Free CISI Derivatives practice questions
Exam-standard Derivatives questions written to the current CISI syllabus. No sign-up, full explanations, and a feel for the real paper.
These 10 questions are a free sample for the CISI Derivatives exam, written to the current syllabus and the real multiple-choice format. Pick an answer and the explanation appears straight away, so each one teaches you something whether you get it right or wrong.
They span several syllabus elements rather than one topic, so you get a feel for the breadth of the paper. For the complete question bank and full mock exams weighted exactly like the real Derivatives paper, it is all included in the £59 Pass Package, which covers all nine CISI exams.
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Try 10: Derivatives
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Which of the following best describes a derivative?
Not quite. The answer is B.
A derivative is a financial instrument whose value is derived from an underlying asset, index, rate, or reference. The underlying may be an equity, bond, currency, commodity, interest rate, or another derivative. Derivatives do not confer ownership of the underlying; they create contractual rights or obligations based on its price.
In the equity markets, which of the following best describes a 'short sale'?
Not quite. The answer is B.
A short sale involves borrowing shares from a securities lender (usually a prime broker or custodian), selling them in the market, and hoping to repurchase them later at a lower price to return to the lender. The profit is the difference between the sale price and the repurchase price, less borrowing fees. Short sellers profit from falling prices and bear unlimited theoretical risk if prices rise.
Which of the following correctly distinguishes an exchange-traded derivative from an OTC derivative?
Not quite. The answer is D.
Exchange-traded derivatives have standardised contract terms (size, expiry, tick size) and are traded anonymously on regulated exchanges via an order book. OTC derivatives are negotiated bilaterally with bespoke terms. Both OTC and exchange-traded derivatives must be reported to trade repositories under EMIR/UK EMIR. Exchange-traded derivatives carry lower counterparty risk (due to CCP), not higher.
In futures markets, the term 'contango' describes a situation where:
Not quite. The answer is B.
Contango occurs when the futures price is higher than the current spot price. This is typical where the cost of carry is positive (the financing cost exceeds any income from the asset), so the futures price reflects the spot price plus net carry. Backwardation occurs when the futures price is below the spot price — typically due to a high convenience yield (e.g. physically holding a commodity has value when supply is tight).
An interest rate swap in which Company A pays a fixed rate and receives a floating rate (SONIA) from Company B is described as a:
Not quite. The answer is D.
A payer swap (or 'pay-fixed swap') is one where the party pays a fixed rate and receives a floating rate. Company A in this example is paying fixed and receiving SONIA, so it has entered a payer swap. A receiver swap (pay-floating, receive-fixed) is the opposite. Payer swaps benefit when floating rates rise (increasing receipts) and are used to hedge floating-rate liabilities.
The process by which a central counterparty (CCP) becomes the legal counterparty to both sides of a trade is known as:
Not quite. The answer is D.
Novation is the legal process by which a CCP interposes itself between the original buyer and seller. The original bilateral contract is extinguished and replaced by two new contracts: one between the CCP and the buyer, and one between the CCP and the seller. This eliminates bilateral counterparty risk — each party now has a credit exposure only to the CCP, which is highly capitalised and backed by a default waterfall.
The Exchange Delivery Settlement Price (EDSP) is:
Not quite. The answer is D.
The Exchange Delivery Settlement Price (EDSP) is the price determined by the exchange at expiry and used for cash (or physical) settlement of futures contracts that have not been closed before the delivery date. For equity index futures such as the FTSE 100, the EDSP is typically based on intraday auction prices on expiry day. It ensures a single, unambiguous settlement price and cannot be manipulated by individual participants.
A bull call spread involves buying a call at a lower strike and selling a call at a higher strike with the same expiry. The net premium paid is £2. The lower strike is 100 and the higher strike is 110. What is the maximum profit?
Not quite. The answer is C.
Bull call spread maximum profit = (high strike − low strike) − net premium paid = (110 − 100) − 2 = 10 − 2 = £8. This is achieved when the underlying is at or above the higher strike (110) at expiry. Maximum loss = net premium paid = £2 (if the underlying finishes at or below the lower strike of 100). The strategy profits from a moderate rise in the underlying while reducing the cost compared to a straight long call.
Which of the following is a function of a derivatives trade repository?
Not quite. The answer is A.
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.
An investor uses an equity index future to protect a £2m equity portfolio against a market fall. This use of a derivative is best described as:
Not quite. The answer is C.
Hedging involves taking a derivative position to offset or reduce an existing risk. Selling index futures against a long equity portfolio reduces exposure to a market decline. Speculation involves taking on risk in pursuit of profit; arbitrage exploits price discrepancies between related markets; gearing describes the leverage effect of derivatives.
These are a free sample. Passkey has over 4,400 exam-standard questions across all nine CISI exams, sorted so you drill exactly where you are weak. Find your weak spots with the free diagnostic.
Frequently asked questions
Are these real CISI Derivatives questions?
No. CISI does not publish its live questions. These are original questions written by Passkey to match the current CISI Derivatives syllabus, format and difficulty.
Is the CISI Derivatives practice free?
The questions on this page are free with no sign-up. The full Derivatives question bank and mocks are part of the £59 Pass Package, a single payment covering all nine CISI exams.
How should I use practice questions to pass Derivatives?
Read the workbook once to build the picture, then spend most of your time answering questions and reviewing the explanations, focusing hardest on the topics you keep getting wrong. Finish with full, timed mocks weighted like the real paper.
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