Try 10 focused DFOL questions on Exchange Traded Options, with answers and explanations, then continue with Securities Prep.
| Field | Detail |
|---|---|
| Exam route | DFOL |
| Issuer | CSI |
| Topic area | Exchange Traded Options |
| Blueprint weight | 14% |
| Page purpose | Focused sample questions before returning to mixed practice |
Use this page to isolate Exchange Traded Options for DFOL. Work through the 10 questions first, then review the explanations and return to mixed practice in Securities Prep.
| Pass | What to do | What to record |
|---|---|---|
| First attempt | Answer without checking the explanation first. | The fact, rule, calculation, or judgment point that controlled your answer. |
| Review | Read the explanation even when you were correct. | Why the best answer is stronger than the closest distractor. |
| Repair | Repeat only missed or uncertain items after a short break. | The pattern behind misses, not the answer letter. |
| Transfer | Return to mixed practice once the topic feels stable. | Whether the same skill holds up when the topic is no longer obvious. |
Blueprint context: 14% of the practice outline. A focused topic score can overstate readiness if you recognize the pattern too quickly, so use it as repair work before timed mixed sets.
Options questions reward clean separation of buyer rights and writer obligations. Start with call or put, long or short, strike, premium, expiry, and the underlying move.
If you miss these questions, draw a two-line payoff before reading the explanation: underlying up and underlying down. Then drill strategy-risk questions to combine single options into spreads, covered positions, and income strategies.
These questions are original Securities Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.
Topic: Exchange Traded Options
A Canadian manufacturer has a CAD 50 million 12-month floating-rate bank loan priced at CORRA + 1.20%. Management is concerned short-term rates may rise, but it still wants some benefit if rates fall. The firm has limited cash for an upfront option premium and is willing to give up savings if CORRA drops below a specified lower level. Which OTC interest rate strategy best meets this objective?
Best answer: B
What this tests: Exchange Traded Options
Explanation: An interest rate collar is generally created by buying a cap and selling a floor. That structure limits the borrower’s maximum rate while reducing or offsetting the premium, which matches the firm’s low-cost hedge objective and its willingness to give up some benefit if rates fall enough.
The key concept is matching the derivative payoff to the user’s financing objective. A borrower with floating-rate debt is hurt when rates rise, so it wants protection above a ceiling; that is the role of a cap. When the borrower also wants to reduce the upfront premium and is willing to give up some benefit from large rate declines, adding a sold floor creates a collar.
In this case:
A floor alone is usually used by a lender or investor seeking a minimum return, not by a borrower trying to limit borrowing costs.
A collar fits a floating-rate borrower that wants upside protection, reduced upfront cost, and is willing to surrender some benefit from sharply falling rates.
Topic: Exchange Traded Options
During an options-account suitability review, a client says, “I want to write one listed equity put on ABC. If the option is exercised, I can simply decline because assignment only applies to the buyer.” What is the best next step for the registered representative?
Best answer: D
What this tests: Exchange Traded Options
Explanation: The client is mistaken about who bears assignment risk. In a short put, the writer has the obligation and may be assigned to buy the underlying shares at the strike price, so that basic feature must be clarified before moving ahead.
The core concept is that the option holder has the right, while the option writer has the obligation. For a listed equity put, the buyer can exercise and the writer can be assigned; if assigned, the short put writer must buy the shares at the strike price. That means the representative’s proper next step is to correct the client’s misunderstanding first, then determine whether the strategy fits the client’s objectives, risk tolerance, and account approval.
Entering the trade before explaining the obligation skips an essential suitability safeguard. Switching to a different approval path without correcting the misconception also misses the issue. Asking the clearing corporation about assignment likelihood is premature because the client must understand the product’s basic features before any order is considered.
A short put creates an obligation for the writer, so the misunderstanding about assignment must be corrected before suitability or order entry proceeds.
Topic: Exchange Traded Options
A retail client enters this order for a Bourse de Montreal listed equity option. Assume each contract represents 100 shares.
Exhibit: Order ticket
Underlying: XYZ
Expiry: June 20, 2025
Option type: Call
Strike: 130
Action: Sell to open
Contracts: 2
Limit premium: \$4.10
If the order is filled, which interpretation is supported?
Best answer: C
What this tests: Exchange Traded Options
Explanation: The exhibit shows sell to open on a call, which means the client is writing the call, not buying it. A call writer takes on an obligation if assigned, and the strike price of $130 applies to 200 shares.
The key distinction is buyer versus writer. Sell to open creates a new short option position, so the client becomes the call writer. A call writer receives premium if the order is filled, but in exchange accepts the obligation tied to the contract. For a call, that obligation is to sell the underlying shares at the strike price if assigned.
Here, the exhibit states a call, sell to open, 2 contracts, and a strike of $130. Since each contract represents 100 shares, the position covers 200 shares. The strike price is the exercise price, not the strike plus the premium. The main takeaway is that a written call creates an obligation, while a purchased call creates a right.
sell to open with buy to open; the right to buy belongs to the call purchaser.Call.Selling to open a call creates a short call position, so the writer can be assigned to deliver 200 shares at the strike price.
Topic: Exchange Traded Options
All amounts are in CAD. A client is watching Bourse de Montreal listed June 50 options on Maple Energy. Only 30 minutes pass between the two observations, and interest rates and dividends are unchanged.
| Time | Stock price | June 50 call | June 50 put |
|---|---|---|---|
| 10:00 | 50.00 | 1.90 | 1.85 |
| 10:30 | 50.02 | 2.40 | 2.35 |
What is the best interpretation of the premium change?
Best answer: A
What this tests: Exchange Traded Options
Explanation: This is a volatility-driven move. With the stock nearly unchanged, a rise of about 0.50 in both same-strike option premiums is coming mainly from higher time value, not from a directional change in intrinsic value.
Use the link between stock movement, intrinsic value, and extrinsic value. Over 30 minutes, the stock moved from 50.00 to 50.02, so the June 50 call could gain only 0.02 of intrinsic value, while the June 50 put did not gain intrinsic value at all. Yet both premiums rose by about 0.50. That pattern points to higher implied volatility, which increases the expected range of future price movement before expiry and therefore increases time value for both calls and puts, especially when they are near the money.
A purely directional move usually benefits one side more than the other. Time decay works in the opposite direction and would slightly reduce, not increase, both premiums.
Because the stock was essentially unchanged while both same-strike premiums rose sharply, the extra value is mainly higher extrinsic value from increased implied volatility.
Topic: Exchange Traded Options
A Canadian pension fund holds 1,350,000 shares of ABC Inc. at $49.10 and wants downside protection for exactly 37 days with a floor near $47.25. Listed puts are available only at $47 or $48 strikes and 1-month or 2-month expiries. A dealer offers an OTC put on exactly 1,350,000 shares with a $47.25 strike expiring in 37 days. Which interpretation best describes the OTC put’s profile relative to the listed alternatives?
Best answer: C
What this tests: Exchange Traded Options
Explanation: The main benefit of the OTC put is customization: it can match the fund’s exact share count, strike, and 37-day hedge window. The trade-off is that OTC contracts are typically less liquid than listed options and expose the buyer to the dealer’s ability to perform.
This question tests the core OTC trade-off. Standardized listed options are easier to trade and usually benefit from exchange liquidity and clearing, but they may not line up with a hedger’s exact needs. Here, the OTC put reduces hedge mismatch by matching the precise number of shares, desired floor, and time horizon.
That benefit comes at a cost: OTC options are bilateral contracts, so they are generally less liquid to unwind than listed options and they introduce counterparty risk to the dealer. If the put finishes in the money, the fund depends on the dealer to perform. The key takeaway is that OTC customization improves hedge fit, but usually weakens liquidity and adds credit exposure compared with standardized listed contracts.
An OTC put can match the fund’s exact size, strike, and expiry, but that customization usually comes with weaker secondary-market liquidity and bilateral credit exposure.
Topic: Exchange Traded Options
A corporate treasurer is reviewing two OTC interest-rate exposures.
Exhibit: Treasury note
Exposure 1: CAD 25 million floating-rate loan at 3-month CORRA + 1.25%
Objective: Set a maximum borrowing cost while keeping the benefit if rates fall.
Exposure 2: CAD 25 million floating-rate investment at 3-month CORRA + 0.40%
Objective: Set a minimum earned rate if short-term rates decline.
Which OTC option strategy is best supported by the exhibit?
Best answer: D
What this tests: Exchange Traded Options
Explanation: A floating-rate borrower worried about higher rates uses an interest rate cap to set a ceiling on borrowing cost. A floating-rate investor worried about lower rates uses an interest rate floor to protect a minimum return.
The core concept is matching the hedge to the rate risk. A borrower with floating-rate debt is hurt when benchmark rates rise, so the appropriate OTC option is a cap. The cap pays when the reference rate moves above the strike, offsetting higher loan interest while still allowing the borrower to benefit if rates fall.
An investor earning a floating rate has the opposite concern: falling benchmark rates reduce income. That exposure is protected with a floor, which pays when the reference rate drops below the strike and helps maintain a minimum earned rate. The main mistake is to reverse the instruments; caps hedge rising borrowing costs, while floors hedge falling investment rates.
A cap limits rising borrowing costs, while a floor protects a floating-rate investment against declining rates.
Topic: Exchange Traded Options
A Canadian manufacturer expects to draw a $50 million 18-month floating-rate loan next month, with interest reset quarterly. The treasurer wants borrowing costs capped at 5.5%, wants to keep the full benefit if rates fall, and wants the hedge tailored to the exact notional amount and reset dates. The firm is willing to pay an upfront premium if needed. Which derivative is the single best recommendation?
Best answer: C
What this tests: Exchange Traded Options
Explanation: An OTC interest rate cap is designed for a floating-rate borrower that wants a ceiling on borrowing cost without giving up the benefit of lower rates. Because it is OTC, the notional amount, term, strike, and reset dates can be matched to the firm’s loan.
The core concept is that an interest rate cap is an OTC option used by a floating-rate borrower to limit rising-rate risk. If the reference rate rises above 5.5%, the cap pays an amount that offsets the extra borrowing cost above that level. If rates stay below 5.5%, the firm simply pays the lower market rate and keeps the full benefit of declining rates.
The OTC feature matters because the firm wants the contract tailored to a $50 million notional, an 18-month term, and quarterly reset dates. A pay-fixed swap would hedge rising rates, but it would effectively convert the loan to fixed-rate exposure. A collar would lower net premium, but selling the floor would give up some benefit if rates fall below the floor strike. The best fit is the customized cap.
An OTC cap sets a maximum borrowing rate while preserving savings from lower rates and can be customized to the loan terms.
Topic: Exchange Traded Options
A client reviews three June call options on Northern Rail Inc., listed on the Bourse de Montreal. The shares are trading at $54.00, and all three options have the same expiry.
Exhibit: Option snapshot
| Strike | Delta |
|---|---|
| 40 | 0.91 |
| 55 | 0.48 |
| 70 | 0.06 |
Which interpretation is best supported by the exhibit?
Best answer: C
What this tests: Exchange Traded Options
Explanation: With the shares at $54.00, the 40 strike call is deep in-the-money, and its 0.91 delta is close to 1. That means it should change almost dollar-for-dollar with small moves in the underlying, unlike the far out-of-the-money 70 strike call with a delta near 0.
Delta measures how much an option’s price is expected to change for a small change in the underlying. For call options with the same expiry, deeper in-the-money contracts usually have delta magnitudes closer to 1, near-the-money calls often sit around 0.50, and far out-of-the-money calls tend toward 0.
Here, a share price of $54.00 makes the 40 strike call deep in-the-money, the 55 strike call near the money, and the 70 strike call far out-of-the-money. The listed deltas match that pattern: 0.91, 0.48, and 0.06. So the 40 strike is the call expected to track the stock most closely on small price moves. The key takeaway is that deeper call moneyness generally means higher delta magnitude.
A deep in-the-money call usually has a delta closer to 1, so the 40 strike should move most closely with the shares.
Topic: Exchange Traded Options
A Canadian exporter will receive USD 3.65 million in 53 days. The treasurer wants protection if the U.S. dollar falls against the Canadian dollar, wants to keep the upside if the U.S. dollar rises, and does not want to over- or under-hedge using standardized contract sizes. The firm is approved to trade dealer-negotiated derivatives. Which strategy is the best fit?
Best answer: C
What this tests: Exchange Traded Options
Explanation: The deciding issue is customization. An OTC currency option can match the exporter’s exact USD amount and 53-day timing while still allowing gains if the U.S. dollar strengthens, unlike a standardized listed option or a forward.
OTC options are most useful when a hedger needs terms that listed options do not provide in standardized form. In this case, the exporter needs three things at once: an exact hedge amount, an exact maturity date, and the right rather than the obligation to transact.
A dealer can structure an OTC currency option for USD 3.65 million with a 53-day expiry, so the hedge lines up closely with the expected receivable. That preserves upside if the U.S. dollar rises, because the firm can simply let the option expire if market rates move favourably. A listed option would still provide optionality, but it usually comes only in standard contract sizes and listed expiries, so the firm would need to approximate the exposure. A forward can match the amount and date, but it removes upside because it creates an obligation to exchange at the contracted rate.
The key takeaway is that OTC options stand out when precise customization matters.
An OTC option can be tailored to the exact amount and expiry date while preserving upside participation.
Topic: Exchange Traded Options
A new retail client holds a TSX-listed bank stock and wants a three-month downside hedge. During the options account review, she says she wants lower counterparty risk and the ability to close the hedge before expiry, and she has not yet received the firm’s option risk disclosure document. What is the best next step?
Best answer: B
What this tests: Exchange Traded Options
Explanation: The client’s concerns point to exchange-traded options rather than OTC options. A listed put is cleared through CDCC and can usually be closed with an offsetting trade before expiry, but the representative must first provide disclosure and complete the suitability review.
The core concept is that exchange-traded options offer important benefits over OTC options for many retail hedgers: standardized terms, transparent market pricing, easier secondary-market liquidity, and central clearing. For a client who specifically wants lower counterparty exposure and the ability to exit early, a listed put is the better fit because CDCC becomes the central counterparty and the position can usually be closed before expiry by selling the option. In the workflow, however, the representative cannot skip the basic safeguard steps. The option risk disclosure document must be provided and the account’s suitability and approval must be reviewed before any order is entered or any contract is arranged.
The key takeaway is that the exchange-traded benefit matters, but it does not override the required account-opening process.
This is best because exchange-traded listed puts offer central clearing and offsetting flexibility, but disclosure and suitability must be completed first.
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