Derivatives Fundamentals and Options Licensing Course (DFOL)

In this chapter, we describe the interrelationships between the various participants in the Canadian securities industry. In particular, we discuss the important role that investment dealers and other financial intermediaries play in channelling funds between lenders and borrowers.

Topics covered in this chapter are:

• What Is a Derivative?

• Common Features of All Derivative Instruments

• Types of Derivative Instruments

• Key Differences Between Option-Based and Forward-Based Derivatives

• Exchange-Traded and Over-the-Counter Derivatives

• Key Differences Between Exchange-Traded and Over-the-Counter Derivatives

• Types of Underlying Interests

• Commodities

• Financials

• Why Are Derivatives Useful?

• Operational Considerations

• Who Uses Derivatives and to What Extent Are They Used?

Topics covered in this chapter are:

• A Brief Overview of Forward-Based Derivatives

• A History of Forwards

• What Is a Forward Agreement?

• What Is a Futures Contract?

• Organized Futures Markets

• Buying and Selling a Futures Contract

• Cash Settlement

• Margin Requirements and Marking-to-Market

• Futures Trading and Leverage

• Reading a Futures Quotation Page

• Contract Size and the Value of the Underlying Interest

Topics covered in this chapter are:

• A Brief Overview of Futures Pricing

• Futures Market versus Cash Market

• Cost of Carry

• Basis

• Cash and Carry Arbitrage

• Reverse Cash and Carry Arbitrage

• Conditions that Facilitate Arbitrage

• Inverted Markets

• Convergence

Topics covered in this chapter are:

• Hedging

• Types of Hedges

• Imperfect Hedges

• Optimal Hedge Ratio

Topics covered in this chapter are:

• What Attracts Speculators?

• Types of Speculators

• Price Forecasting Techniques

• Fundamental Analysis

• Technical Analysis

Topics covered in this chapter are:

• The History of Options

• Key Option Terminology and Definitions

• Application of Key Terms and Definitions

• Why Investors Buy Options

• Why Investors Write Options

• Other Related Benefits of Options

• Advantages of Exchange-Traded Options versus Over-the-Counter Options

• Reading Option Quotations

• Common Questions Pertaining to the Options Market

Topics covered in this chapter are:

• Pricing of Options

• Major Factors that Affect the Price of an Option

• Intrinsic Value

• Time Value

• Delta

Topics covered in this chapter are:

• Over-the-Counter Interest Rate Options

• Interest Rate Caps

• Interest Rate Floors

• Interest Rate Collars

• Exotic Options

Topics covered in this chapter are:

• Overview of the Swap Market

• What Is a Swap?

• Role of the Swap Dealer

• History of Swaps

• OTC Derivatives Market Reform

Topics covered in this chapter are:

• Plain Vanilla Interest Rate Swap

• A Note on Rate and Day Count Conventions

• The Structure of an Interest Rate Swap

• Pricing an Interest Rate Swap

• Indication Pricing Schedule

• Credit Risk

• Terminating an Interest Rate Swap

• Why are Interest Rate Swaps Used?

• Deliverable Interest Rate Swap Futures and Centrally Cleared Swaps

• Other Types of Interest Rate Swaps

• Swaptions

Topics covered in this chapter are:

• The Structure of a Currency Swap

• Currency Swaps as a Portfolio of Fixed- and/or Floating-Rate Bonds

• Pricing of Currency Swaps

• Reasons for Currency Swaps

Topics covered in this chapter are:

• Credit Derivatives

• The Role of Credit Derivatives

• The Structure of Credit Default Swaps (CDSs)

• What are Index CDSs?

• Why are CDSs and Index CDSs Used?

Topics covered in this chapter are:

• Equity Swaps

• Commodity Swaps

Topics covered in this chapter are:

• Regulatory Framework for Canadian Investment Funds and Structured Products

• Use of Derivatives in Mutual Funds

• Risks of Derivatives Use by Mutual Funds

Topics covered in this chapter are:

• Use of Derivatives by Alternative Mutual Funds and Closed-End Funds

• Alternative Investments and Alternative Strategies

• Hedge Funds Compared to Alternative Mutual Funds

• Types of Alternative Strategies

• Advantages and Disadvantages of Derivatives

Topics covered in this chapter are:

• Principal-Protected Notes (PPNs) — What Are They?

• PPN Structures and the Use of Derivatives

• CPPI and Zero-Coupon Bond Plus Call Option Structures — Key Differences

Topics covered in this chapter are:

• Principal-Protected Notes (PPNs) — What Are They?

• PPN Structures and the Use of Derivatives

• CPPI and Zero-Coupon Bond Plus Call Option Structures — Key Differences

Topics covered in this chapter are:

• Introduction

• Commodity ETFs

• Swap-Based ETFs and the Synthetic Replication of Indexes

• Leveraged and Inverse ETFs

Topics covered in this chapter are:

• Long Call

• Married Put

• Covered Call (also known as Covered Write)

• Put Writing

• Benchmark Indexes for Income-Producing Option Strategies

• A Brief Review of Spreads, Straddles and Combinations

• Bull Call Spread

• Bull Put Spread

This chapter will discuss the features and risk characteristics of the various types of mutual funds. You will learn about the different fund management styles and strategies, and the theories behind them. You will also learn how to make appropriate recommendations, including price calculation, the various types of withdrawal plans, and the tax consequences of redemption. Finally, you will learn how mutual fund performance is measured and how to assess the performance of one fund against that of another.

Topics covered in this chapter are:

• Long Put

• Protected Short Sale

• Covered Put Sale

• Call Writing

• Bear Put Spread

• Bear Call Spread

Topics covered in this chapter are:

• An Introduction to Volatility

• Importance of Volatility to Options Trading

• Short Volatility Strategies

• Long Volatility Strategies

Topics covered in this chapter are:

• Options Regulation

• Individual Registration Categories

• Registrant Code of Ethics

• Registrant Standards of Conduct

• Trading and Sales Practices

• Regulations Covering Registrants Employed by IIROC Member Firms or Approved Participants of the Bourse

Topics covered in this chapter are:

• Completion and Approval of Option Account Application Forms

• Significant Items of Information on the Option Account Application Form

• Unanswered Questions on the Option Account Application Form

• Responsibility for Final Acceptance of an Option Account

• Completion of the Options Trading Agreement Prior to Option Transactions

• Risk Disclosure Statement

• Applying a Suitability Concept to Option Recommendations

• Managed Accounts and Simple Discretionary Accounts

• Transfer of Option Accounts from One Member Firm to Another

• Commissions

Topics covered in this chapter are:

• Basic Margin Terms

• Factors Affecting the Amount of Margin Required

• IIROC and Bourse de Montréal Minimum Margin Requirements for Equity and index Option Strategies

• Meeting Margin Calls

• Capital Requirements for Firm and Market Maker Accounts

• Member Firm Clearing Deposit Requirements for positions at the Clearing Corporation

Topics covered in this chapter are:

• Essential Information Required for All Types of Orders

• Order Ticket Information Unique to Options

• A Generic Order Entry Screen

• Types of Buy and Sell Orders

• Types of Contingent Orders

• Implied Orders and the Bourse De Montréal's Implied Pricing Algorithm

• The Bourse de Montréal's User-Defined Strategies (UDS) Functionality

Topics covered in this chapter are:

• Professional versus Non-Professional Option Traders

• Federal Tax Consequences for Non-Professional Traders

• Federal Tax Consequences for Professional Traders

• Tax Consequences for LEAPS^® Investors

• Allowable Use of Exchange-Traded Options in RRSPs, RRIFs and RESPs

Topics covered in this chapter are:

• Opening Corporate Option Accounts

• Opening Option Accounts for Acceptable Institutions

• Know Your Client Rule

• Permissible Option Transactions for Pension Plans, Insurance Companies and Trust Companies in Canada

• Canadian Mutual Funds

Topics covered in this chapter are:

• What is a Clearing Corporation?

• Canadian Derivatives Clearing Corporation

• Options Clearing Corporation

• Functions of a Clearing Corporation

Topics covered in this chapter are:

• What is an Options Exchange?

• Providing a Trading Forum

• Adding and Deleting Option Classes

• Adding and Deleting Option Series

• Expiration Cycles on the Bourse

• Setting Reporting Levels, Position Limits and Exercise Limits

• Setting Capital and Margin Rules

• Developing and Administrating Rules Governing the MarketPlace and Approved Participants Dealing in Options

Topics covered in this chapter are:

• The Bourse de Montréal Inc.

• The U.S. Exchanges

Topics covered in this chapter are:

• Obligations of Market Makers

• How Market Makers Reduce or Eliminate Their Exposure

Topics covered in this chapter are:

• Adjustments for Stock Splits

• Adjustments for Stock Dividends

• Cash Dividends

• Impact of Dividends on Option Premiums

• Rights Issues

Topics covered in this chapter are:

• Unique Characteristics and Risks of Index Options

• Key Index Option Contracts

Topics covered in this chapter are:

• Exchange Rate Quoting Convention

• Selecting the Right Option

• Unique Characteristics and Risks of North American Listed Currency Options