CISI CMP Sec/Deriv Quick Reference

How to use this Quick Reference

This independent Quick Reference supports candidates preparing for the Chartered Institute for Securities & Investment CISI Capital Markets Programme - Securities / Derivatives exam, code CISI CMP Sec/Deriv.

Use it to check:

• Product mechanics: equities, bonds, money-market instruments, repos, futures, options, swaps, warrants, and structured exposures.
• Exam-style distinctions: exchange vs OTC, agency vs principal, clean vs dirty price, forward vs futures, option buyer vs writer, hedging vs speculation.
• Calculation triggers: yield, accrued interest, TERP, option payoff, futures hedge size, duration-based price sensitivity.
• Risk and conduct vocabulary: market abuse, conflicts, suitability, client assets, counterparty risk, liquidity risk, and settlement risk.

Core product map

Market structure and roles

Primary vs secondary markets

Participant roles

Trading and order terminology

Equity securities and corporate actions

Share types and rights

Equity valuation and performance formulas

\[ \text{Dividend yield}=\frac{\text{Annual dividend per share}}{\text{Share price}}\times100 \]\[ \text{EPS}=\frac{\text{Profit attributable to ordinary shareholders}}{\text{Weighted average ordinary shares}} \]\[ \text{P/E ratio}=\frac{\text{Share price}}{\text{Earnings per share}} \]\[ \text{Holding-period return}=\frac{\text{Income}+\text{Ending value}-\text{Beginning value}}{\text{Beginning value}}\times100 \]

High-yield interpretation:

• High P/E may indicate growth expectations, overvaluation, or temporarily low earnings.
• Dividend yield rises when dividend increases or price falls; a high yield can signal distress.
• EPS dilution can occur after new share issues, conversion of convertibles, or warrant exercise.
• Total return includes income and capital change; price return excludes income.

Corporate actions

Rights issue and TERP

Use when an exam question gives a rights ratio and subscription price. \(P_\text{cum}\) is the share price before the shares go ex-rights.

\[ \text{TERP}=\frac{(N_\text{old}\times P_\text{cum})+(N_\text{new}\times P_\text{sub})}{N_\text{old}+N_\text{new}} \]\[ \text{Value per existing share right}=P_\text{cum}-\text{TERP} \]

Where needed, convert between “value per existing share right” and “value of rights required to buy one new share” using the stated rights ratio.

TERP traps:

• TERP is theoretical; market price can differ.
• A rights issue raises cash; a bonus issue does not.
• A discounted subscription price is not a free gain because the ex-rights price adjusts.
• If a shareholder does not take up or sell rights, value may be lost.

Debt securities and money-market instruments

Bond vocabulary

Bond price, yield, and risk relationships

Core bond formulas

\[ \text{Accrued interest}=\text{Coupon for period}\times\frac{\text{Days since last coupon}}{\text{Days in coupon period}} \]\[ \text{Dirty price}=\text{Clean price}+\text{Accrued interest} \]\[ P=\sum_{t=1}^{n}\frac{C_t}{(1+y)^t}+\frac{M}{(1+y)^n} \]\[ \text{Current yield}=\frac{\text{Annual coupon}}{\text{Clean price}}\times100 \]\[ \text{Approximate YTM}= \frac{\text{Annual coupon}+\frac{\text{Redemption value}-\text{Price}}{\text{Years to maturity}}} {\frac{\text{Redemption value}+\text{Price}}{2}}\times100 \]\[ D_\text{mod}=\frac{D_\text{Mac}}{1+y/m} \]\[ \frac{\Delta P}{P}\approx-D_\text{mod}\Delta y \]

Formula traps:

• Use the day-count convention supplied in the question.
• Clean price is not cash paid; dirty price is the settlement amount.
• Current yield ignores redemption gain/loss.
• Approximate duration price change is linear; large yield moves need convexity awareness.
• Bond prices can exceed 100 when coupon is above current yield.

Money-market and repo quick reference

Repo perspective trap:

• The party doing a repo usually sells securities and receives cash: economically a collateralized borrowing.
• The party doing a reverse repo usually gives cash and receives securities: economically a collateralized lending.
• A haircut protects the cash lender against collateral value decline.

Derivatives reference

Exchange-traded vs OTC derivatives

Instrument selection

Linear derivative payoff

\[ \text{Long forward/futures payoff}=S_T-F_0 \]\[ \text{Short forward/futures payoff}=F_0-S_T \]

Interpretation:

• Long futures/forward: benefits if underlying price rises.
• Short futures/forward: benefits if underlying price falls.
• Futures are marked to market through variation margin; forwards commonly settle at maturity unless collateralized.
• Basis risk arises when the hedge instrument does not move perfectly with the hedged exposure.

Options quick reference

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

Option style, Greeks, and volatility

Forward pricing and parity

For a simple continuously compounded cost-of-carry model, where \(u\) represents storage/financing costs and \(y\) represents income yield:

\[ F_0=S_0e^{(r+u-y)T} \]

For a non-dividend-paying European call and put with same strike and expiry:

\[ C-P=S_0-Ke^{-rT} \]

If known dividends apply, replace the spot price with spot less the present value of dividends in the parity relationship.

Parity traps:

• Put-call parity applies to European options under stated assumptions.
• American exercise features and dividends can change relationships.
• Higher volatility increases both call and put value, not just calls.
• A forward price is not a forecast; it is a no-arbitrage pricing relationship under assumptions.

Swaps and rate derivatives

Hedge sizing formulas

For an equity index futures hedge:

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

For an approximate duration hedge using bond futures:

\[ \text{Number of contracts}\approx \frac{\text{Portfolio value}\times\text{Portfolio modified duration}} {\text{Futures contract value}\times\text{Futures modified duration}} \]

Direction:

• Long cash equity or bond exposure and want to reduce market risk: usually sell futures.
• Need to buy asset later and fear price rise: usually buy futures.
• Want downside protection while keeping upside: buy puts instead of selling futures.
• Want income and accept capped upside: write covered calls.

Settlement, clearing, custody, and lifecycle

Trade lifecycle

Settlement and entitlement terms

Risk reference

Suitability and product-choice cues

Suitability and appropriateness depend on client facts, jurisdiction, and firm rules. For exam scenarios, focus on objective, risk tolerance, time horizon, liquidity need, knowledge/experience, leverage, and capacity for loss.

Conduct, regulation, and market integrity vocabulary

Common exam traps

Rapid scenario decision checklist

Before answering a product or risk question, identify:

1. Position direction: long or short; buyer or writer; payer or receiver.
2. Instrument type: cash security, debt, equity, derivative, fund, or structured product.
3. Cash-flow certainty: contractual, discretionary, variable, or contingent.
4. Leverage: fully funded, margin-based, embedded leverage, or premium-only.
5. Downside profile: limited to premium, limited to investment, margin-call risk, or potentially unlimited.
6. Liquidity: exchange-traded standard instrument or bespoke OTC exposure.
7. Counterparty: issuer risk, exchange/CCP clearing, bilateral OTC counterparty, custodian.
8. Time horizon: short-term hedge, long-term investment, maturity-matched liability, speculative trade.
9. Client objective: income, growth, capital protection, hedging, liquidity, tax planning.
10. Conduct overlay: disclosure, suitability, conflicts, market integrity, and recordkeeping.

Practical next step

Use this Quick Reference as a checklist, then complete timed mixed practice covering: bond accrued interest and yield, equity corporate actions, options payoff diagrams, futures hedge sizing, repo perspective questions, settlement lifecycle, and conduct scenarios. Review every missed question by identifying the product, position direction, cash-flow obligation, and main risk before moving to the next set.