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CIRO Derivatives Exam study materials
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CIRO Derivatives Exam practice questions

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Question 1Derivatives Fundamentals and Market Structure

Which type of derivative derives its value from the price of an underlying asset such as a stock or commodity?

  1. A bank deposit with a guaranteed interest rate
  2. An equity share issued directly by a company
  3. A government bond with a fixed coupon
  4. A derivative contract whose payoff is linked to the underlying asset's price Correct answer.

Explanation

A derivative is a financial contract whose value depends on the price of an underlying asset, rate, or index. The underlying itself is not the derivative; the contract's payoff is determined by reference to it.

Question 2Derivatives Fundamentals and Market Structure

In a forward contract, which two parties bear the counterparty credit risk?

  1. Only the buyer of the contract
  2. Only the exchange where the contract trades
  3. The central clearing house
  4. Both the long and the short parties Correct answer.

Explanation

A forward is a bilateral over-the-counter agreement, so each party faces the risk that the other defaults on its obligation. Because no clearing house guarantees the trade, both the long and short sides carry credit exposure.

Question 3Derivatives Fundamentals and Market Structure

What does a futures exchange clearing house do with respect to counterparty risk between buyers and sellers?

  1. It leaves the original parties fully exposed to each other
  2. It eliminates the risk by becoming the counterparty to every trade Correct answer.
  3. It transfers all risk to the government
  4. It requires both parties to post no margin at all

Explanation

The clearing house interposes itself between buyer and seller, becoming the buyer to every seller and the seller to every buyer. This novation means each party faces the clearing house rather than the original counterparty, greatly reducing default risk.

Question 4Derivatives Fundamentals and Market Structure

Which contract gives the holder the right, but not the obligation, to buy an underlying asset at a specified price on or before a set date?

  1. A call option Correct answer.
  2. A put option
  3. A futures contract
  4. A forward contract

Explanation

A call option confers the right to buy the underlying at the strike price, with the holder free to let it expire. The obligation-free nature distinguishes options from forwards and futures.

Question 5Derivatives Fundamentals and Market Structure

What is the primary economic function of a derivatives market in relation to risk?

  1. Guaranteeing profits for all participants
  2. Allowing risk to be transferred from those who wish to reduce it to those willing to bear it Correct answer.
  3. Eliminating all price volatility in the underlying
  4. Preventing any trading in the underlying asset

Explanation

Derivatives enable risk transfer: hedgers reduce exposure while speculators accept it in exchange for potential return. This reallocation improves market efficiency but does not remove volatility or guarantee outcomes.

Question 6Derivatives Fundamentals and Market Structure

A trader buys a futures contract at a price of 100 and the contract has a multiplier of 10. If the settlement price rises to 104, what is the trader's gain?

  1. 4
  2. 104
  3. 1040
  4. 40 Correct answer.

Explanation

The gain equals the price change multiplied by the contract multiplier: (104 - 100) x 10 = 40. The multiplier scales the per-unit price move into the contract's monetary value.

Question 7Derivatives Fundamentals and Market Structure

Which feature distinguishes an exchange-traded futures contract from a forward contract?

  1. Forwards are standardized with fixed contract sizes
  2. Forwards are always centrally cleared
  3. Futures have no margin requirements
  4. Futures are standardized and marked to market daily Correct answer.

Explanation

Futures contracts are standardized as to quantity, quality, and delivery date, and their value is settled daily through mark-to-market. Forwards are customized bilateral agreements without daily settlement.

Question 8Derivatives Fundamentals and Market Structure

An investor holds a long call option with a strike of 50 when the underlying price is 58. What is the option's intrinsic value per share?

  1. 0
  2. 50
  3. 58
  4. 8 Correct answer.

Explanation

For a call, intrinsic value equals the underlying price minus the strike when positive: 58 - 50 = 8. The option is in the money by 8, while any remaining premium reflects time value.

Question 9Derivatives Fundamentals and Market Structure

An investor buys a put option with a strike of 40 and pays a premium of 3. At what underlying price does the position break even at expiration?

  1. 43
  2. 37 Correct answer.
  3. 46
  4. 40

Explanation

A long put breaks even when the underlying equals the strike minus the premium paid: 40 - 3 = 37. Below that price the payoff exceeds the premium and the position is profitable.

Question 10Derivatives Fundamentals and Market Structure

A company expects to receive 1,000 barrels of oil in three months and wants to lock in the sale price. Which hedge best addresses its exposure?

  1. Buy a call option on oil
  2. Enter a short futures position in oil Correct answer.
  3. Buy a put option on oil and also sell a call
  4. Enter a long futures position in oil

Explanation

A party that will sell the underlying is exposed to falling prices, so a short futures position gains when prices fall, offsetting the loss. A short hedge locks in a selling price for the anticipated inventory.

Question 11Derivatives Fundamentals and Market Structure

What does daily mark-to-market of a futures position mean?

  1. The exchange refunds all margins at the end of each day
  2. Gains and losses are credited or debited to the margin account each trading day Correct answer.
  3. The contract is settled only at final maturity
  4. The contract price is fixed for the life of the trade

Explanation

Mark-to-market revalues the position at the daily settlement price, and the resulting variation margin flows into or out of the trader's margin account. This daily settlement prevents large accumulated losses from building up.

Question 12Derivatives Fundamentals and Market Structure

Which statement best describes the payoff of a long forward position at maturity?

  1. It equals the agreed forward price minus the spot price at maturity
  2. It is always zero because forwards are settled at inception
  3. It equals the premium paid at the start of the contract
  4. It equals the spot price at maturity minus the agreed forward price Correct answer.

Explanation

The long forward profits when the spot price at maturity exceeds the locked-in forward price, so its payoff is spot minus forward. No premium is exchanged at inception in a standard forward.

Question 13Derivatives Fundamentals and Market Structure

What is the key difference between the obligations of an option buyer and an option writer?

  1. Both parties have obligations to perform
  2. The buyer has a right and the writer has an obligation Correct answer.
  3. The buyer has an obligation and the writer has a right
  4. Neither party has any obligation under the contract

Explanation

The option buyer pays a premium and acquires a right, with no obligation to exercise. The writer receives the premium and must perform if the buyer exercises, so the writer bears the obligation.

Question 14Derivatives Fundamentals and Market Structure

A speculator believes volatility in an underlying will rise sharply but has no directional view. Which strategy most directly expresses this view?

  1. Buying a single call option
  2. Selling a straddle
  3. Buying a straddle Correct answer.
  4. Entering a short forward position

Explanation

A long straddle combines a call and a put at the same strike, gaining when the underlying moves substantially in either direction. It profits from large moves regardless of direction, consistent with a volatility view.

Question 15Derivatives Fundamentals and Market Structure

Why does the initial margin requirement exist for a futures position?

  1. To pay the exchange's trading commissions
  2. To fund the underlying asset purchase in full
  3. To guarantee a profit for the trader
  4. To provide a performance bond covering potential adverse price moves Correct answer.

Explanation

Initial margin is a good-faith performance bond that protects the clearing house against default. It is not a down payment on the asset but collateral that is adjusted through variation margin.

Question 16Derivatives Fundamentals and Market Structure

An investor writes a call option with a strike of 30 and receives a premium of 2. What is the maximum profit on this position?

  1. 30
  2. Unlimited
  3. 2 Correct answer.
  4. 28

Explanation

A call writer keeps the premium if the option expires worthless, which occurs when the underlying stays at or below the strike. That premium of 2 is therefore the maximum profit, while the loss potential is unlimited above the strike.

Question 17Derivatives Fundamentals and Market Structure

What role does a central counterparty play in over-the-counter derivative reform?

  1. It sets the underlying asset's market price
  2. It guarantees that no participant can default
  3. It interposes itself between counterparties to reduce systemic risk Correct answer.
  4. It removes the need for any collateral

Explanation

By novating trades to a central counterparty, exposures are netted and collateralized through margin, reducing interconnectedness and systemic risk. The central counterparty manages risk but does not eliminate the possibility of default.

Question 18Derivatives Fundamentals and Market Structure

A stock currently trades at 100. A one-year forward has a forward price of 108, and the risk-free rate is 5 percent with no dividends. Which statement is most accurate?

  1. No arbitrage relationship links the spot and forward prices
  2. The forward is overpriced relative to its theoretical value Correct answer.
  3. The forward is underpriced relative to its theoretical value
  4. The forward is fairly priced at the theoretical level

Explanation

The theoretical forward price is the spot compounded at the risk-free rate: 100 x 1.05 = 105. Since the quoted forward is 108, it is above fair value, allowing an arbitrageur to sell the forward and buy the stock.

Question 19Derivatives Fundamentals and Market Structure

An investor holds a long straddle with a strike of 60 and pays a total premium of 8. What are the breakeven prices at expiration?

  1. 52 and 60
  2. 52 and 68 Correct answer.
  3. 56 and 64
  4. 60 and 68

Explanation

A long straddle breaks even at the strike plus or minus the total premium: 60 - 8 = 52 and 60 + 8 = 68. Between these prices the combined premium is not recovered, so the position loses money.

Question 20Derivatives Fundamentals and Market Structure

A futures contract is priced at 200 and the initial margin is 10 with a maintenance margin of 6. After a settlement price of 195, what happens to a long position of one contract with a multiplier of 1?

  1. A margin call for 5 to restore the initial margin Correct answer.
  2. No action, because the loss is within maintenance
  3. A margin call for 4 to restore the maintenance margin
  4. The position is automatically closed at a profit

Explanation

The long loses 5 (200 - 195), reducing the margin balance from 10 to 5, which is below the maintenance level of 6. The trader must top up to the initial margin of 10, a call of 5.

Question 21Derivatives Fundamentals and Market Structure

Which arbitrage argument explains why a European call and put with the same strike and expiry must satisfy put-call parity?

  1. A portfolio of a call plus cash equals a portfolio of a put plus the underlying Correct answer.
  2. Both options must have identical premiums at all times
  3. The underlying price must equal the strike at expiry
  4. Options can never be exercised before expiry

Explanation

Put-call parity states that a call plus a bond paying the strike equals a put plus the underlying stock. If the two portfolios differed in price, an arbitrageur could buy the cheaper and sell the dearer for a riskless profit.

Question 22Derivatives Fundamentals and Market Structure

An investor shorts a futures contract at 150. The settlement prices over the next three days are 148, 153, and 149. Ignoring margin, what is the cumulative profit or loss with a multiplier of 1?

  1. A profit of 1 Correct answer.
  2. A loss of 3
  3. A loss of 1
  4. A profit of 3

Explanation

Daily settlement credits or debits each day's move for a short: +2 on day one, -5 on day two, and +4 on day three. The cumulative result is 2 - 5 + 4 = +1, a profit of 1.

Question 23Derivatives Fundamentals and Market Structure

A hedger with a long position in a stock wants protection against a price decline while retaining some upside. Which strategy fits this objective?

  1. Entering a short forward on the stock
  2. Selling a call option on the stock
  3. Buying a put option on the stock Correct answer.
  4. Selling a put option on the stock

Explanation

A protective put sets a floor on the stock's value while leaving upside intact if the price rises. The cost is the premium paid, which is the price of retaining that upside.

Question 24Derivatives Fundamentals and Market Structure

Which statement correctly describes the relationship between an option's premium and its time to expiration, all else equal?

  1. Longer time to expiration always decreases the value of a call
  2. Longer time to expiration generally increases the value of both calls and puts Correct answer.
  3. Time value is negative for at-the-money options
  4. Time to expiration affects only put options

Explanation

More time until expiration gives the underlying more opportunity to move favorably, raising the time value of both calls and puts. This holds for European options on non-dividend-paying assets, where longer-dated options are generally worth more.

Question 25Futures Contracts and Mechanics

Which feature distinguishes a futures contract from a forward contract?

  1. Futures are standardized and cleared through a central counterparty Correct answer.
  2. Forwards are traded only on regulated exchanges
  3. Futures always require full payment at trade date
  4. Forwards are marked to market daily by a clearinghouse

Explanation

Futures contracts are standardized in terms of quantity, quality, delivery date and location, and they are cleared through a central counterparty that guarantees performance. Forwards are privately negotiated and carry bilateral counterparty risk.

Question 26Futures Contracts and Mechanics

What is the primary role of the clearinghouse in a futures market?

  1. Guaranteeing profits for retail traders
  2. Providing loans to traders who post margin
  3. Setting the spot price for the underlying asset
  4. Acting as buyer to every seller and seller to every buyer Correct answer.

Explanation

The clearinghouse interposes itself between the two sides of every trade, becoming the counterparty to both the buyer and the seller. This novation removes bilateral counterparty risk and allows participants to trade anonymously.

Question 27Futures Contracts and Mechanics

An initial margin deposit on a futures position is best described as:

  1. A performance bond held to cover potential losses Correct answer.
  2. A tax withheld by the exchange on gains
  3. A down payment toward the purchase of the underlying
  4. A commission charged by the broker at trade entry

Explanation

Initial margin is a good-faith performance bond, not a partial payment for the asset. It protects the clearing system against losses if the position moves adversely before it is closed out.

Question 28Futures Contracts and Mechanics

A trader is long one futures contract and the price falls. What happens to the trader's margin account at the daily settlement?

  1. The contract size is reduced to reflect the loss
  2. The position is automatically liquidated at the settlement price
  3. The account is debited by the loss and may trigger a margin call Correct answer.
  4. The account is credited with the price decline

Explanation

Futures are marked to market daily, so a long position loses money when prices fall and the loss is debited from the margin account. If the balance drops below the maintenance level, a variation margin call is issued.

Question 29Futures Contracts and Mechanics

Which order type becomes a market order once a specified price is reached?

  1. Market-if-touched order
  2. Limit order
  3. Discretionary order
  4. Stop order Correct answer.

Explanation

A stop order rests until the stop price is traded, then converts into a market order for immediate execution. This makes it useful for limiting losses on an existing position, though execution price is not guaranteed.

Question 30Futures Contracts and Mechanics

A futures contract specification typically includes all of the following EXCEPT:

  1. Delivery months
  2. Contract size
  3. Tick size
  4. The issuer's credit rating Correct answer.

Explanation

Exchange futures specifications standardize contract size, deliverable grade, delivery months and locations, tick size and price limits. A credit rating is a property of a bond issuer and has no place in a futures contract specification.

Question 31Futures Contracts and Mechanics

Which statement about the daily settlement price of a futures contract is correct?

  1. It is the last trade price of the previous calendar month
  2. It is set by the largest long position holder
  3. It is the price at which the exchange buys back all open positions
  4. It is a reference price determined by the exchange for marking accounts Correct answer.

Explanation

The exchange determines a daily settlement price using a defined methodology, often based on the volume-weighted average of trades in a closing window. All open positions are marked to this price and variation margin flows accordingly.

Question 32Futures Contracts and Mechanics

A hedger who will buy copper in three months wants protection against a price increase. Which futures position is appropriate?

  1. Short a copper call option only
  2. Long copper futures Correct answer.
  3. Short copper futures
  4. Buy copper in the spot market now and store it

Explanation

A future buyer is exposed to rising prices, so a long futures position gains when prices rise and offsets the higher purchase cost. This is a classic long hedge.

Question 33Futures Contracts and Mechanics

A producer will sell crude oil in two months and fears falling prices. Which futures action hedges the exposure?

  1. Sell crude oil futures Correct answer.
  2. Buy crude oil futures
  3. Buy a put option and also buy futures
  4. Do nothing because futures cannot hedge sales

Explanation

A future seller loses if prices fall, so selling futures locks in a price, since gains on the short futures position offset the lower spot sale proceeds. This is a short hedge.

Question 34Futures Contracts and Mechanics

Basis in a futures hedge is defined as:

  1. The initial margin divided by contract value
  2. Futures price minus spot price
  3. Spot price minus futures price Correct answer.
  4. The difference between two delivery months

Explanation

Basis is conventionally spot price minus futures price, though some texts use the reverse. A hedge is imperfect because basis can change between hedge inception and lift.

Question 35Futures Contracts and Mechanics

A portfolio manager holds a diversified equity portfolio and sells stock index futures to reduce exposure. What risk remains?

  1. Basis risk and the risk that the portfolio beta differs from the index Correct answer.
  2. No risk remains because the hedge is complete
  3. Only currency risk
  4. Only interest rate risk

Explanation

A cross hedge using an index leaves basis risk because the portfolio and index may not move perfectly together. If the portfolio's beta differs from one, the hedge ratio must be adjusted or residual market exposure remains.

Question 36Futures Contracts and Mechanics

An investor deposits 5,000 in margin and controls a futures position worth 100,000. What is the approximate leverage?

  1. 20 times Correct answer.
  2. 5 times
  3. 10 times
  4. 100 times

Explanation

Leverage is the notional position value divided by the margin posted, so 100,000 divided by 5,000 equals 20. High leverage magnifies both gains and losses relative to the margin.

Question 37Futures Contracts and Mechanics

A trader buys 10 futures contracts at 50.00 and sells them at 52.50. Each contract has a multiplier of 100. Ignoring costs, what is the profit?

  1. 25,000
  2. 250
  3. 2,500 Correct answer.
  4. 250,000

Explanation

The gain per contract is 2.50 points, multiplied by 100 gives 250 per contract. Ten contracts produce a total profit of 2,500.

Question 38Futures Contracts and Mechanics

A maintenance margin call is triggered when:

  1. The delivery month begins
  2. The account equity falls below the maintenance margin level Correct answer.
  3. The trader closes the position at a loss
  4. The exchange raises the contract multiplier

Explanation

When daily settlement reduces account equity below the maintenance margin, the trader must restore the balance to the initial margin level by the next business day. Failure to meet the call can lead to forced liquidation.

Question 39Futures Contracts and Mechanics

Which function does a futures exchange perform?

  1. Guaranteeing that hedgers earn a profit
  2. Providing a regulated venue with price transparency and standardized contracts Correct answer.
  3. Lending funds to speculators for margin
  4. Setting the spot price of the underlying commodity

Explanation

Exchanges provide a centralized, regulated marketplace with standardized contracts and public price reporting, which improves liquidity and transparency. They do not guarantee profits or set spot prices.

Question 40Futures Contracts and Mechanics

What does open interest measure in a futures market?

  1. The number of delivery notices issued
  2. The number of contracts traded during the session
  3. The total value of margin held by the clearinghouse
  4. The total number of outstanding long positions, equal to outstanding short positions Correct answer.

Explanation

Open interest counts contracts that have been opened and not yet closed or delivered, with each contract having one long and one short side. Volume, by contrast, counts trades executed during the session.

Question 41Futures Contracts and Mechanics

A speculator expects the price of gold to fall. Which action reflects that view using futures?

  1. Sell gold futures Correct answer.
  2. Buy gold futures
  3. Buy a gold call option
  4. Buy gold and store it

Explanation

Selling futures creates a short position that profits if the price declines. The speculator can close the position later by buying back the contract at a lower price.

Question 42Futures Contracts and Mechanics

In a contango market, which relationship holds?

  1. Futures prices are below spot prices for all maturities
  2. Futures prices are set by the clearinghouse
  3. Futures prices equal spot prices at every maturity
  4. Futures prices exceed expected spot prices, typically due to carry costs Correct answer.

Explanation

Contango describes an upward-sloping futures curve where deferred prices exceed nearby prices, often reflecting storage, insurance and financing costs. The opposite structure, where futures trade below spot, is backwardation.

Question 43Futures Contracts and Mechanics

A trader wants to close a long futures position. What must the trader do?

  1. Request physical delivery from the exchange
  2. Sell an offsetting contract for the same delivery month Correct answer.
  3. Pay the clearinghouse the full contract value
  4. Transfer the position to another trader by novation

Explanation

Most futures positions are closed by taking the opposite position in the same contract, which extinguishes the obligation through the clearinghouse. Only a small fraction proceed to delivery.

Question 44Futures Contracts and Mechanics

A clearing member fails to collect variation margin from a client. Which layer of the clearing structure absorbs the loss first?

  1. The client's other brokers
  2. The clearing member's own capital and margin Correct answer.
  3. The central bank
  4. The exchange's guarantee fund

Explanation

Clearing members are responsible for their clients' obligations, so the member's own resources and margin absorb losses before mutualized default funds are used. This layered defense protects the clearinghouse from individual client defaults.

Question 45Futures Contracts and Mechanics

A hedge ratio of 0.8 using futures implies the hedger should:

  1. Short futures equal to 125 percent of the exposure
  2. Short futures equal to 80 percent of the exposure being hedged Correct answer.
  3. Buy futures equal to 80 percent of the exposure
  4. Avoid futures entirely

Explanation

The hedge ratio expresses the futures position size relative to the cash exposure, so 0.8 means hedging 80 percent of the exposure with a short futures position. Ratios above one would over-hedge the exposure.

Question 46Futures Contracts and Mechanics

A trader is long a futures contract and the exchange raises initial margin. What is the most likely immediate consequence for the trader?

  1. Additional funds may be required to keep the position open Correct answer.
  2. The trader's settlement price is locked at the old level
  3. The position is automatically closed by the exchange
  4. The contract multiplier is reduced

Explanation

Higher margin requirements increase the collateral needed to support a position, so the trader may have to deposit additional funds. If the trader cannot, the position may be liquidated, but that is not automatic at the moment of the change.

Question 47Futures Contracts and Mechanics

A cash-and-carry arbitrageur observes that the futures price exceeds the spot price by more than the cost of carry. Which strategy exploits this?

  1. Sell both the spot asset and futures
  2. Buy the spot asset, finance and store it, and sell futures Correct answer.
  3. Buy the futures and sell the spot asset
  4. Buy both the spot asset and futures

Explanation

When futures are rich relative to spot plus carry, the arbitrageur buys the underlying, carries it to delivery, and sells futures to lock in the overpricing. This activity tends to push futures down and spot up until the relationship is restored.

Question 48Futures Contracts and Mechanics

Which situation best illustrates a short squeeze in a futures market?

  1. Shorts are forced to buy back contracts as prices rise sharply, accelerating the rally Correct answer.
  2. Longs voluntarily roll positions to a later month
  3. The exchange lowers margin requirements
  4. Deliverable supply is abundant and delivery costs are low

Explanation

A short squeeze occurs when rising prices force short sellers to cover, and their buying pushes prices even higher. It is most likely when deliverable supply is scarce and many shorts must exit at once.

Question 49Options Contracts and Pricing

A European call option gives its holder which of the following rights?

  1. The right to buy the underlying at the strike price on the expiry date Correct answer.
  2. The right to sell the underlying at the strike price at any time
  3. The right to receive dividends paid by the underlying before expiry
  4. The obligation to sell the underlying at the strike price on the expiry date

Explanation

A European call confers the right, exercisable only at expiry, to buy the underlying asset at the agreed strike price. The buyer pays a premium for this right and is never obliged to exercise it. The obligation to sell describes a written call, not a purchased one.

Question 50Options Contracts and Pricing

An investor buys a put option. Which statement best describes the payoff profile at expiry?

  1. Both profit and loss are unlimited in either direction
  2. Profit is capped at the premium received at trade inception
  3. Profit rises as the underlying price rises above the strike
  4. Loss is limited to the premium paid while profit grows as the underlying falls Correct answer.

Explanation

A long put gains value as the underlying falls below the strike, with maximum gain approached as the underlying approaches zero. The maximum loss is the premium paid, so the risk is bounded. This asymmetric profile is the defining feature of a purchased option.