How to Pass the CISI Derivatives Exam (CMP Level 3)
This guide covers the Capital Markets Programme Level 3 Derivatives paper, not the separate Level 4 IAD Derivatives unit. Here are the nine weightings, key terms and revision plan.
Looking for the Level 4 IAD Derivatives paper?What is on the CISI Derivatives exam?
One hundred multiple-choice questions in 120 minutes, with a 70% pass mark, across nine syllabus elements. Five elements carry 72 of the 100 marks: Introduction to Derivatives (17), Underlying Markets (16), Principles of Clearing and Margin (14), Trading, Hedging and Investment Strategies (14) and Principles of Pricing and Valuation (11). Much of the paper turns on precise terminology such as long and short, holder and writer, call and put, covered and naked. This is the Level 3 Capital Markets Programme unit, not the separate Level 4 IAD Derivatives unit.
- Format
- 100 multiple-choice questions in 120 minutes, computer based
- Pass mark
- 70%
- Heaviest elements
- Introduction to Derivatives 17, Underlying Markets 16, Clearing and Margin 14, Trading, Hedging and Investment Strategies 14, Pricing and Valuation 11
- Top five weight
- 72 of the 100 marks
- Revise first
- The terminology pairs: long and short, open and close, holder and writer, call and put, covered and naked, premium
- Clearing and margin
- The central counterparty, initial margin, variation margin and the daily mark-to-market process
- Prerequisite
- IntegrityMatters, CISI's online integrity test
- Where it fits
- A technical unit of the Capital Markets Programme, taken with UK Financial Regulation; you choose Derivatives or Securities
This guide covers the Level 3 Derivatives unit of the CISI Capital Markets Programme, not the separate Level 4 Investment Advice Diploma Derivatives unit. It is the technical unit candidates most often find the hardest, and the reason is simple: the concepts are genuinely new to most people. Equities and bonds you have a feel for. Futures, options, swaps, margin and the language around them you usually do not, until you drill them. The good news is that derivatives reward drilling more than almost any other paper, because once the terminology clicks it stays clicked. This guide shows you what to drill.
It is 100 multiple-choice questions in 120 minutes, with a 70% pass mark, computer based, no negative marking. You complete the Capital Markets Programme with this paper plus the regulatory unit, UK Financial Regulation. IntegrityMatters, CISI's online integrity test, is a prerequisite for sitting it.
Know the weightings before you revise
The 100 questions span nine elements, weighted unevenly. Five elements carry the paper.
| # | Element | Questions |
|---|---|---|
| 1 | Introduction to Derivatives | 17 |
| 2 | Underlying Markets | 16 |
| 3 | Market Structure | 9 |
| 4 | Principles of Pricing & Valuation | 11 |
| 5 | OTC Derivatives | 7 |
| 6 | Principles of Clearing & Margin | 14 |
| 7 | Delivery & Settlement | 6 |
| 8 | Trading, Hedging & Investment Strategies | 14 |
| 9 | Regulatory Requirements | 6 |
The top five elements, Introduction, Underlying Markets, Clearing and Margin, Trading and Strategies, and Pricing, are 72 of the 100 marks. Get those solid and you have your pass. The smaller elements matter, but they are not where your evenings should go.
Test yourself on CMP: Derivatives
4 questions written to the current syllabus, in the format of the real paper. Pick an answer and the explanation appears. Nothing to sign up for.
Which of the following explains why a futures position shows a far larger percentage return than the movement in the underlying index?
Not quite. The answer is C.
A future gives exposure to the full contract value while tying up only a small initial margin, so any move in the underlying is magnified into a much larger percentage gain or loss on the money actually committed. That is gearing. The contract size is fixed by the contract specification and is not derived from the margin, which is instead worked out from the risk the position carries. No multiplier is applied to profits either, because the settlement run simply passes the day's change in contract value between the two sides. And each day's variation margin is the change in the contract's value against the previous day's settlement price, not against the margin lodged.
A gilt is best described as:
Not quite. The answer is D.
Gilts are UK government bonds issued by HM Treasury. They represent borrowing by the UK government and are considered among the safest sterling-denominated assets. Gilts pay a fixed semi-annual coupon and repay par at maturity, and issues run out as far as fifty years, which puts them well beyond the twelve months that mark out a money market instrument. A gilt is a loan to the state rather than a share in a company, so it is not an equity however it happens to be listed. Corporate bonds are the borrowing of companies, which is exactly what a gilt is not. Gilts are traded in the gilt repo market and underpin the gilt futures contract traded on ICE.
On a futures exchange, the term 'tick' means:
Not quite. The answer is B.
A tick is the minimum price movement of the contract, and the exchange fixes it in the contract specification. Tick value is the tick size multiplied by the contract multiplier, so it turns each tick into money: a FTSE 100 future quoted in steps of 0.5 index points on a multiplier of £10 is worth £5 a tick, and the result on a position is the number of ticks moved multiplied by the tick value and by the number of contracts. The spread between the quoted bid and offer prices is the dealing spread, which may be one tick wide, several ticks wide or nothing at all, and it reflects liquidity rather than the rules of the contract. The difference between today's and yesterday's settlement prices is that day's price change, which is what drives variation margin rather than what sets the smallest step allowed. The initial margin required per contract is a deposit taken against the risk on a position and says nothing about the size of a price step.
The holder of physical stock may be willing to sell a future below the cash price mainly because of:
Not quite. The answer is D.
The convenience yield is the benefit of having the physical material available, and where it exceeds the cost of carry the holder will accept a lower futures price. Backwardation is the closest distractor, but that is the resulting shape of the curve rather than the reason the holder is willing to sell below spot.
That is 4 of more than 10,800 questions in the PasskeyPrep bank. Chapter 1 of every exam is free, with the study notes and flashcards that go with it, and every answer is marked and explained the way these were.
The terminology is the whole game
More than any other CISI paper, Derivatives is a vocabulary test before it is anything else. A large share of the questions turn on whether you have the precise meaning of a term, and the terms come in pairs that are easy to muddle:
- Long and short. A long position profits if the price rises; a short profits if it falls.
- Open and close. Opening a position establishes it; closing it cancels it with an equal and opposite trade.
- Holder and writer. The holder buys an option and has the right; the writer sells it and has the obligation.
- Call and put. A call is the right to buy; a put is the right to sell.
- Covered and naked. A covered writer owns the underlying or an offsetting position; a naked writer does not, and carries far greater risk.
- Premium. What the holder pays the writer for the option.
If you can rattle these off without hesitation, a meaningful chunk of the paper is already yours. If you cannot, every question that uses them is a coin toss. Drill the vocabulary first.
What the heavy elements test
Introduction to Derivatives and Underlying Markets (33 combined). What futures, options and swaps are, what they are used for, hedging versus speculation versus arbitrage, and the underlying markets they reference, from equities and bonds to commodities and currencies.
Principles of Clearing and Margin (14). The role of the central counterparty, why it removes counterparty risk, and how margin works: initial margin, variation margin, and the daily mark-to-market process. Conceptually the bit that most rewards careful study.
Trading, Hedging and Investment Strategies (14). Putting the instruments to work: the basic strategies, how a hedge offsets risk, and the payoff of a position. Expect questions that describe a scenario and ask what it achieves.
Principles of Pricing and Valuation (11). The fair value of a future, what drives an option premium, intrinsic value and time value. Some of this calculates, so practise it.
Where people slip
The first trap is treating it like the foundation paper. It is not. The concepts are new and they do not absorb from a single read; they need repetition until the terminology and the mechanics are automatic.
The second is the length. One hundred questions in two hours, on material that makes you think, is tiring. Full, timed mocks are the only way to build the stamina, and to find out whether your speed holds up under pressure.
The third is the usual one: revising by reading instead of being tested. With derivatives the gap between recognising a term and knowing it cold is enormous, and only practice closes it.
How to revise it
Start by nailing the vocabulary, because so much of the paper depends on it. Then move to questions across the five heavy elements, reading the explanation on every one you miss. Practise the pricing and margin calculations until they are quick. Finish with full, timed, 100-question mocks weighted exactly like the real paper. Use repeated full, timed mock results alongside your timetable, confidence and remaining weak areas when deciding whether to book; no mock score can predict an individual result.
Drill it for free. Try a set of free CISI Derivatives practice questions. For the full method, see the complete guide to passing your CISI exams.
Hunting for past papers? Read CISI Derivatives past papers: what exists and the best mock exams.
Sit a whole paper for free. The free 100-question Derivatives mock exam runs to the real time limit and the published element weighting, with a score, an element breakdown and an explanation for every answer. No sign-up.
Frequently asked questions
How many questions are on the CISI Derivatives exam?
One hundred multiple-choice questions in 120 minutes, with a 70% pass mark. It is computer based with no negative marking, so answer every question.
Why is the Derivatives exam considered the hardest CISI paper?
Because the concepts are new to most candidates, the terminology is dense, and the paper is long. None of it is beyond a prepared candidate, but it rewards drilling more than recall, so people who only read the workbook tend to come unstuck. See how hard the CISI exams are.
Do I have to sit Derivatives, or can I choose Securities instead?
You choose. The Capital Markets Programme is completed with the regulatory unit plus one technical unit, Derivatives or Securities, depending on your role. PasskeyPrep covers both.
What should I revise first?
The terminology: long and short, open and close, holder and writer, call and put, covered and naked, premium. So many questions depend on it that getting it cold early lifts your whole score.