IFMP Financial Derivative Traders Certification (FDTC), Pakistan cheat sheet

A derivative is a contract whose value derives from an underlying (equity, index, currency, commodity, rate); no principal need change hands at inception.

Forward: bilateral, OTC, settled at maturity, customised, exposed to counterparty credit risk. Future: exchange-traded, standardised, margined daily, cleared.

Payoff formulas: long forward = S_T − K; short forward = K − S_T; long call = max(S_T − K, 0); long put = max(K − S_T, 0).

Put-call parity (European, non-dividend): C − P = S − K·e^(−rT); a breach permits riskless arbitrage via synthetic positions.

Option moneyness: call in-the-money when S > K, put in-the-money when S < K; intrinsic value = max(S − K, 0) for a call.

Futures fair value: F = S·e^((r − q)T) for continuous dividend/carry yield q; for a stock index q is the dividend yield.

Delta = ∂V/∂S; gamma = ∂Delta/∂S; vega = ∂V/∂σ; theta = ∂V/∂t; rho = ∂V/∂r. Long options have positive gamma and negative theta.

Swap: agreement to exchange cash flows; in a plain vanilla interest rate swap one leg pays fixed and the other a floating reference rate on a notional principal.

Pakistan context: PSX-index and eligible single-stock futures trade on the Pakistan Stock Exchange; currency futures reference USD/PKR and are cash-settled.

Primary regulator: Securities and Exchange Commission of Pakistan (SECP) under the Securities Act, 2015; the Pakistan Stock Exchange (PSX) operates and self-regulates its derivatives market.

SRO 1007(I)/2017 (SECP Futures Trading Regulations) governs futures trading on the exchange; SRO 1005(I)/2017 governs brokers and their conduct.

Eligibility rule: only 'eligible customers' (as defined by SECP/PSX criteria, generally excluding small retail) may trade derivatives; brokers must document eligibility before onboarding.

Client money must be kept in segregated accounts; broker use of client collateral for its own obligations is prohibited.

Exchange-traded contracts are standardised by PSX (lot size, tick, expiry, margin) and require SECP approval before launch; OTC derivatives are reported under SECP reporting regimes.

Market-abuse prohibitions cover insider trading, front-running, spoofing/layering and wash trades; surveillance and investigation powers sit with PSX and SECP.

Brokers must maintain minimum net capital, keep records, and file periodic returns; breaches attract fines, suspension or cancellation of licence.

Dispute resolution: PSX arbitration and SECP complaint channels precede or accompany civil remedies; investors should first exhaust the exchange's complaint mechanism.

Position limits cap net open interest per client or broker per contract; breach forces reduction or close-out and may attract penalties.

Margin types: initial margin (posted at trade), maintenance margin (minimum equity), variation margin (daily mark-to-market settlement); a margin call arises when equity < maintenance.

Value at Risk (VaR) at confidence c and horizon T estimates loss not exceeded with probability c; it says nothing about the size of losses beyond that quantile.

Stop-loss and take-profit orders are contingent; a stop becomes a market order when triggered, so slippage is possible in illiquid conditions.

Ethical duties: suitability (know your customer), best execution, fair allocation of fills, priority of client orders over proprietary orders, and confidentiality.

Conflicts of interest must be disclosed and managed; personal account dealing by employees requires pre-clearance and is restricted around client order flow.

Leverage magnifies both gains and losses; a 10x leverage turns a 10% adverse move into a 100% loss of margin.

Suitability judgement uses client objectives, risk tolerance, financial capacity and derivative experience; inadequate records are a common enforcement finding.

Central counterparty (CCP) interposes itself between buyer and seller (novation), becoming buyer to every seller and seller to every buyer, and manages default via a default fund.

Daily mark-to-market: gains credited and losses debited to the margin account; unsettled variation margin becomes a receivable/payable to the clearing house.

Clearing members must post initial margin to the CCP; the CCP calculates margin (e.g. SPAN-style) on portfolio risk, not on notional alone.

Cash-settled contracts settle the difference between final settlement price and trade price; physically settled contracts require delivery and payment instructions.

Expiry mechanics: final settlement price is determined per exchange rules (e.g. average of underlying prices over a stated window) on the last trading day.

Operational controls: trade capture and confirmation, reconciliation of broker and CCP records, segregation of duties, and business-continuity arrangements.

Settlement risk is the risk that one leg of a delivery-versus-payment transaction is not completed; CCP and DVP mechanisms mitigate it.

Corporate actions (splits, dividends, bonuses) trigger contract adjustments (lot size, strike or reference price) per exchange rules; failure to adjust creates mispricing.

A derivative is a contract whose value derives from an underlying asset, index, rate or commodity; no principal need change hands at inception.

Forward: bilateral, OTC, customised, settled at maturity, with counterparty credit risk. Future: exchange-traded, standardised, margined daily, cleared by a CCP.

Payoff formulas: long forward = S_T − K; short forward = K − S_T; long call = max(S_T − K, 0); long put = max(K − S_T, 0).

Put-call parity (European, no dividends): C − P = S − K·e^(−rT); a breach permits riskless arbitrage via synthetic positions.

Moneyness: a call is in-the-money when S > K; a put is in-the-money when S < K. Intrinsic value of a call = max(S − K, 0).

Futures fair value: F = S·e^((r − q)T), where q is the continuous dividend or carry yield; for a stock index q is the dividend yield.

Greeks: delta = ∂V/∂S; gamma = ∂delta/∂S; vega = ∂V/∂σ; theta = ∂V/∂t; rho = ∂V/∂r. Long options have positive gamma and negative theta.

Swap: an agreement to exchange cash flows; in a plain vanilla interest rate swap one leg pays fixed and the other a floating reference rate on a notional principal.

Pakistan context: PSX-index and eligible single-stock futures trade on the Pakistan Stock Exchange; currency futures reference USD/PKR and are cash-settled.

Primary regulator: Securities and Exchange Commission of Pakistan (SECP) under the Securities Act, 2015; PSX operates and self-regulates the derivatives market.

SRO 1007(I)/2017 (SECP Futures Trading Regulations) governs futures trading on the exchange; SRO 1005(I)/2017 governs brokers and their conduct.

Eligibility rule: only 'eligible customers' meeting SECP/PSX criteria (generally excluding small retail) may trade derivatives; brokers must document eligibility before onboarding.

Client money must be held in segregated accounts; a broker may not use client collateral for its own obligations.

Exchange-traded contracts are standardised by PSX (lot size, tick, expiry, margin) and require SECP approval before launch; OTC derivatives are reported under SECP reporting regimes.

Market-abuse prohibitions cover insider trading, front-running, spoofing/layering and wash trades; surveillance and investigation powers sit with PSX and SECP.

Brokers must maintain minimum net capital, keep records and file periodic returns; breaches attract fines, suspension or cancellation of licence.

Dispute resolution: PSX arbitration and SECP complaint channels precede or accompany civil remedies; investors should first exhaust the exchange's complaint mechanism.

Position limits cap net open interest per client or broker per contract; breach forces reduction or close-out and may attract penalties.

Margin types: initial margin (posted at trade), maintenance margin (minimum equity), variation margin (daily mark-to-market settlement); a margin call arises when equity < maintenance.

Value at Risk (VaR) at confidence c and horizon T estimates a loss not exceeded with probability c; it says nothing about the size of losses beyond that quantile.

Stop-loss and take-profit orders are contingent; a stop becomes a market order when triggered, so slippage is possible in illiquid conditions.

Ethical duties: suitability (know your customer), best execution, fair allocation of fills, priority of client orders over proprietary orders, and confidentiality.

Conflicts of interest must be disclosed and managed; personal account dealing by employees requires pre-clearance and is restricted around client order flow.

Leverage magnifies both gains and losses; a 10x leverage turns a 10% adverse move into a 100% loss of margin.

Suitability judgement uses client objectives, risk tolerance, financial capacity and derivative experience; inadequate records are a common enforcement finding.

Central counterparty (CCP) interposes itself between buyer and seller (novation), becoming buyer to every seller and seller to every buyer, and manages default via a default fund.

Daily mark-to-market: gains credited and losses debited to the margin account; unsettled variation margin becomes a receivable or payable to the clearing house.

Clearing members must post initial margin to the CCP; the CCP calculates margin (e.g. SPAN-style) on portfolio risk, not on notional alone.

Cash-settled contracts settle the difference between final settlement price and trade price; physically settled contracts require delivery and payment instructions.

Expiry mechanics: final settlement price is determined per exchange rules (e.g. average of underlying prices over a stated window) on the last trading day.

Operational controls: trade capture and confirmation, reconciliation of broker and CCP records, segregation of duties, and business-continuity arrangements.

Settlement risk is the risk that one leg of a delivery-versus-payment transaction is not completed; CCP and DVP mechanisms mitigate it.

Corporate actions (splits, dividends, bonuses) trigger contract adjustments (lot size, strike or reference price) per exchange rules; failure to adjust creates mispricing.