CISI Derivatives – Study Notes
1. Introduction to Derivatives transactions without delay and with certainty of price
• The premium on an equity index option is paid/to be and execution
settled (T+1) • Block trade on ICE Futures Europe - The counterparties
• Futures transactions are contingent liability are required to ensure the price represents fair value
transactions where the investor may lose money over • Block trade – do not need to report client details in a
and above the amount originally invested trade report for a block trade
• Cash and carry - a way of using futures to take • Dual trading - a member firm trades for its own
advantage of arbitrage opportunities account and that of a client irrespective of time
• In a standardised options contract, the premium is not • Price + time for order priority on most order book
fixed in advance markets.
• ICE Futures trading System – CONNECT
• LME - SELECT
• Closing contract on the LME - Closing-out of a position
to realise a profit on a contract on the settlement date
• Trade is registered when it is ready for clearing
4. Principles of Exchange-Traded Derivatives
• Time value of an option is greatest when it is at-the-
money.
• Time value greatest when option has greatest
remaining life
• Fair value of the future = cash price + costs of carry
(financing costs less dividends)
• Cost of carry is Risk Free Rate + Storage Costs
2. Underlying Market Structure
• Sample calculation: $23 + (£23 x 0.05 x 90/360) + ($23
• Rights Issue – share price likely to fall after issue, given
x 0.03 x 90/360) = $23.46
discount given
• Fair Value = Index value + index value (Interest rate -
• Bonus Issue – objective is to lower the share price to
dividend yield pro-rated for X days)
increase liquidity/marketability
• Binary Option aka digital option– pays a fixed amount
• Stock Split – existing shares split results in lowering
or nothing at all.
nominal value and share price
• Compound Option - right to buy or sell another option.
• Moody's a default = C
• Basis trades combine a position in the underlying with
• Synthetic CDO – a CDO that invests in CDSs
a position in the future
• CDO – a derivative that creates IG bond from a pool of
• Premium = Intrinsic Value + Time Value (P = IV + TV)
Junk bonds
• As price of underlying increases, the premium on an
• Sugar, cocoa and coffee are soft commodities
ATM put option decreases
• Euronext Commodity – UTP system
• Basis = Cash Price - Futures Price. Basis is usually
• If the redemption date is followed by 'aft', meaning 'or
negative as futures prices normally greater than cash
after', it marks the bond out as undated or
price (as futures price includes cost of carry)
irredeemable
• Basis change – non-linear
3. Market Structure
• Basis Strengthening – means basis more positive - buy
• Give-up, where trade is allocated to originating firm
the cash and sell the future
through UCP
• Basis risk eliminated if derivative HELD TO EXPIRY
• On ICE Europe – Allocation is facility by which a trade is
• Delta = Change Premium/ Change Underlying
given up to a designated global clearer
• Delta – likelihood of option expiring in the money
• SGX (Singapore Stock Exchange) and CME (Chicago
Mercantile Exchange) – mutual offset system for:
o JGB futures, Nikkie futures, EURUSD futures,
EURYEN futures
• NYMEX and CME are the responsibility of the CFTC.
• EFP Exchange for Physicals allows firms to trade in a
physical market place. Price at which EFP agreed is
price agreed by counterparties
• Block trade- allows members and their wholesale
clients to transact business as bilaterally agreed
1
1. Introduction to Derivatives transactions without delay and with certainty of price
• The premium on an equity index option is paid/to be and execution
settled (T+1) • Block trade on ICE Futures Europe - The counterparties
• Futures transactions are contingent liability are required to ensure the price represents fair value
transactions where the investor may lose money over • Block trade – do not need to report client details in a
and above the amount originally invested trade report for a block trade
• Cash and carry - a way of using futures to take • Dual trading - a member firm trades for its own
advantage of arbitrage opportunities account and that of a client irrespective of time
• In a standardised options contract, the premium is not • Price + time for order priority on most order book
fixed in advance markets.
• ICE Futures trading System – CONNECT
• LME - SELECT
• Closing contract on the LME - Closing-out of a position
to realise a profit on a contract on the settlement date
• Trade is registered when it is ready for clearing
4. Principles of Exchange-Traded Derivatives
• Time value of an option is greatest when it is at-the-
money.
• Time value greatest when option has greatest
remaining life
• Fair value of the future = cash price + costs of carry
(financing costs less dividends)
• Cost of carry is Risk Free Rate + Storage Costs
2. Underlying Market Structure
• Sample calculation: $23 + (£23 x 0.05 x 90/360) + ($23
• Rights Issue – share price likely to fall after issue, given
x 0.03 x 90/360) = $23.46
discount given
• Fair Value = Index value + index value (Interest rate -
• Bonus Issue – objective is to lower the share price to
dividend yield pro-rated for X days)
increase liquidity/marketability
• Binary Option aka digital option– pays a fixed amount
• Stock Split – existing shares split results in lowering
or nothing at all.
nominal value and share price
• Compound Option - right to buy or sell another option.
• Moody's a default = C
• Basis trades combine a position in the underlying with
• Synthetic CDO – a CDO that invests in CDSs
a position in the future
• CDO – a derivative that creates IG bond from a pool of
• Premium = Intrinsic Value + Time Value (P = IV + TV)
Junk bonds
• As price of underlying increases, the premium on an
• Sugar, cocoa and coffee are soft commodities
ATM put option decreases
• Euronext Commodity – UTP system
• Basis = Cash Price - Futures Price. Basis is usually
• If the redemption date is followed by 'aft', meaning 'or
negative as futures prices normally greater than cash
after', it marks the bond out as undated or
price (as futures price includes cost of carry)
irredeemable
• Basis change – non-linear
3. Market Structure
• Basis Strengthening – means basis more positive - buy
• Give-up, where trade is allocated to originating firm
the cash and sell the future
through UCP
• Basis risk eliminated if derivative HELD TO EXPIRY
• On ICE Europe – Allocation is facility by which a trade is
• Delta = Change Premium/ Change Underlying
given up to a designated global clearer
• Delta – likelihood of option expiring in the money
• SGX (Singapore Stock Exchange) and CME (Chicago
Mercantile Exchange) – mutual offset system for:
o JGB futures, Nikkie futures, EURUSD futures,
EURYEN futures
• NYMEX and CME are the responsibility of the CFTC.
• EFP Exchange for Physicals allows firms to trade in a
physical market place. Price at which EFP agreed is
price agreed by counterparties
• Block trade- allows members and their wholesale
clients to transact business as bilaterally agreed
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