CMFAS Module 6A Securities & Futures Products Knowledge. Summary of Updates (April 2015 Version 2)

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1 CMFAS Module 6A Securities & Futures Products Knowledge Summary of Updates (April 2015 Version 2) The study guide for CMFAS M6A has been updated in line with the recent updates in product knowledge and analysis for securities & futures products. The revised study guide is available from 20 April Candidates registered to take the CMFAS M6A examination from 20 May 2015 onwards will be tested based on the revised study guide. The updates made to the CMFAS Module 6A (July 2013 Version 1.7) are summarized as follows: Chapter Title Summary of changes 1 Overview of Securities and Futures 1.1 Introduction What are Investments and Financial Markets? 1.4 The Fund Management Process 1.5 Summary 1.2 Money Market Securities 1.3 Common Types of Securities Debt Securities Equity Securities 1.4 Derivatives Exchange-Traded Derivatives Over-the-Counter (OTC) Derivatives Uses of Derivatives Types of Derivatives The Derivatives Markets in Singapore 2 Futures Chapter 5 Futures) 2.1 Introduction The Economic Importance of the Futures Market 2.2 Differences between Futures & Other Financial Instruments 2.4 Futures Exchanges Listing of Derivatives Contracts on SGX Understanding Ticks for SGX Derivatives Trading Derivatives Clearing Process 2.7 Types of Futures Interest Rates Futures Currency Futures Currency Futures Equity Index Futures Innovation with New Types of Derivatives - Real Estate 2.8 Summary 2.2 Differences between Futures & Other Financial Instruments Leverage 2.3 General Features of Futures 1

2 2.3.1 Futures versus Forwards Term Sheet and Contract Specifications Understanding Futures Contracts Specifications Modes of Settlement 2.4 Futures Exchanges Singapore Exchange Limited (SGX) Types of Orders on SGX Mutual Offset System (MOS) Packs & Bundles 2.5 Futures Pricing Model Spot Price Futures versus Spot Market (Cash Market) Expectancy Model of Futures Pricing 2.6 Basis in Futures Contracts Factors Affecting Basis Basis in Hedging 3 Futures Strategies Chapter 6 Strategies for Futures Markets) 4 Options Chapter 8 Options) 3.1 Market Participants 3.2 Types of Trades & Strategies 3.3 Spread Trades Calendar Spread Butterfly Spread Condor Spread TED Spread 3.4 Hedging and Portfolio Management Identifying and Measuring Risk Developing an Effective Hedge Program Determining the Hedge Instrument Determining the Target Rate for the Hedge Hedges for Currently Held or Anticipated Positions Hedge Ratio Types of Hedges Hedging Long-Term Interest Rate Risk Hedging Equity Risks Structuring the Hedge Managing the Hedge Further Examples of Hedging 3.5 Portfolio Management Techniques Examples of Portfolio Management Applications 3.6 Arbitrage Arbitrage Using Interest Rate Futures Arbitrage using Options 3.7 Summary 4.5 Factors Influencing Equity Option Premiums Expected Dividends of Underlying Share during the Option s Life Summary of Factors affecting Price Sensitivity of Equity Options 4.6 Maximum Gain, Maximum Loss and Breakeven Point Buying Call Options 2

3 4 Options (continued) Selling Call Options Buying Put Options Selling Put Options 4.7 Put-Call Parity Theory Definition Arbitrage Synthetic Positions 4.8 Option Valuation Black-Scholes Formula Volatility The Volatility Greeks Delta Delta Gamma Theta Vega Rho 4.9 Differences between Exchange-Traded and OTC-Traded Options 4.10 Understanding Option Contract Specifications 4.14 Other Types of Options Bond Options 4.16 Summary 4.1 What is an Option? 4.2 Introduction to Options Trading 4.3 Basic Option Concepts Definitions Call Options vs Put Options 4.4 Features of Options Strike Price Expiration Date Time Value of Options 4.5 Factors Influencing Equity Option Premiums Changes in the Underlying Share Price Strike Price (or Exercise Price) Time to Expiration Price Volatility of the Underlying Share Current Risk-Free Interest Rate 4.11 Option Strategies Understanding Diagrams for Options Strategies Call Buying Strategies Call Writing Strategies Put Buying Strategies Put Writing Strategies 4.12 Market Outlook Strategies Market Outlook Straddles Strangles Option Spreads 4.13 Trading with Options 3

4 4 Options (continued) 4.14 Other Types of Options Equity Index Options Interest Rate Options Options on Futures Currency Options 4.15 Hedging with Options Using Options to Protect an Equity Portfolio Using Options to Manage Currency Exposure Zero-Cost Options 5 Warrants & Other Investment Products Chapter 9 Warrants & Other Investment Products) 5.2 Key Features and Terms of a Warrant Issue Investing in Call Warrants Investing in Put Warrants 5.7 Settlement of Warrants Realising Gains from Call and Put Warrants 5.12 Summary 5.1 Introduction Company Warrants Structured Warrants 5.2 Key Features and Terms of a Warrant Issue Conversion Ratio Exercise or Strike Price Expiry Date Issue Price Physical Delivery or Cash Settlement Gearing Delta Effective Gearing Implied Volatility 5.3 Interpreting Trading Names of Structured Warrants 5.4 Warrant Valuation Intrinsic Value (IV) Conversion Price (CP) Premium 5.5 Roles of the Warrant Holder & Issuer 5.6 Market-Making of Structured Warrants 5.7 Settlement of Warrants Physical Settlement Cash Settlement Settlement Procedures 5.8 Corporate Action Adjustments for Structured Warrants 5.9 Exotic Warrant Structures and Features Index Warrants Currency Translated Warrants Basket Warrants Yield Enhanced Securities Commodity Warrants Foreign Exchange (FX) Warrants 4

5 5.10 Convertible Bonds Traditional Valuation Approach Using the Black-Scholes Formula 5.11 Market Outlook and Products 6 Structured Products Chapter 10 Basics of Structured Products) 6.1 Introduction Growth of Structured Products 6.2 Key Features of Structured Products Maturity Type Pay-off on Maturity Coupon Structure 6.4 Common Strategies Used by Structured Products Zero Coupon Fixed Income Plus Option Strategy (or Zero Plus Option) Uses and Suitability of Zero plus Option Structured Deposit / Note Short Option Strategy Constant Proportion Portfolio Insurance (CPPI) Strategy Dynamic Proportion Portfolio Insurance (DPPI) 6.6 Risk-Return Trade-off of Structured Products 6.8 Summary 6.1 Introduction Uses of Structured Products Underlying Asset Other Features of Structured Products 6.3 Types of Structured Products Structured Investment-Linked Policies (ILPs) Other Structured Products 6.5 Other Features of Structured Products Principal Redemption Liquidity and Market Access Restrictions on Underlying Assets 6.7 Suitability of Structured Products for Investors Needs of Investors Sales Restrictions Issuer Oversight 7 Structured Notes Chapter 12 Structured Notes) 7.6 Structured Notes with Embedded Short Options Equity Linked Notes (ELNs) Worst of Equity Linked Notes Characteristics of ELNs Credit Linked Notes (CLNs) First to Default Credit Linked Note Bond-Linked Notes (BLNs) Accumulators 7.8 Risks of Specific Structured Products Equity Linked Notes (ELNs) Credit Linked Notes (CLNs) 5

6 7 Structured Notes Chapter 12 Structured Notes) Bond Linked Notes (BLNs) Risks of Structured Deposits 7.11 Summary 7.1 What is a Structured Note? 7.2 Issuer Direct Issuance (on Balance Sheet) Special Purpose Vehicle Issuance (Off Balance Sheet) 7.3 Wrapper Debentures Structured Deposits 7.4 Types of Structured Notes 7.5 Yield Enhancement Structures Range Accrual Notes (RANs) Variable Maturity Multi-Callable RAN Inverse Floater Note Variations of RANs 7.7 Market Access Exchange-Traded Notes (ETNs) Index-Linked Notes Participatory Notes (PNs) Access Notes 7.9 Investors of Structured Notes Assessing Product Suitability for Retail Investors Factors for Investors to Consider in the Sales Process Providing After Sales Information 7.10 Documentation Required for Structured Notes Contents of Product Highlights Sheet 8 Structured Funds & Structured ETFs Chapter 13 Structured Funds and Structured Exchange-Traded Funds) 8.1 Structured Funds The Global ETF Market Types of ETFs Replication Methodologies ETF Pricing & Valuation Issues ETFs vs Exchange-Traded Notes (ETNs) ETFs vs Mutual Funds / Unit Trusts ETF & Fund Governance in USA & Europe ETF Investors & Investment Strategies Benefits of ETFs 8.3 Summary 8.1 Structured Funds What is a Structured Fund? Common Terminology How Are Structured Funds Different from Traditional Mutual Funds? How Are Structured Funds Different from Trackers? Components of a Structured Fund Using Derivatives in a Structured Fund 6

7 8.1.7 Various Structures and Design Overview of Common Fund Examples of Structured Funds Structures Risks of Structured Funds Roles & Responsibilities of Fund Managers and Trustees How to Manage Underlying Risk Exposure in a Structured Fund Typical Types of Fund Documentation What Type of Investors Invest in Structured Funds After Sales 8.2 Structured Exchange Traded Funds (ETFs) What are ETFs? Risks of ETFs ETFs After Sales 9 Key Product & Investment Risks Chapter 11 Key Risks) 9.1 Risk-Return Trade-Off 9.3 Investment Risks of Derivatives Risks in Trading Futures Risks in Trading Options Risks of Trading Equity Index Options Risks of Trading Bond Options Risks of Trading Currency Options Risks of Trading Warrants 9.4 Key Risks of Structured Products Risk of Mis-selling (Incongruence to Investment Strategy) 9.5 Trading Risk Control and Management Managing Market Risk for Futures Managing Market Risk for Options Managing Credit Risk for Options Managing Settlement Risk for Options 9.6 Summary 9.2 Generic Investment Risks Country Risk Market Risk Market Disruption Risk Counterparty Risk Concentration Risk Operational Risk 9.4 Key Risks of Structured Products Risks of Constant Proportion Portfolio Insurance (CPPI) Strategy Products Market Risk Credit and Counterparty Risks Types of Credit Default Liquidity Risks and Secondary Market Trading Early Termination Risk Structure Risk Reinvestment Risk Volatility Risk 7

8 Correlation Risk Foreign Exchange Risk Legal Risk Transactional Risk 10 Comparison of Different Types of Structured Products Chapter 14 Comparison of Different Types of Structured Products) 10.1 Same Wrapper with Seemingly Same Structures but Differences in Features Product Risks Short Option Positions 10.4 Summary 10.1 Same Wrapper with Seemingly Same Structures but Differences in Features Wrappers Risk-Return Profile of Structured Products Callable Features Product Risks Short Option Positions 10.2 Comparison of Different Forms of Structured Products 10.3 Cross-Product Case Study Reverse Convertibles Discount Certificates Risk-Return Profile of Structured Products 11 Knock-Out Products Chapter 16 Knock-Out Products) 11.8 Summary 11.1 Complex Options 11.2 Barrier Options 11.3 Types of Knock-Out Barrier Options Single Barrier Option Double Barrier Option Categories of Barrier Options Advantages of Barrier Options Disadvantages of Barrier Options 11.4 Examples of Common Knock-out Products Knock-Out Warrants Barrier Capital Preservation Certificate Barrier Capital Preservation Certificate (Straddle) Barrier Reverse Convertible Bonus Certificate 11.5 Callable Bull/Bear Contracts Price Movement of a CBBC (in relation to the underlying asset) Lifespan and Mandatory Call Event (MCE) Gearing Effect Hedging Instrument (for Bear Contracts) 8

9 Categories of CBBC Factors Affecting CBBC Pricing & Valuation Determination of Residual Value if Mandatory Call Event Occurs Valuation at Maturity (Expiry) Capital Adjustments Other Issues Related to Trading on the Exchange (SGX) Callable Bull/Bear Contracts (CBBCs) - Examples & Illustrations 11.6 Risks of CBBCs 11.7 Similarities and Differences between Knock-Out Products and Structured Warrants (or Other Products) 12 Contracts for Differences (CFDs) Chapter 17 Contracts for Differences Summary 12.1 History and Origin of CFDs 12.2 What Are Contracts for Differences (CFDs)? 12.3 Characteristics and Features of CFDs 12.4 CFD Business Models 12.5 Advantages of CFDs over Other Instruments 12.6 Trading Mechanisms of CFDs Margin Mark-to-Market Margin Call Liquidation Orders and Stops Financing Going Short Corporate Actions Comparing CFDs with Futures 12.7 Global Trading Opportunities Equity CFDs Index & Sector CFDs Currencies Commodities Government Treasuries CFDs on ETFs Others 12.8 CFD Trading Strategies Trading for Dividends (Dividend Stripping / Capture) Trading in Pairs 12.9 Risks of Investing in CFDs Leverage Risk Market Volatility (Underlying Asset) Market Volatility (Underlying Asset) Counterparty Risk Liquidity Risk Currency Risk Financing Costs Risks Associated With Different CFD Models (Direct Market Access vs Market-Maker) 9

10 13 Extended Settlement Contracts (previously Chapter 18 Extended Settlement (ES) Contracts 13.6 Trading Strategies Using ES Contracts Long Hedge Short Hedge Using ES Contract as a Hedging Tool Stock Spreads Arbitraging 13.9 Benefits of Trading ES Contracts Comparing ES Contracts with Contra and Margin Financing Summary 13.1 What Is An Extended Settlement Contract? 13.2 Types of Investors Who Invest In ES Contracts 13.3 Risks of Trading ES Contracts Leverage Margin Calls Liquidity Volatility Buying-In Changes in Interests 13.4 Contract Specifications and Trading and Settlement of ES Contracts Underlying Securities Margin Requirements Contract Months Settlement by Delivery of Underlying Securities Corporate Actions Contra Trades Clearing Fees and GST ES Location on the Trading Screen 13.5 Calculation of Profit and Loss for ES Contracts Calculation of Profit and Loss for ES Contracts 13.7 Mark-To-Market and Margining Daily Mark-to-Market Key Margining Concepts Margining on Gross Basis Margin Calculations Margins for Positions Which Have Been Offset Acceptable Forms of Margin Collateral Margin Calls Acceptance of Orders during Margin Calls Excess Margins Reporting of Under-Margined Accounts 13.8 Managing Positions New Position Reporting Requirement Global Position Limits 14 Case Studies Chapter 19 Case Studies) 14.1 Case Studies on Structured Notes Range Accrual Note (RAN) Accumulator 10

11 14.3 Summary 14.1 Case Studies on Structured Notes Hang Seng Index (HSI) Daily Range Accrual Note First-to-Default Credit Linked Note (CLN) 14.2 Case Studies on Structured Funds Auto-Redeemable Structured Fund ABC Auto-Redeemable Structured Fund XYZ A B C D E F Constant Proportion Portfolio Insurance (CPPI) Strategy MAS Guidelines on the Product Highlights Sheet Futures Contracts Specifications Formulae Sheet Review Questions Essential Readings New New Updated to match revised study guide Updated to match revised study guide Updated to match revised study guide Updated to match revised study guide 11