LICENSING EXAMINATION STUDY OUTLINE For January to March 2014 Examinations (Issued in January 2014) Module 14 Futures and Options Copyright Securities Industry Development Corporation (This document consists of 9 pages including the cover page)
STUDY OUTLINE MODULE 14: FUTURES AND OPTIONS This examination is designed to test candidate s knowledge and understanding of the Futures and Options in Malaysia. It is one of the examinations to be passed by individuals who: (1) intend to apply for a Capital Markets Services Representative's License (CMSRL) to carry on the regulated activity of dealing in derivatives; or (2) intend to hold the position of compliance officer in a firm which is a holder of a Capital Markets Services License (CMSL) for carrying on the business of dealing in derivatives. Candidates are advised to refer to the Licensing Handbook for detailed combination of examinations required for each regulated activity. This examination falls under Level 1 of the SC licensing examinations where candidates are expected to possess good knowledge and understanding of the subject matter provided in this study outline and specified references. In addition, candidates will be tested on the ability to analyse and apply the information at a basic level. It is estimated that this module will require a minimum of 80 hours of study time. Candidates may need less or more depending on the education background and work experience. Candidates are expected to update themselves with the latest changes relevant to this examination as all questions will be continuously updated to reflect these changes. Module 14 examination is a closed-book test and candidates are not allowed to use any reference material during the examination. Candidates are required to comply with the terms and conditions of the SC licensing examination. Severe penalties will be taken against candidates for any misconduct during the examination. At the end of this study outline are 5 sample questions of various formats used in the Module 14 examination. The samples provided do not in any way reflect the level of difficulty or the subject-matter distribution of the actual examination. They are merely intended to familiarise candidates with the styles of multiple-choice questions used in the examination. 2
EXAMINATION STRUCTURE Details of this examination are as follows: Type of Questions Number of Questions Multiple Choice 60 questions Passing Mark 70% Time Allocated 90 minutes Level of Examination Level 1 Reference /Text Examination Study Guide for Module 2: Futures (Fifth Print, 2007 Reprint) Module 2 Study Guide Updates (Dec 2007) Module 2 Study Guide Updates (Jan 2012) Examination Study Guide for Module 3: Options (Fifth Print, 2008 Reprint) Module 3 Study Guide Updates (Dec 2012) Additional Reading Materials on Single Stock Futures Additional Reading Materials on USD Crude Palm Oil Futures (FUPO) REFERENCE MATERIAL The reference materials for this examination can be obtained from: SIDC Shop, Ground Floor 3, Persiaran Bukit Kiara Bukit Kiara 50490 Kuala Lumpur Tel: (603) 6204 8665/8667 For more information, please visit the SIDC website at www.sidc.com.my. 3
LEARNING OBJECTIVES Candidates are expected to have good knowledge, understanding and ability to apply in the following areas: Concepts and structure of the futures and options markets Product knowledge on all contracts that are currently available on Bursa Derivatives Hedging, arbitraging and speculative trading strategies using all futures contracts available on Bursa Derivatives Option trading strategies including pay-off diagrams Options valuation Option pricing models and their uses in options trading Market analysis - fundamental and technical analysis of futures market EXAMINATION SYLLABUS The syllabus for the examination is divided into 2 sections and the maximum composition of questions from each section is as follows: Section Composition of Questions (Maximum) Number of Questions (Maximum) Section 1: Futures 60% 36 Section 2: Options 60% 36 Details of the syllabus are as below: SECTION 1: FUTURES 1. Introduction to Futures 1. How the Futures Market Works 2. Using Futures to Hedge 3. Speculating with Futures 4. Arbitraging with Futures 4
2. Commodity Futures Crude Palm Oil Futures 1. What are Crude Palm Oil Futures? 2. Using Crude Palm Oil Futures to Hedge 3. Speculating with Crude Palm Oil Futures 4. Arbitraging with Crude Palm Oil Futures 3. Commodity Futures USD Crude Palm Oil Futures (Please refer to the Additional Reading Material on USD Crude Palm Oil Futures) 1. Introduction to USD Crude Palm Oil Futures (FUPO ) 2. FUPO Contract 3. Hedging with FUPO 4. Speculating with FUPO 5. Arbitraging with FUPO 6. Risks in trading FUPO 7. Comparative Analysis Between FUPO and Ringgit (MYR) denomination Crude Palm Oil Futures (FCPO) 4. Commodity Futures - Crude Palm Kernel Oil Futures 1. The Underlying Instruments 2. Using Crude Palm Kernel Oil Futures to Hedge 3. Speculating with Crude Palm Kernel Oil Futures 4. Arbitraging with Crude Palm Kernel Oil Futures 5. hedging a Portfolio of Similar Instruments 5. Equity Futures 1. Overview of Equity Futures 2. Using Stock Index Futures to Hedge 3. Speculating with Equity Futures 4. Arbitraging with Equity Futures 5
6. Single Stock Futures (Please refer to the Additional Reading Material on Single Stock Futures) 1. Introduction to Single Stock Futures (SSF) 2. SSF in Malaysia 3. Hedging with SSF 4. Speculating with SSF 5. Arbitraging with SSF 6. Comparative Analysis Between SSF and Stocks 7. Interest Rate Futures 1. The Underlying Instrument 2. What are KLIBOR Futures? 3. Using KLIBOR Futures 4. Arbitraging with KLIBOR Futures 5. Other Uses of KLIBOR Futures 8. Bond Futures - Malaysian Government Securities (MGS) Futures 1. The Underlying Instruments 2. What are MGS Futures? 3. Trading MGS Futures 9. Market Analysis 1. Overview of Market Analysis 2. Fundamental Analysis of Futures Prices 3. Technical Analysis 6
SECTION 2: OPTIONS 1. Introduction to Options 1. What are Options? 2. How Options are Traded 3. Valuing Options 4. Pay-off Diagrams 5. Uses of Options 2. Option Strategies 1. Pay-off Diagrams 2. Option Strategies and When to Use Them 3. Option Pricing 1. Basic Pricing European Options 2. Option Pricing Models 3. Delta 4. The Use of Options in Portfolio Management 7
SAMPLE QUESTIONS AND ANSWERS Sample Question 1 Select the CORRECT statement about options sellers. They have: (A) (B) (C) (D) limited risk unlimited risk the right to exercise their options unlimited profit potential Sample Question 2 When investors use a derivative instrument to reduce his exposure to the price volatility of certain underlying assets, he is said to be: (A) (B) (C) (D) speculating investing arbitraging hedging Sample Question 3 A synthetic long put position is constructed by: (A) (B) (C) (D) selling the underlying instrument and buying a call option buying the underlying instrument and buying a call option selling the underlying instrument and selling a put option buying the underlying instrument and selling a put option 8
Sample Question 4 A trader buys 4 crude palm oil futures contracts at RM1,100 and the price rises to RM1,130. The market then falls and the trader liquidates them at RM1,115. What is the profit from the above transaction? (A) RM 15 (B) RM 30 (C) RM 375 (D) RM 1,500 Sample Question 5 In April, company A plans to invest RM5 million in the interbank money market in three months time. The company s treasurer, Mr Lee, has a strong feeling that interest rates will be falling. To protect the company from an interest-rate downturn, Mr Lee should: (A) (B) (C) (D) buy 5 July KLIBOR futures contracts sell 5 July KLIBOR futures contracts buy 5 April KLIBOR futures contracts sell 5 April KLIBOR futures contracts Answers Sample Question 1 B Sample Question 2 D Sample Question 3 A Sample Question 4 D Sample Question 5 A 9