IFMP Financial Derivative Traders Certification (FDTC), Pakistan flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Derivative contract

A financial contract whose value is derived from an underlying asset, index, rate or commodity. The underlying need not be owned or delivered, and settlement may be cash-based.

Forward versus futures

A forward is a bilateral OTC contract, customised and settled at maturity with counterparty credit risk. A future is exchange-traded, standardised, margined daily and cleared by a central counterparty.

Long forward payoff

At maturity the payoff equals S_T minus K, where S_T is the spot price and K the agreed forward price. Profit equals payoff minus the present value of the contract's initial cost, typically zero.

Put-call parity

For European options on a non-dividend stock, C minus P equals S minus K times e to the minus rT. A deviation from this relationship permits riskless arbitrage using synthetic positions.

Option intrinsic value

The exercise value if the option were exercised now: max(S minus K, 0) for a call and max(K minus S, 0) for a put. Any premium above intrinsic value is time value.

Futures fair value formula

F equals S times e to the power (r minus q)T, where r is the risk-free rate and q the continuous dividend or carry yield. For a stock index, q is the dividend yield.

Option delta

Delta measures the change in option value for a one-unit change in the underlying price. Calls have positive delta between zero and one; puts have negative delta between minus one and zero.

Interest rate swap

An agreement between two parties to exchange interest cash flows on a notional principal, typically one fixed leg and one floating leg linked to a reference rate, over a defined term.

In-the-money call condition

A call option is in-the-money when the underlying price exceeds the strike price. A put is in-the-money when the underlying price is below the strike price.

SECP regulatory role

The Securities and Exchange Commission of Pakistan regulates the securities and derivatives market under the Securities Act, 2015, approving exchange rules and supervising brokers and market conduct.

Eligible customer requirement

SECP and PSX rules restrict derivatives trading to eligible customers meeting defined criteria, generally excluding small retail investors. Brokers must document eligibility before onboarding a client.

Client money segregation

Broker rules require client funds and collateral to be held in segregated accounts, separate from the firm's own money, and prohibit using client assets for the broker's obligations.

SRO 1007(I)/2017

The SECP Futures Trading Regulations, 2017 set the framework for exchange-traded futures in Pakistan, covering contract approval, eligibility, margining and trading conduct on the exchange.

Market abuse prohibitions

Insider trading, front-running, spoofing, layering and wash trades are prohibited. PSX surveillance and SECP investigation powers support enforcement, with penalties including fines and licence action.

Broker net capital rule

Brokers must maintain minimum net capital and file periodic regulatory returns. Shortfalls or record-keeping failures can lead to fines, suspension or cancellation of the trading licence.

PSX self-regulation

The Pakistan Stock Exchange operates the derivatives market and enforces its rulebook on members, including contract specifications, margining, position limits and surveillance, subject to SECP oversight.

Position limit

A cap on the net open interest a client or broker may hold in a given contract. Breaching the limit requires reduction or close-out and may attract penalties from the exchange.

Initial versus maintenance margin

Initial margin is posted when a position is opened. Maintenance margin is the minimum equity that must be maintained; falling below it triggers a margin call for additional funds.

Variation margin

The daily mark-to-market settlement of gains and losses on open futures positions. Profits are credited and losses debited, keeping margin accounts aligned with current market value.

Value at Risk

VaR estimates the loss that will not be exceeded with a stated probability over a stated horizon. It does not describe the size of losses beyond that confidence level.

Stop-loss order mechanics

A stop becomes a market order once the trigger price trades, so the fill may be worse than the trigger in fast or illiquid markets. Slippage is an inherent risk.

Suitability obligation

Before recommending derivatives, a broker must assess the client's objectives, risk tolerance, financial capacity and experience, and keep records evidencing that assessment.

Best execution duty

A broker must take reasonable steps to obtain the best available terms for client orders, considering price, speed, likelihood of execution and cost, and must not favour proprietary orders.

Personal account dealing

Employee trades in instruments they cover require pre-clearance and are restricted around client order flow. Undisclosed personal trading is a conflict of interest and a disciplinary matter.

Leverage risk

Leverage magnifies both gains and losses relative to posted margin. A ten-times leveraged position loses its entire margin on a ten percent adverse move in the underlying.

Central counterparty novation

The CCP interposes itself between buyer and seller, becoming buyer to every seller and seller to every buyer. It manages member default through margin and a default fund.

Daily mark-to-market settlement

Each trading day open positions are revalued at the settlement price. Gains are credited and losses debited to margin accounts, and unsettled variation margin becomes a clearing-house payable.

SPAN-style margin

A portfolio risk margining method that estimates potential loss across a range of price and volatility scenarios, rather than charging margin on gross notional exposure alone.

Cash settlement

On expiry the difference between the final settlement price and the trade price is paid in cash, with no delivery of the underlying. Many index and currency futures settle this way.

Final settlement price

The price set by exchange rules on the last trading day, often an average of underlying prices over a stated window, used to compute cash settlement of expiring contracts.

Settlement risk

The risk that one leg of a transaction is not completed after the other has been delivered. Delivery-versus-payment and central clearing mechanisms are designed to mitigate it.

Contract adjustment for corporate actions

Splits, bonuses and certain dividends trigger exchange-specified adjustments to lot size, strike or reference price. Failure to apply the adjustment correctly creates mispricing and settlement disputes.