Free CISI IAD Derivatives Practice Questions: Exchange-Traded Futures and Options

CISI means Chartered Institute for Securities & Investment. IAD means Investment Advice Diploma, and this page is for the Derivatives unit. Use this focused CISI IAD Derivatives page as a short practice test for Exchange-Traded Futures and Options. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CISI questions, copied live-exam content, or exam dumps.

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Use this page to isolate Exchange-Traded Futures and Options for CISI IAD Derivatives. Work through the 10 questions first, then review the explanations and return to mixed practice in Finance Prep.

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Sample questions

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

Question 1

Topic: Exchange-Traded Futures and Options

An energy producer has a privately negotiated fixed-for-floating crude oil swap with a bank covering 100,000 barrels for the next six months. Both parties now want to replace the OTC swap exposure with equivalent crude oil futures positions that will be cleared through an exchange. No physical oil cargo is changing hands. Which exchange facility is the single best fit?

• A. Use a flex product, with bespoke expiry or strike terms under exchange rules.
• B. Use a block trade, with a large futures order privately agreed and reported to the exchange.
• C. Use an exchange for physicals, with the crude futures exchanged against a physical oil cargo.
• D. Use an exchange for swaps, with the OTC swap replaced by equivalent cleared futures positions.

Best answer: D

What this tests: Exchange-Traded Futures and Options

Explanation: Exchange for swaps transactions allow parties to privately negotiate the transfer of an OTC swap exposure into an equivalent exchange-traded futures position, which can then be cleared under exchange rules. The decisive facts are that the existing exposure is an OTC swap, the target exposure is exchange-traded futures, and there is no physical commodity delivery. This differs from a standard block trade, which is mainly a facility for executing large exchange-traded orders away from the central order book and then reporting them. It also differs from an exchange for physicals, which links a futures position with a related physical cash-market position. Flex products are used when exchange users need customised contract terms, such as non-standard strikes or expiries, while still using exchange infrastructure.

• A block trade addresses large-size execution and market impact, but it does not specifically convert an OTC swap into futures.
• An exchange for physicals would require a related physical commodity transaction, which the facts rule out.
• A flex product is about customising exchange contract terms, not replacing an OTC swap exposure with futures.

An exchange for swaps is designed to exchange an OTC swap exposure for a corresponding exchange-traded futures position.

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Question 2

Topic: Exchange-Traded Futures and Options

A broker member executes the following matched trades in the same exchange-traded futures contract. Exchange rules require member firms to submit or confirm accurate trade details through the exchange trade-reporting system. The exchange counts one contract of volume for each matched contract traded, and open interest rises only when both sides open positions and falls only when both sides close positions.

Previous closing open interest: 18,400 contracts

Which action and monitoring conclusion is correct?

• A. Submit or confirm all four trades; monitor volume of 400 contracts and closing open interest of 18,450.
• B. Submit or confirm only the net open-interest increase; monitor volume of 50 contracts and closing open interest of 18,450.
• C. Submit or confirm all four trades; monitor volume of 200 contracts and closing open interest of 18,450.
• D. Submit or confirm all four trades; monitor volume of 200 contracts and closing open interest of 18,600.

Best answer: C

What this tests: Exchange-Traded Futures and Options

Explanation: Exchange-traded derivatives create transparent market data, but the member still has a responsibility to ensure each executed trade is accurately submitted or confirmed through the exchange’s systems. Volume measures trading activity, so each matched contract is counted once, regardless of the buyer and seller sides. Here, total volume is 200 contracts. Open interest measures contracts still outstanding. It increases by 80 when both sides open, is unchanged when an opening position replaces a closing one, decreases by 30 when both sides close, and is unchanged when an existing long transfers to a new long. The net open-interest change is +50, so closing open interest is 18,450 contracts.

• Reporting only the net open-interest increase confuses market statistics with trade-reporting obligations.
• Counting 400 contracts double-counts the buyer and seller sides of the same matched trades.
• Increasing open interest by the full 200 contracts treats all trades as new openings, which is not how open interest is calculated.

All matched trades require accurate reporting or confirmation, volume is 80 + 50 + 30 + 40, and open interest changes by +80, 0, -30, and 0.

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Question 3

Topic: Exchange-Traded Futures and Options

An adviser reviews a listed index option trade for a client.

At expiry, what is the net cash profit or loss on the position, excluding commission and exchange fees?

• A. A net loss of £8,200
• B. A net profit of £8,000
• C. A net loss of £200
• D. A net profit of £200

Best answer: C

What this tests: Exchange-Traded Futures and Options

Explanation: A cash-settled put option pays intrinsic value at expiry when the strike is above the final settlement value. Here, the put finishes in the money by 80 index points: 7,600 minus 7,520. With a £10 multiplier, the cash settlement per contract is £800, so 10 contracts receive £8,000. The premium cost was 82.0 points per contract, converted using the same multiplier: 82.0 × £10 × 10 = £8,200. The stated margin requirement confirms that the long buyer pays the premium only, so no extra initial margin changes the net profit or loss. Net result is £8,000 received less £8,200 premium paid, or a £200 loss.

• A £200 profit reverses the sign; the put finished in the money but not enough to cover the premium.
• A £8,000 profit counts the intrinsic settlement receipt but omits the premium paid.
• A £8,200 loss counts only the premium and ignores the expiry cash settlement.

The in-the-money settlement receipt is £8,000 and the premium paid is £8,200, giving a £200 net loss.

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Question 4

Topic: Exchange-Traded Futures and Options

A broker executes an order in an exchange-traded equity index futures contract. The firm’s client portal and supervisory blotter receive the following post-trade information:

• Actual exchange execution: buy 12 contracts at 6,240 at 10:02.
• Report released to the client portal and supervisory blotter: buy 12 contracts at 6,255 at 11:15, with the execution time omitted.
• Contract multiplier: £10 per index point.
• Same-day settlement price used for variation margin: 6,230.

Which statement best describes the effect of the reporting problem?

• A. It overstates the client’s same-day loss by £1,800 and reduces the ability of the client and supervisors to understand and monitor the trade accurately.
• B. It has no practical effect because the exchange-traded contract is standardised and the clearing system holds the correct execution price.
• C. It overstates the client’s same-day loss by £3,000 and makes market monitoring more effective by showing a larger adverse movement.
• D. It understates the client’s same-day loss by £1,800 and affects only the client’s cash planning, not supervisory monitoring.

Best answer: A

What this tests: Exchange-Traded Futures and Options

Explanation: Accurate and timely post-trade information is essential even where the exchange and clearing house hold the correct transaction record. For the actual buy at 6,240 with settlement at 6,230, the loss is 10 points × £10 × 12 = £1,200. The reported buy price of 6,255 shows a 25-point loss, or £3,000. The reporting error therefore overstates the loss by £1,800. The delay and missing execution time also matter because the client cannot assess the trade properly, and supervisors lose key information for checking execution quality, order handling, and unusual trading patterns. Inaccurate or incomplete reporting weakens the audit trail that supports market transparency and market integrity.

• Treating the problem as an understatement reverses the futures profit and loss calculation for a long position.
• Relying only on the clearing record ignores the separate importance of client reporting, supervisory review, and monitoring data.
• A larger reported loss does not improve monitoring; inaccurate data can mislead reviews and distort the audit trail.

The reported price creates a loss of 25 points instead of the actual 10 points, overstating the loss by 15 points × £10 × 12 = £1,800.

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Question 5

Topic: Exchange-Traded Futures and Options

A dealing adviser is checking premium sensitivity before placing an order for a client who wants to buy a listed European-style call option on a dividend-paying UK share. The option is near at the money, has six months to expiry, and the client is comparing otherwise similar contracts and quotes. Assuming all other pricing inputs remain unchanged, which set of changes would be expected to increase the call premium?

• A. The share price falls and implied volatility falls.
• B. The strike price is set higher and expected dividend payments rise.
• C. Time to expiry shortens and risk-free interest rates fall.
• D. The share price rises and implied volatility rises.

Best answer: D

What this tests: Exchange-Traded Futures and Options

Explanation: For a call option, the premium is generally higher when the underlying price is higher, the strike is lower, implied volatility is higher, time to expiry is longer, or risk-free interest rates are higher. Expected dividends work in the opposite direction for calls because dividend payments reduce the expected price of the underlying share when it goes ex-dividend. In this case, a rise in the share price makes exercise more valuable, and a rise in implied volatility increases the chance of a favourable move before expiry. Both changes support a higher call premium.

• A higher strike and higher expected dividends both reduce the attractiveness of a call.
• A shorter remaining life reduces time value, and lower interest rates generally reduce call values.
• A falling share price and lower volatility both point to a lower call premium.

A higher underlying share price and higher implied volatility both increase the value of a call option, all else equal.

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Question 6

Topic: Exchange-Traded Futures and Options

A dealer executes exchange-traded UK equity index futures for an advised client. The trade review file shows:

• Exchange transparency rule: execution details must appear on the public trade-reporting tape within 1 minute.
• Execution: 20 cash-settled futures at 8,100 at 09:31:40.
• Public tape: the same price and size appeared at 09:35:05.
• Initial margin: the exchange requirement was £3,000 per contract and was fully collected.
• Client file: understanding, risk capacity, and suitability for a 20-contract trade are documented.

Which conclusion identifies the market transparency concern?

• A. The dealer should escalate settlement because the equity index future must be physically delivered at expiry.
• B. The dealer should escalate margin because initial margin was collected rather than the full futures exposure.
• C. The dealer should escalate trade reporting because publication occurred 3 minutes 25 seconds after execution, exceeding the 1-minute rule.
• D. The dealer should escalate suitability because leverage is present, despite documented understanding and capacity.

Best answer: C

What this tests: Exchange-Traded Futures and Options

Explanation: Market transparency in an exchange-traded futures context focuses on timely and accurate availability of trade information to the market and to surveillance systems. The elapsed time from 09:31:40 to 09:35:05 is 3 minutes 25 seconds, which exceeds the stated 1-minute publication requirement. That is a trade-reporting and monitoring issue. The other facts point away from the adjacent concerns: the suitability file is documented for this trade size, the required initial margin has been collected, and the contract is stated to be cash-settled. A transparency breach can exist even when client suitability, margin collection, and settlement mechanics are otherwise in order.

• Delayed public reporting is the transparency issue because the trade missed the stated publication deadline.
• Leverage alone does not establish unsuitability when the client file documents understanding, capacity, and suitability for the trade.
• Initial margin is a performance bond set under exchange rules; it does not have to equal full futures exposure.
• A cash-settled equity index future does not require physical delivery of the index shares at expiry.

The public report was later than the exchange’s stated transparency deadline, even though the reported price and size were accurate.

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Question 7

Topic: Exchange-Traded Futures and Options

A grain producer is short hedging an expected wheat sale using an exchange-traded September wheat futures contract. The firm defines basis as cash price minus futures price.

At hedge initiation, the local cash wheat price was £220 per tonne and the September futures price was £230 per tonne. One week before expiry, the local cash price is £236 per tonne and the September futures price is £237 per tonne.

Which is the single best interpretation of the basis movement?

• A. The basis has strengthened only if the futures price falls below the cash price before expiry.
• B. The basis is unchanged because both the cash price and futures price have risen since hedge initiation.
• C. The basis has strengthened from -£10 to -£1 per tonne, reflecting cash prices rising relative to futures as the contract approaches convergence.
• D. The basis has weakened from -£10 to -£1 per tonne because the futures price remains above the cash price.

Best answer: C

What this tests: Exchange-Traded Futures and Options

Explanation: Basis must be interpreted using the stated definition. Here, basis equals cash price minus futures price. At the start it was £220 - £230 = -£10 per tonne. One week before expiry it is £236 - £237 = -£1 per tonne. A move from -£10 to -£1 is a strengthening or narrowing of a negative basis, because the cash price has risen by more than the futures price. For a deliverable futures contract, basis normally tends toward zero as expiry approaches because arbitrage, delivery terms, and settlement mechanics pull futures and cash prices together, although location, grade, and delivery costs can leave small differences.

• A futures price still above the cash price does not mean the basis has weakened; the basis is less negative than before.
• Rising cash and futures prices do not make basis unchanged; the relative movement matters.
• Strengthening does not require cash to exceed futures; a negative basis can strengthen by moving closer to zero.

With basis defined as cash minus futures, the move from -£10 to -£1 is a strengthening as the cash and futures prices converge near expiry.

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Question 8

Topic: Exchange-Traded Futures and Options

A derivatives adviser is reviewing a transparent order book snapshot for an exchange-traded equity index future before a client buys 12 contracts at market. Ignore fees and market movement. The post-trade tape will be checked after execution to monitor the actual fill.

The best bid is 7,839.5 and the last traded price is 7,840.0. Which interpretation of the transparent market data is most useful for the investor before the order is sent?

• A. The post-trade tape is the only transparency source that can estimate the fill.
• B. The offer depth supports an estimated average fill of 7,840.42 for 12 contracts.
• C. The best bid supports an estimated average fill of 7,839.50 for 12 contracts.
• D. The last traded price supports an estimated average fill of 7,840.00 for 12 contracts.

Best answer: B

What this tests: Exchange-Traded Futures and Options

Explanation: Pre-trade transparency in an order book helps investors discover prices by showing executable bids and offers and compare market depth at each price level. A market buy order is matched against offers, not bids. The visible offer depth is 5 at 7,840.0 and 4 at 7,840.5, so only 9 contracts are available before 7,841.0. To buy 12 contracts, the order would need 3 more contracts at 7,841.0. Estimated average price: (5 × 7,840.0 + 4 × 7,840.5 + 3 × 7,841.0) / 12 = 7,840.42. This is not a guaranteed fill, because prices and displayed depth can change, but it is useful for judging likely execution quality. Post-trade transparency then helps monitor the actual reported price and quantity against the pre-trade view.

• Using the last traded price treats a historic execution as if it were current available size; it does not show 12 contracts offered at that price.
• Using the best bid applies the sell-side quote to a buy order; a buyer normally lifts offers.
• Treating the post-trade tape as the only useful source ignores the pre-trade order book, which displays current executable interest and depth.

A buyer consumes displayed offers, so 5 contracts at 7,840.0, 4 at 7,840.5, and 3 at 7,841.0 give an average of 7,840.42.

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Question 9

Topic: Exchange-Traded Futures and Options

A dealer is handling an order in exchange-traded Brent crude futures. The client wants to buy the June/September calendar spread and does not want the two legs executed separately. The exchange quotes the spread as:

\[ \text{June futures price} - \text{September futures price} \]

If the dealer bought June at the offer and sold September at the bid, the spread would be $82.12 - $82.42 = -$0.30. The client will trade only at this spread or better. Which order type is most consistent with the instruction?

• A. An iceberg order to buy June futures and then sell September futures after the first fill
• B. Separate market orders to buy June and sell September immediately
• C. A calendar spread limit order to buy June and sell September at -$0.30 or better
• D. A stop order to buy June futures if the June price rises above $82.12

Best answer: C

What this tests: Exchange-Traded Futures and Options

Explanation: A spread order is used when the trader wants execution based on the price difference between two related contracts, rather than on each contract price independently. Here, the relevant spread is June minus September. Buying June at $82.12 and selling September at $82.42 gives a spread of -$0.30. Because the client requires this spread or better and does not want leg risk from separate executions, the appropriate control is a calendar spread limit order. The limit fixes the acceptable differential, while the spread order structure links the two legs. This is different from using market orders, which prioritise immediate execution but do not protect the spread price.

• Separate market orders may fill quickly but expose the client to legging risk and give no control over the final spread differential.
• An iceberg order is used to hide order size, not to ensure a two-leg calendar spread is executed at a specified differential.
• A stop order is used to trigger an order after a price level is reached, which does not match the client’s spread-execution instruction.

This order controls the spread price and executes the two related futures legs as a spread rather than as separate outright trades.

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Question 10

Topic: Exchange-Traded Futures and Options

A UK manufacturer expects to buy 1,160 tonnes of aluminium in seven weeks and wants to hedge the purchase price. Its adviser is considering exchange-traded aluminium futures. The relevant futures contract is standardised at 25 tonnes per contract, uses exchange-specified grades and delivery months, and has exchange-published prices and volumes. Which statement best describes the effect of this standardisation on the hedge?

• A. It reduces transparency because standardised contracts are traded bilaterally rather than through exchange order books.
• B. It removes basis risk because exchange-traded contracts are centrally cleared and marked to market each day.
• C. It supports liquidity and transparent pricing, but the hedge may leave residual basis, timing, or sizing risk because the contract terms may not exactly match the exposure.
• D. It makes the futures contract bespoke, allowing the manufacturer to set the exact tonnage, grade, and settlement date.

Best answer: C

What this tests: Exchange-Traded Futures and Options

Explanation: Exchange-traded futures use standard contract specifications, such as fixed contract size, approved grade, delivery location, and expiry months. Standardisation makes contracts easier to compare and trade, so more participants can quote, enter, and exit positions. That generally improves liquidity and price transparency. The trade-off is that the hedge may not perfectly match the commercial exposure. In this case, 1,160 tonnes cannot be matched exactly with 25-tonne contracts, and the seven-week purchase date may not align with the available futures expiry. If the futures grade or delivery terms also differ from the manufacturer’s actual aluminium requirement, basis risk can remain even when the hedge direction is sensible.

• Central clearing and daily margining reduce counterparty and settlement risks, but they do not eliminate basis risk.
• Bespoke tonnage, grade, and settlement dates are features more associated with OTC contracts, not standardised exchange-traded futures.
• Exchange trading generally improves, rather than reduces, price transparency through published prices and volumes.

Standard terms attract broader trading interest and visible pricing, but fixed contract size, grade, and expiry can create an imperfect hedge.

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