M6A_V2.8_July2018.pdf - \u00a9 ALL RIGHTS RESERVED The Institute of Banking Finance July 2018(Version 2.8 No part of this Study Guide may be reproduced

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Unformatted text preview: © ALL RIGHTS RESERVED The Institute of Banking & Finance July 2018 (Version 2.8) No part of this Study Guide may be reproduced, stored in a retrieval system, or transmitted in any form by or any means, electronic, electrical, chemical, mechanical, optical, photocopying, recording or otherwise, without the prior permission of The Institute of Banking & Finance (IBF). IBF shall not be responsible or liable for any loss or damage whatsoever that may be caused by or suffered as a result of reliance on any statement, error or omission contained in this Study Guide. This Study Guide contains information believed to be correct, current or applicable at the time of compilation. The reader or user is advised to seek professional assistance where appropriate. You shall not modify, remove, delete, augment, add to, publish, transmit, sell, resell, license, create derivative works from, or in any way exploit any of the study guide content, in whole or in part, in print or electronic form, and you shall not aid or permit others to do so. Acknowledgements IBF would like to express its gratitude to the following individuals for their contributions and support in the development of CMFAS Study Guide and Examinations: CMFAS Examinations Board Mr Richard Teng, Singapore Exchange Limited (Chairperson) Ms Grace Mok, Singapore Exchange Limited Ms Yolanda Constantine, Monetary Authority of Singapore Mr Kenneth Kaw, Monetary Authority of Singapore Ms Lim Mei Shern, Monetary Authority of Singapore Mr Rodney Lim, Nikko Asset Management Asia Limited Ms Karen Tiah, Allen & Gledhill LLP Ms Rachel Eng, WongPartnership LLP Mr TK Yap, OCBC Securities Pte Ltd Mr Kan Shik Lum, DBS Bank Ltd Ms Yit Chwee Fung, UOB Bank Ltd Ms Kao Shih Teng, Lion Global Investors Ltd Ms Yvonne Ong, CapitaCommercial Trust Management Limited Mr Martin Siah, Standard Chartered Bank Study Guide Writers Mr Ramesh Shahdadpuri Candidates who have passed the CMFAS examinations are encouraged to continue on their learning journey by attending IBF accredited programmes. For more information, please visit . ii Preface Module 6A – Securities & Futures Product Knowledge The objective of the CMFAS Module 6A – Securities & Futures Product Knowledge (“M6A”) Exam is to test candidates on their knowledge and understanding of the characteristics of securities and futures products including Specified Investment Products (SIPs). Unless exempted, a representative who intends to conduct any of the regulated activities in respect of SIPs on or after 1 January 2012 is required to pass the M6A Exam and the applicable rules and regulations modules relevant to the specific types of regulated activities before commencing any regulated activity. An existing CMFAS representative who is conducting any of the following regulated activities in respect of SIPs immediately before 1 January 2012, and continues to conduct such regulated activities after that date, is required to pass the M6A Exam: (i) (ii) (iii) Dealing in securities; Trading in future contracts; or Leveraged foreign exchange trading. Candidates are required to pass the relevant modules of the CMFAS examinations pertaining to the regulated activity that they intend to conduct. Once they have passed the relevant CMFAS examinations, candidates must ensure that their notification to act as an appointed representative is lodged with MAS on the Public Register via the Representative Notification Framework (RNF), before they can commence any dealings in regulated activities. For details, please refer to the relevant MAS Notice under the Securities and Futures Act (SFA) – SFA 04-N09. Organisation of the Study Guide The Study Guide consists of 14 chapters, starting with an overview of the securities and futures markets. Each chapter begins with a list of learning objectives and ends with a chapter summary. The emphasis in each chapter is to ensure that candidates have a good understanding of simple to complex derivative securities, as well as their applications. Examples and case studies are used where appropriate to enhance candidate’s understanding of key learning points and application of issues discussed. A summary of each chapter is provided below: Chapter 1: Provides an overview of the features and characteristics of securities and futures products and its development in Singapore. Chapter 2-8: Provides an understanding of the characteristics, features, valuation concepts and techniques of futures, options, warrants, structured iii products, structured notes, structured funds and structured exchangetraded funds. Chapter 9: Provides an appreciation of the risks of investing in different types of derivatives and structured products and related risk management methods. Chapter 10: Provides a comparison of the different types of structured products and their advantages and disadvantages. Chapter 11-13 Provides an understanding of other derivatives products such as knockout products, contracts for differences and extended settlement contracts. Chapter 14: Provides case studies on the various securities and futures products to demonstrate the application of investment tools and analysis. To assist candidates in the review of the study materials, we have included a set of review questions, answer key and formulae sheets at the end of the Study Guide. A list of essential readings is also provided. Candidates should ensure that they complete the essential readings before attempting the examination. The Appendices are provided for candidates’ reference and to enhance their understanding of the important concepts on securities and futures products covered in the study guide chapters. Study Guide Updates The Study Guide is updated at appropriate intervals to reflect changes and developments in the financial industry. Candidates should ensure that they have the latest version of the Study Guide before sitting for the examination. Please refer to the IBF website at or contact IBF directly to check for the latest updates. Candidates should note that the study guide contains information believed to be correct, current or applicable at the time of compilation. The Study Guide is available in electronic/e-book format. Candidates may request for printed hardcopies of the Study Guide at an additional fee. Important Notes about the Exam The M6A Exam is conducted at the Assessment Centre of IBF. The examination comprises of 75 multiple-choice questions (MCQ) for a duration of 2 hours. The passing mark is 70%. The exam includes questions that test candidates’ knowledge, understanding and application of securities and futures products. Candidates should note the following: iv i. Chapter 1 (Overview of Securities and Futures) will not be tested in the M6A Examination; and ii. The M6A Examination includes 3 case studies of 10 MCQ questions, which will be based on the cases discussed in Chapter 14 (Case Studies). Candidates are advised to bring along a non-programmable financial calculator for use during the examination. A formulae sheet will be provided during the examination. For more information on the examination rules, regulations and other administrative procedures, please refer to the IBF website at . v Contents Chapter 1 – Overview of Securities & Futures 1.1 Introduction………………………………………………………………….…...................................................................... 1.2 Money Market Securities ……………………………........................................................................................... 1.3 Common Types of Securities…………………................................................................................................. 1.4 Derivatives……..........................................................…………...................................................................... 1.5 Summary..........………….........................................………….............................……....................................... 1 1 1 2 5 Chapter 2 – Futures 2.1 Introduction............................................................................................................................................. 2.2 Differences between Futures & Other Financial Instruments………………………………................................ 2.3 General Features of Futures…………......................................................................................................... 2.4 Futures Exchanges……………………………………………………………………………………………………………………………… 2.5 Futures Pricing Model ……………………………………………………………………………………………………………………….. 2.6 Basis in Futures Contracts …………………………………………………………………………………………………………………. 2.7 Types of Futures ……………………………………………………………………………………………...........…………................ 2.8 Summary …………………………….………………………………………………………...........………….................................. 7 8 10 14 19 21 23 30 Chapter 3 – Futures Strategies 3.1 Market Participants…………………………………………………………………………………………………………………………… 3.2 Types of Trades & Strategies……………………………………………………………………………………………………………… 3.3 Spread Trades ……………………………………………........................................……………………………………………….. 3.4 Hedging and Portfolio Management.…………………………………………………………………………………………………. 3.5 Portfolio Management Techniques…..…………………………………………………………….…..…………………………….. 3.6 Arbitrage…..…………………………………………………………………………............………….......................................... 3.7 Summary ……………………………………………………………………………..……………………………………………………………. 34 36 36 40 52 54 57 Chapter 4 – Options 4.1 What is an Option?…………………………………………………………………………………………………………………………….. 4.2 Introduction to Options Trading ……………................................................................................................ 4.3 Basic Option Concepts ………………….......................................................................................................... 4.4 Features of Options………………………………………………….............................................................................. 4.5 Factors Influencing Equity Option Premiums ……………………………………………………………………………………… 4.6 Maximum Gain, Maximum Loss and Breakeven Point ………………………………………………………………………… 4.7 Put-Call Parity Theory ………………………………………………………………………………………………………………………… 4.8 Option Valuation ………..........…………..........................................………….................................................... 4.9 Differences between Exchange-Traded and OTC-Traded Options........................................................... 4.10 Understanding Option Contract Specifications ………….………………………................................................. 4.11 Option Strategies.......................................…………................................................................................... 4.12 Market Outlook Strategies…………………….………………………………….………….…………………………………………… 4.13 Trading with Options……………..........………………………………...........…………................................................. 4.14 Other Types of Options................................……………………………………….......…………................................. 4.15 Hedging with Options..........…………........................................…………...................................................... 4.16 Summary..........…………........................................………….......................................................................... 61 61 62 62 64 65 70 74 77 78 79 86 97 97 99 102 Chapter 5 – Warrants & Other Investment Products 5.1 Introduction.............................................................................................................................................. 5.2 Key Features and Terms of a Warrant Issue...................................…..………….……………………………………… 5.3 Interpreting Trading Names of Structured Warrants.............................................................................. 5.4 Warrant Valuation………….……………………….....................................................…………............................... 5.5 Roles of the Warrant Holder & Issuer………….………………….........…………………………………………………………. 5.6 Market-Making of Structured Warrants……….………………………................................................................ 5.7 Settlement of Warrants……….………………………..............................…………................................................ 5.8 Corporate Action Adjustments for Structured Warrants………….………..........…………................................ 5.9 Exotic Warrant Structures and Features……….………………….………….…………………………………………………….. 5.10 Convertible Bonds………….………………………….……………………………..…….…………………………………………………. 5.11 Market Outlook and Products…………….……….……………………………..…….……………………………………………….. 5.12 Summary.……………………………..…….…………………………………………………………………………………………………….. 106 107 110 110 112 113 113 115 116 118 121 121 Chapter 6 – Structured Products 6.1 Introduction..........…………..................................…………........................................................................... 6.2 Key Features of Structured Products..........…………........................................…………............................... 6.3 Types of Structured Products..........…………...........................................…………........................................ 6.4 Common Strategies Used by Structured Products..........………….............................................................. 6.5 Other Features of Structured Products..........…………............................................................................... 6.6 Risk-Return Trade-off of Structured Products..........………….................................................................... 6.7 Suitability of Structured Products for Investors..........………….................................................................. 6.8 Summary..........…………..................................................…………................................................................ 123 124 127 128 133 134 135 136 Chapter 7 – Structured Notes 7.1 What is a Structured Note?............…………........................................…………............................................ 7.2 Issuer..........…………......................................………….................................................................................. 7.3 Wrapper..........…………........................................…………........................................................................... 7.4 Types of Structured Notes..........…………........................................…………............................................... 7.5 Yield Enhancement Structures..........…………..............................................…………................................... 7.6 Structured Notes with Embedded Short Options..........…………............................................................... 7.7 Market Access..........…………..................................................................................................................... 7.8 Risks of Specific Structured Products..........………….................................................................................. 7.9 Investors of Structured Notes..........…………............................................................................................. 7.10 Documentation Required for Structured Notes..........…………................................................................. 7.11 Summary..........………..................................................…………................................................................. 138 140 140 142 142 145 151 153 155 156 157 Chapter 8 – Structured Funds & Structured ETFs 8.1 Structured Funds..........…………................................................................…………...................................... 8.1.1 What is a Structured Fund? ..........…………............................................………….......................... 8.1.2 Common Terminology..........…………............................................…………................................... 8.1.3 How Are Structured Funds Different from Traditional Mutual Funds?.................................... 8.1.4 How Are Structured Funds Different from Trackers?............................................................... 8.1.5 Components of a Structured Fund ..........…………...................................................................... 8.1.6 Using Derivatives in a Structured Fund..........…………................................................................ 8.1.7 Various Structures and Design..........…………............................................................................. 8.1.8 Overview of Common Fund Structures..........…………................................................................ 8.1.9 Examples of Structured Funds..........…………............................................................................. 8.1.10 Risks of Structured Funds ..........………….................................................................................... 8.1.11 Roles & Responsibilities of Fund Managers and Trustees ..........…………................................... 159 159 160 163 163 164 166 167 168 168 169 170 8.1.12 How to Manage Underlying Risk Exposure in a Structured Fund………………………………………….. 8.1.13 Typical Types of Fund Documentation..........…………................................................................. 8.1.14 What Type of Investors Invest in Structured Funds..........…………............................................. 8.1.15 After Sales..........………….........................................…………........................................................ 8.2 Structured Exchange Traded Funds (ETFs) ..........………….......................................................................... 8.2.1 What are ETFs? ..........…………..........................................…………............................................... 8.2.2 The Global ETF Market..........………….........................................…………..................................... 8.2.3 Types of ETFs..........…………........................................................…………..................................... 8.2.4 Replication Methodologies..........………….................................................................................. 8.2.5 ETF Pricing & Valuation Issues..........…………............................................................................. 8.2.6 ETFs vs Exchange-Traded Notes (ETNs) ..........…………............................................................... 8.2.7 ETFs vs Mutual Funds / Unit Trusts ..........…………..................................................................... 8.2.8 ETF & Fund Governance in USA & Europe ..........………….......................................................... 8.2.9 ETF Investors & Investment Strategies..........…………................................................................ 8.2.10 Benefits of ETFs..........………….................................................................................................... 8.2.11 Risks of ETFs ..........…………........................................................................................................ 8.2.12 ETFs After Sales..........………….................................................................................................... 8.3 Summary..........………..................................................…………................................................................... 171 171 173 174 175 175 175 176 177 182 183 183 184 184 186 186 187 188 Chapter 9 - Key Product & Investment Risks 9.1 Risk-Return Trade-Off..........………….........................................................…………..................................... 9.2 Generic Investment Risks..........…………....................................................…………..................................... 9.3 Investment Risks of Derivatives ..........…………..........................................………….................................... 9.4 Key Risks of Structured Products..........…………..............................................……..................................... 9.5 Trading Risk Control and Management..........………….......................................................
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  • Fall '19
  • Securities & Futures Product Knowledge, Overview of Securities & Futures

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