Derivatives Module (Advanced) Practice Exam

Derivatives Module (Advanced) Practice Exam

Derivatives are playing an increasingly significant role in global financial markets as essential tools for risk management. In India too, their adoption has seen consistent growth, making them a critical part of the broader financial ecosystem. Their widespread use, particularly in hedging strategies, highlights their undeniable value in managing uncertainty and enhancing portfolio performance.

The Derivatives (Advanced) Module is designed to provide an in-depth understanding of complex derivative instruments and their strategic applications in risk mitigation and portfolio optimization. Clearing this certification demonstrates your proficiency in advanced valuation techniques and structured financial instruments.

Key Learning Objectives:

• Gain a deep and structured understanding of derivative markets.
• Master advanced techniques for valuing securities and derivative instruments.
• Develop the ability to design and implement investment and hedging strategies.

Who Should Take This Exam?

The Derivatives (Advanced) Module Exam is ideal for:

• Financial professionals like portfolio managers, derivatives traders, and risk analysts aim to specialize in advanced derivatives products.
• Students
• Stockbrokers and sub-brokers dealing in derivatives
• Security Market Professionals.
• Finance Professionals
• Portfolio Managers
• Employees with banks and financial institutions.

Roles and Responsibilities

With a certification in Derivatives (Advanced) Module, you might be qualified for roles such as:

• Derivatives Trader (Advanced): Executing complex derivatives trades and strategies for clients or institutions.
• Structured Products Specialist: Developing and structuring innovative derivative-based products for investment purposes.
• Risk Management Analyst (Derivatives Focus): Specializing in assessing and managing derivatives-related risks within a financial institution.
• Portfolio Manager (Advanced): Utilizing advanced derivatives strategies to optimize investment portfolios and achieve specific risk-return objectives.

Exam Details

• Duration: 120 minutes
• No. of questions: 55
• Maximum marks: 100, Passing marks: 60 (60%); There is negative marking for incorrect answers.
• Certificate validity: Certificates are valid for 5 years from the test date.

Course Outline

The exam covers the following topics:

1. Derivatives & Quantitative Fundamentals – A Backgrounder
A. Derivative Types
B. Beta
C. R-Square
D. Continuous Compounding
E. Option Valuation

• Historical Volatility (σ)

F. Normal Distribution
G. Share Prices – Lognormal Distribution
H. Volatility (σ)

• ARCH(m) Model
• Exponentially Weighted Moving Average (EWMA)
• GARCH Model
• Implied Volatility

2. Fundamentals of Equity Futures
A. Contracts
B. Selection Criteria

• Stock Selection Criteria
• Criteria for Continued Eligibility of Stock
• Criteria for Re-inclusion of Excluded Stocks
• Index Selection Criteria

C. Price Steps and Price Bands for Contracts
D. Quantity Freeze for Futures Contracts
E. Novation
F. Margins
G. Daily Mark-to-Market Settlement
H. Final Settlement
I. Cost of Carry
J. Determining Stock Futures Price (without Dividend)
K. Determining Stock Futures Price (with Dividend)
L. Determining Index Futures Price (without Dividend)
M. Determining Index Futures Price (with Dividend)
N. Cash & Carry Arbitrage
O. Reverse Cash & Carry Arbitrage
P. Convergence of Spot & Futures
Q. Contango & Backwardation
R. Cost of Carry - Commodities

3. Investment with Equity Futures
A. Relation between Futures and Spot Price
B. Payoff Matrix from Futures

• Long Futures
• Short Futures

C. Hedging with Futures
D. Basis Risk
E. Modifying the Portfolio Beta with Futures
F. Rolling Hedges
G. Investment Strategies Using Futures

4. Interest Rate Futures
A. Interest Risk Management through Futures
B. Contracts & Eligible Securities
C. Conversion Factor
D. Cheapest to Deliver (CTD)
E. Contract Structure & Mechanics of FUTIRD
F. Contract Structure & Mechanics of FUTIRT

5. Black-Scholes Option Pricing Model

A. European Call Option
B. European Put Option 
C. Dividends
D. American Options

6. Option Greeks
 A. Delta

• European Call on non-dividend paying stock
• European Put on non-dividend paying stock
• European Call on asset paying a yield of q
• European Put on asset paying a yield of q

 B. Gamma

• European Call / Put on non-dividend paying stock
• European Call / Put on asset paying a yield of q

 C. Theta

• European Call on non-dividend paying stock
• European Put on non-dividend paying stock
• European Call on asset paying yield of q
• European Put on asset paying yield of q

D. Vega

• European Call / Put on non-dividend paying stock
• European Call / Put on asset paying yield of q

E. Rho

• European Call on non-dividend paying stock
• European Put on non-dividend paying stock

7. Currency Futures & Options

A. Currency Futures Contracts
B. Calculation of Daily Settlement Price of Currency Futures
C. Transactions in Currency Futures
D. Currency Futures or Forward Rate Agreement
E. Currency Options Contracts
F. Valuation of Currency Options

• European Call Option
• European Put Option

G. Transactions in Currency Options

8. Swaps
A. OTC Products
B. Interest Rate Swap
C. Valuing Interest Rate Swaps

• Valuation based on Bonds
• Valuation based on Forward Rate Agreements (FRAs)

D. Currency Swap
E. Valuing Currency Swaps
F. Swaption

9. Embedded Options in Debt Instruments
A. Warrants
B. Convertible Bonds
C. Call Option in a Debt Security
D. Put Option in a Debt Security
E. Put & Call Option in a Debt Security
F. Caps
G. Floors
H. Collars

10. Credit Risk & Derivatives
A. Credit Risk & Rating
B. Default History & Recovery Rates
C. Calculation of Default Risk

• Simple Approach
• Present Value Approach

D. Mitigating Credit Risk
E. Credit Default Swaps
F. Collateralized Debt Obligation (CDO)