Free CISI Derivatives (CMP Level 3) practice questions

Not quite. The answer is B.

A total return swap pays the performance of a reference basket without the receiver ever owning it, so the position is purely contractual and amounts to a claim rather than an interest. A debenture holder is a creditor, so the claim runs against the company and its assets rather than over its shares. Preference shares are a class of share in their own right, so registering a holding of them gives the investor an interest in shares rather than a claim over them. Shares registered in a nominee name are held for the investor, who keeps the beneficial interest in them.

Not quite. The answer is D.

This is a short sale, and the profit is the fall in the price less the fee paid for borrowing the stock. The stock loan is only one leg of the transaction rather than the transaction itself, so naming it describes the funding and not the position taken. Writing a put is an options position that profits from a rising or steady price, and selling an index future to trim market exposure is a hedge in which no stock is borrowed at all.

Not quite. The answer is D.

Only a negotiated forward can match an unusual grade and a single named date, and the price of that flexibility is that performance depends on the counterparty rather than on a clearing house. An exchange future would bring the guarantee but fixes grade, size and delivery month. The other pairings contradict themselves, because a forward is bespoke by definition and a future standardised by definition.

Not quite. The answer is A.

Basis is the cash price less the futures price, so 2,240 less 2,305 gives minus 65: a negative basis and a market in contango. Rolling a long position therefore sells the near contract cheap and buys the deferred contract dear, eroding return. Reading the basis as positive reverses the subtraction, and expecting the roll to add return describes a backwardated curve, where the deferred contract is the cheaper of the two.

Not quite. The answer is C.

The fixed payer is owed the floating rate and owes the fixed, so once the floating fixing exceeds the fixed rate the difference on the notional flows to Bridgeforth as a single net settlement. Paying the net amount is the closest distractor and applies only in the opposite case, where the floating rate sets below the fixed. The whole floating amount never arrives, because the two legs are set against each other and only the balance moves. The notional itself moves in neither direction on an interest rate swap: it is only the figure the interest is worked out on.

Not quite. The answer is A.

Novation replaces the bilateral bargain with two contracts facing the clearing house, so the original parties no longer have credit exposure to each other and no longer need to know or assess each other at all. The pairing of I and II is the closest distractor, but market risk on the open position is untouched by clearing and remains with whoever holds the position. Variation margin still has to be settled every day, so any combination including IV overstates what novation achieves.

Not quite. The answer is D.

The exchange determines the EDSP under the contract specification, using the method published for that contract, and it is against that price that an expiring contract is cash settled or invoiced. The clearing house is the closest distractor because it uses the EDSP to calculate invoice amounts and the final variation margin run, but it takes the price as given; it does not set it.

Not quite. The answer is A.

The strategy tops out with the underlying at or beyond the upper exercise price, where the spread is worth the full distance between the two exercise prices, and the money laid out to open it then comes off that value. The initial outlay alone is the nearest miss because it answers the neighbouring calculation, the worst case, which lands when both calls finish worthless. Adding the outlay to that distance overstates what the spread can pay, and the upper exercise price minus the outlay muddles the profit ceiling with the breakeven level.

Not quite. The answer is B.

A trade repository (TR) is a centralised database that collects and maintains records of OTC derivative transactions. Under UK EMIR and EU EMIR, both counterparties must report OTC derivative trades to an authorised TR. This gives regulators (FCA, ESMA) visibility into aggregate OTC market positions and systemic risk exposures. TRs do not act as CCPs, set margin requirements, or determine settlement prices.

Not quite. The answer is C.

Selling index futures creates a position that profits as the market falls, offsetting the loss on the shares at no upfront cost beyond margin, so it is the cleanest hedge available here. Writing call options is the genuine runner up because the premium cushions a small fall, but the protection stops at the premium received while the portfolio's downside carries on. Buying futures or calls adds to market exposure rather than reducing it.