I85PREP
⌘ K
ACI Diploma study materials
ACI Diploma study resources

ACI Diploma: Financial Markets Products and Instruments

ACI Diploma · Work through your exam, one topic at a time.

All guide sections

Financial Markets Products and Instruments

What the exam tests

Financial Markets Products and Instruments covers the building blocks of wholesale markets: money market instruments, FX, fixed income, repo and derivatives. You must recognise cash flows, quoting conventions and the risk each product transfers.

Core concepts

  • Money market. Deposits, CDs, commercial paper and T-bills are short-dated. Discount instruments quote a discount rate; add-on instruments quote a yield, so the two are not directly comparable.
  • FX. Spot settles T+2 for major pairs by convention; forwards and swaps are priced from the interest rate differential, shown as forward points.
  • Fixed income. A bond's clean price excludes accrued interest; the dirty price includes it. Yield and price move inversely; duration measures sensitivity.
  • Repo. A sale and repurchase: cash is lent against collateral, with a haircut protecting the cash lender. General collateral trades near policy rates; special collateral can trade lower.
  • Derivatives. FRAs, interest rate swaps, futures, options and CDS transfer interest rate, currency, equity or credit risk without necessarily transferring the underlying asset.

Worked example

A corporate treasurer buys a 3x6 FRA on EUR 10 million at 2.50% to hedge future borrowing. At fixing, the three-month rate is 2.70%.

Reasoning: the buyer receives compensation because rates rose. Payment = (2.70% - 2.50%) x 90/360 x EUR 10,000,000 = 0.0020 x 0.25 x 10,000,000 = EUR 5,000, typically discounted to the settlement date. The treasurer then borrows at the higher market rate, and the FRA gain offsets the extra interest. The hedge fixes the effective cost near 2.50%.

Traps

  • Confusing discount and add-on yields when comparing money market instruments.
  • Mixing clean and dirty prices when calculating settlement amounts.
  • Treating FX forward points as a forecast; they reflect interest rate differentials.
  • Reversing the haircut direction in a repo: the cash lender is protected by receiving collateral worth more than the cash lent.