temporarily, usually against collateral and a fee, with an obligation to return equivalent securities. In settlement operations, this can cover a timing mismatch where stock needed for delivery is not yet available, reducing the risk of a failed settlement or buy-in. The same mechanism can support short selling because a seller that does not currently hold the shares can borrow stock to make delivery. It can also improve market liquidity: when stock is available to borrow, market makers and other participants may quote more confidently and in tighter size, because they can source securities needed for delivery or hedging.

• Treating stock lending as unusable for settlement overlooks its common use in covering temporary delivery shortfalls.
• Describing the loan as a permanent transfer ignores the obligation to return equivalent securities to the lender.
• Waiting for the delayed transfer ignores the T+2 settlement need and the link between borrow availability, short selling, and market liquidity.

Temporary stock borrowing can supply equivalent shares for delivery, helping avoid a settlement fail while also supporting short selling and market-maker liquidity.

Question 97

Topic: Derivatives: Regulatory Requirements

A client is long 800 equity index futures contracts. Each contract has a multiplier of £10 per index point. The client posted initial margin of £1,500 per contract.

By the close, the futures price has fallen by 35 index points. The exchange requires central clearing, daily variation margin, position reporting, and market-abuse surveillance.

Ignoring fees and interest, which conclusion best explains why these controls are required?

• A. The client has a £28,000 variation loss, showing that derivatives exposures are usually too small to justify position reporting or surveillance.
• B. The client has a £280,000 variation loss, about 23% of initial margin, showing why regulation focuses on default risk control, transparency, market integrity, and participant protection.
• C. The price move affects only notional value until expiry, so daily margining is unrelated to risk control or participant protection.
• D. The client has a £280,000 profit, showing that regulation is mainly intended to preserve profitable trading conditions for futures users.

Best answer: B

What this tests: Derivatives: Regulatory Requirements

Explanation: Exchange-traded derivatives can create large gains or losses from relatively small market moves because the contract multiplier and number of contracts magnify exposure. Here, a 35-point fall on 800 contracts with a £10 multiplier creates a £280,000 loss. Initial margin was 800 × £1,500 = £1,200,000, so the one-day loss is about 23% of margin posted. Regulation is therefore not just administrative. Central clearing and daily variation margin reduce counterparty and default risk. Position reporting and surveillance support transparency and help detect disorderly trading or market abuse. These controls protect market participants and support confidence in market integrity.

• The £28,000 figure understates the exposure by missing a factor of ten in the contract calculation.
• A long futures position loses when the futures price falls, so the £280,000 movement is not a profit.
• Futures are marked to market daily, so the price move creates an immediate margin cash flow rather than only an expiry effect.

The loss is 800 × £10 × 35 = £280,000, demonstrating the leveraged exposures that margining, reporting, and surveillance are designed to control.

Question 98

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

Best answer: C

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.

Question 99

Topic: Derivatives: Underlying Markets

A derivatives desk is reviewing a proposed OTC cash-settled call on a recently issued cryptoasset token. The risk manager wants to know whether the unusual underlying creates a concern that must be escalated before quotation.

Proposed trade and controls:

Other facts:

• Settlement is in USD cash against an approved two-venue index.
• Operations confirms that the token identifier and price feed are supported in trade capture.
• No other limits are binding.

Assuming the desk hedges the initial delta in the underlying, which assessment is best supported by the estimate?

• A. Escalate a settlement concern because physical delivery of 1,200,000 tokens will be required at expiry.
• B. Escalate a liquidity concern because the initial hedge is about 420,000 tokens, or 28% of reliable daily volume.
• C. Escalate a valuation concern because a two-venue index is not sufficient for any cryptoasset derivative.
• D. Escalate an operational-control concern because the token cannot be identified or priced in trade capture.

Best answer: B

What this tests: Derivatives: Underlying Markets

Explanation: Unusual underlyings can create several types of concern, but the facts point to liquidity. The hedge estimate is the option size multiplied by delta: 1,200,000 tokens × 0.35 = 420,000 tokens. Compared with reliable aggregate average daily volume of 1,500,000 tokens, that is 28%. The desk’s escalation threshold is breached when the initial hedge exceeds 20% of reliable daily volume, so the proposed trade should be escalated for liquidity review before quotation. The cash settlement index and confirmed trade-capture support reduce the force of settlement and operational-control objections under the stated facts.

• A valuation escalation is not supported merely because the underlying is a cryptoasset; the stem states that an approved two-venue index is available.
• A physical settlement concern is inconsistent with USD cash settlement against the approved index.
• An operational-control concern is not supported because the token identifier and price feed are already supported in trade capture.

The estimated delta hedge is 1,200,000 × 0.35 = 420,000 tokens, which exceeds the 20% liquidity threshold.

Question 100

Topic: Securities: Primary Markets

An equity capital markets team is reviewing a proposed share issue for a listed company. Which classification is best supported by the issue summary?

Issue summary:

• The company will issue new ordinary shares to raise £40 million.

• The offer is made only to existing ordinary shareholders in proportion to their current holdings.

• Entitlements cannot be sold or transferred in the market.

• Shareholders may apply for additional shares not taken up by others.

• There is no institutional bookbuild and no offer through retail investment intermediaries.

• A. An open offer

• B. An intermediaries offer

• C. A rights issue

• D. A placing

Best answer: A

What this tests: Securities: Primary Markets

Explanation: A pro rata issue to existing shareholders may be either a rights issue or an open offer. The decisive feature here is that the entitlement cannot be sold or transferred. In a rights issue, shareholders normally receive renounceable rights that can be taken up, sold, or allowed to lapse. In an open offer, shareholders are invited to subscribe in proportion to existing holdings, but the entitlement is not normally traded. The ability to apply for additional shares not taken up by others is also consistent with an open offer. The absence of an institutional bookbuild points away from a placing, and the absence of retail investment intermediaries points away from an intermediaries offer.

• A rights issue would normally involve renounceable, tradable rights, which the summary excludes.
• A placing would involve securities being placed with selected investors, typically institutions, rather than a pro rata offer to all existing shareholders.
• An intermediaries offer would be distributed through investment intermediaries to their clients, which is specifically not part of the structure here.

An open offer is a pro rata offer to existing shareholders where the entitlement is not normally transferable or traded.

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• Free CISI CMP Sec/Deriv Practice Questions: Securities: Asset Classes
• Free CISI CMP Sec/Deriv Practice Questions: Securities: Markets
• Free CISI CMP Sec/Deriv Practice Questions: Securities: Primary Markets
• Free CISI CMP Sec/Deriv Practice Questions: Securities: Secondary Markets
• Free CISI CMP Sec/Deriv Practice Questions: Securities: Corporate Actions
• Free CISI CMP Sec/Deriv Practice Questions: Securities: Clearing and Settlement
• Free CISI CMP Sec/Deriv Practice Questions: Securities: Accounting Analysis
• Free CISI CMP Sec/Deriv Practice Questions: Securities: Investment Management
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives: Introduction to Derivatives
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives: Underlying Markets
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives: Market Structure
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives Pricing and Valuation
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives: OTC Derivatives
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives Clearing and Margin
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives: Delivery and Settlement
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives Trading and Hedging
• Free CISI CMP Sec/Deriv Practice Questions: Derivatives: Regulatory Requirements

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