CISI CMP Sec/Deriv — CISI Capital Markets Programme - Securities / Derivatives Quick Review

Exam identity and Quick Review purpose

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

Use it as a fast consolidation tool before topic drills, mock exams, and detailed explanations. It is not a substitute for the official syllabus or learning materials. The goal is to help you quickly reconnect the major capital markets ideas: securities, derivatives, trading, settlement, valuation basics, risk, and common exam traps.

For best results:

1. Read the tables and decision rules first.
2. Attempt original practice questions by topic.
3. Review detailed explanations for every miss, guess, or slow answer.
4. Return to this page to patch weak areas before full mock exams.

Big-picture capital markets map

Capital markets questions often test whether you can connect an instrument to its purpose, risk, cash flows, and lifecycle.

A useful mental sequence:

Instrument → parties → cash flows → price drivers → risk → trading/settlement → exam trap

If you cannot explain all six for an instrument, it is a good target for topic drills.

Securities: high-yield review

Equity securities

Equity represents ownership. Ordinary shareholders usually rank behind creditors if the company is wound up, but they participate in upside through capital growth and dividends.

Key exam logic:

• Equity investors accept higher uncertainty for potential growth.
• Ordinary shareholders are last in liquidation after secured creditors, unsecured creditors, and preference shareholders.
• Corporate actions can change the number of shares, price per share, voting position, or cash received.
• Ex-dividend means the buyer is not entitled to the declared dividend; the price may adjust downward.

Debt securities

Debt securities create a creditor relationship. The issuer borrows; investors lend. The investor expects interest and principal repayment according to the instrument terms.

Bond price and yield relationships

The most tested bond relationship is simple:

Additional decision rules:

• Higher coupon, all else equal, generally reduces duration compared with a lower-coupon bond of the same maturity.
• Longer maturity generally increases interest-rate sensitivity.
• Higher credit risk usually requires higher yield.
• Yield to maturity assumes cash flows are received as scheduled and incorporates price, coupon, and redemption value.

Common calculation distinctions:

Money market instruments

Money market securities are short-term instruments used for liquidity management, funding, and cash investment.

Repo logic is commonly tested:

• The cash lender receives securities as collateral.
• The cash borrower provides securities and agrees to repurchase them.
• The difference between sale and repurchase price reflects the repo rate.
• Collateral quality, haircuts, and operational settlement are important risk controls.

Securities markets and trading

Primary versus secondary markets

Primary market questions often ask who receives proceeds. If new securities are issued, proceeds usually go to the issuer, after costs. In secondary trading, proceeds go to the selling investor, not the issuer.

Order-driven and quote-driven trading

Order type review:

Bid/offer rule:

• Bid = price at which dealer/market is willing to buy from you.
• Offer/ask = price at which dealer/market is willing to sell to you.
• Investor buying usually pays the offer.
• Investor selling usually receives the bid.
• Spread compensates liquidity provision, risk, and costs.

Short selling and securities lending

Short selling involves selling securities not currently owned, usually by borrowing them first.

Profit/loss logic:

• Short seller benefits if price falls.
• Short seller loses if price rises.
• Potential loss is theoretically large because price can rise significantly.
• Borrowing costs, recalls, dividends, and corporate actions can affect economics.

Clearing, settlement, custody, and corporate actions

Trade lifecycle

Important distinction:

• Clearing prepares and manages obligations after trade execution.
• Settlement completes the transfer of cash and securities.
• Custody is ongoing safekeeping and asset servicing after settlement.

CCPs and novation

A central counterparty may step between buyer and seller. Through novation, the CCP becomes buyer to every seller and seller to every buyer.

Trap: CCP clearing reduces counterparty risk but does not eliminate all risk. It concentrates risk in the CCP and depends on robust margining and default management.

Corporate actions

Exam traps:

• Confusing record date with ex-dividend date.
• Treating all corporate actions as cash events.
• Forgetting that voluntary actions require an investor election.
• Assuming a bonus issue creates wealth by itself.
• Ignoring dilution in rights issues and new share issuance.

Derivatives: high-yield review

A derivative derives value from an underlying such as an equity, bond, interest rate, index, commodity, currency, or credit event. Derivatives are used for hedging, speculation, arbitrage, yield enhancement, and risk transfer.

Core derivative types

Long and short positions

Option payoff essentials

At expiry:

\[ \text{Call payoff} = \max(S - K, 0) \]\[ \text{Put payoff} = \max(K - S, 0) \]

Where \(S\) is the underlying price at expiry and \(K\) is the strike price.

Profit also includes premium:

• Long call profit = call payoff − premium paid.
• Short call profit = premium received − call payoff.
• Long put profit = put payoff − premium paid.
• Short put profit = premium received − put payoff.

Breakeven rules:

The same breakeven number applies to the long and short side of the same option, but the profit direction is opposite.

Option moneyness

Common trap: “In the money” does not automatically mean profitable after premium. It means the option has intrinsic value before considering the premium paid.

Option premium components

General relationships:

The Greeks

Trap: Vega is not a Greek letter, but it is treated as one of the standard option sensitivities.

Futures and forwards

Futures margin review:

Trap: Futures margin is a performance bond/collateral mechanism, not the same as buying an option premium.

Futures profit/loss often follows:

\[ \text{Futures P\&L} = \text{Price change} \times \text{Contract multiplier} \times \text{Number of contracts} \]

If using ticks:

\[ \text{Futures P\&L} = \text{Tick movement} \times \text{Tick value} \times \text{Number of contracts} \]

Basis, hedging, and contract choice

Basis is the difference between spot price and futures price, commonly expressed as:

\[ \text{Basis} = \text{Spot price} - \text{Futures price} \]

Hedging decision rule:

Swaps

A swap is an agreement to exchange cash flows according to specified terms.

Plain interest-rate swap logic:

• Notional amount is used to calculate payments.
• In many plain interest-rate swaps, notional is not exchanged.
• Netting may mean only the difference between fixed and floating payments is paid.
• Floating leg resets periodically.
• Counterparty credit risk and collateral arrangements matter.

Common trap: A swap can reduce one risk while creating another, such as counterparty, liquidity, operational, or basis risk.

Risk review across securities and derivatives

Main risk types

Risk controls

Decision rules for fast exam questions

Instrument selection

Price and risk direction

Lifecycle distinction questions

Common traps and candidate mistakes

Securities traps

• Confusing coupon with yield.
• Forgetting that bond prices and yields move in opposite directions.
• Treating clean price as the final cash settlement amount.
• Assuming all preference shares are identical.
• Ignoring seniority and security when comparing debt instruments.
• Thinking a stock split automatically creates shareholder wealth.
• Forgetting dilution in rights issues, convertibles, and new share issues.
• Confusing primary market proceeds with secondary market proceeds.
• Misreading bid and offer from the investor’s perspective.
• Assuming liquidity risk only applies to small companies; stressed markets can affect many instruments.

Derivatives traps

• Forgetting that option buyers have rights and option sellers have obligations.
• Ignoring the premium when calculating option profit or breakeven.
• Treating futures margin as the cost of buying the contract.
• Confusing a forward with a future.
• Forgetting daily mark-to-market on futures.
• Assuming a hedge eliminates all risk.
• Mixing up long hedge and short hedge.
• Using notional value as if it were the amount at risk in every derivative.
• Confusing intrinsic value with total option premium.
• Forgetting that a short call has potentially very large loss exposure.
• Assuming OTC customisation always means lower risk; it can increase counterparty and liquidity risk.

Wording traps

Watch for these phrases:

Calculation checklist

Before doing any calculation, identify:

1. What is being asked: price, yield, payoff, profit, margin movement, ratio, or settlement amount?
2. Whether the question is from the buyer’s or seller’s perspective.
3. Whether cash flows are income, capital gain/loss, premium, margin, or accrued interest.
4. Whether figures are per share, per bond, per contract, or total position.
5. Whether the answer should include or exclude premium, accrued interest, or transaction costs if specified.

Quick formula reminders:

Practice plan with independent companion questions

Use this Quick Review as a checkpoint, then move into structured question-bank practice. The fastest improvement usually comes from topic drills followed by careful review of detailed explanations, not from repeatedly taking full mocks without analysis.

Suggested drill sequence

Error log categories

When you miss an original practice question, classify the miss:

How to use mocks efficiently

• Do not begin with only full mocks if core concepts are weak.
• Use topic drills to build accuracy first.
• Use timed mixed sets to test switching between securities and derivatives.
• Review every answer explanation, including correct guesses.
• Re-attempt missed questions after a delay.
• Track recurring mistakes by topic, not just overall score.
• Use full mock exams late in preparation to practise pacing and endurance.

Final quick checklist

Before moving to your next question-bank session, confirm you can answer these without notes:

• What is the difference between ordinary shares, preference shares, and debt?
• Why do bond prices usually fall when yields rise?
• What is the difference between clean and dirty bond price?
• Who receives proceeds in a primary issue versus a secondary trade?
• What is the difference between execution, clearing, settlement, and custody?
• What does a CCP do, and what does novation mean?
• How do rights issues, bonus issues, splits, and dividends affect holders?
• What is the difference between a forward and a future?
• Why is futures margin not an option premium?
• What is the payoff of a long call, long put, short call, and short put?
• How do you calculate option breakeven after premium?
• What is basis risk?
• What risks remain after a hedge is placed?
• Which risk control best addresses counterparty, liquidity, operational, or market risk?

Practical next step

Use this Quick Review to choose your weakest two or three topics, then complete focused topic drills in an independent companion practice question bank. Prioritise original practice questions with detailed explanations, especially for derivatives payoffs, bond price/yield relationships, trading terminology, settlement, and corporate actions.