CMFAS Module 6A – Securities & Futures Products Knowledge

Summary of Updates (April 2015 – Version 2)

The study guide for CMFAS M6A has been updated in line with the recent updates in product knowledge and analysis for securities & futures products. The revised study guide is available from 20 April 2015. Candidates registered to take the CMFAS M6A examination from 20 May 2015 onwards will be tested based on the revised study guide.

The updates made to the CMFAS Module 6A (July 2013 – Version 1.7) are summarized as follows:

Chapter Title Summary of changes 1 Overview of New Sections Securities and 1.1 Introduction Futures 1.1.1 What are Investments and Financial Markets? 1.4 The Fund Management Process 1.5 Summary

Updated Sections 1.2 Money Market Securities 1.3 Common Types of Securities 1.3.1 Debt Securities 1.3.2 Equity Securities 1.4 Derivatives 1.4.1 Exchange-Traded Derivatives 1.4.2 Over-the-Counter (OTC) Derivatives 1.4.3 Uses of Derivatives 1.4.4 Types of Derivatives 1.4.5 The Derivatives Markets in Singapore

2 Futures New Sections (Previously 2.1 Introduction Chapter 5 – 2.1.1 The Economic Importance of the Futures Market Futures) 2.2 Differences between Futures & Other Financial Instruments 2.4 Futures Exchanges 2.4.3 Listing of Derivatives Contracts on SGX 2.4.4 Understanding Ticks for SGX Derivatives Trading 2.4.5 Derivatives Clearing Process 2.7 Types of Futures 2.7.1 Interest Rates Futures 2.7.2 Currency Futures 2.7.2 Currency Futures 2.7.3 Equity Index Futures 2.7.4 Innovation with New Types of Derivatives - Real Estate 2.8 Summary

Updated Sections 2.2 Differences between Futures & Other Financial Instruments 2.2.1 Leverage 2.3 General Features of Futures 1

Chapter Title Summary of changes 2.3.1 Futures versus Forwards 2.3.2 Term Sheet and Contract Specifications 2.3.3 Understanding Futures Contracts Specifications 2.3.3 Modes of Settlement 2.4 Futures Exchanges 2.4.1 Singapore Exchange Limited (SGX) 2.4.2 Types of Orders on SGX 2.4.6 Mutual Offset System (MOS) 2.4.7 Packs & Bundles 2.5 Futures Pricing Model 2.5.1 Spot Price 2.5.2 Futures versus Spot Market (Cash Market) 2.5.3 Expectancy Model of Futures Pricing 2.6 Basis in Futures Contracts 2.6.1 Factors Affecting Basis 2.6.2 Basis in Hedging

3 Futures Strategies Updated Sections (Previously 3.1 Market Participants Chapter 6 – 3.2 Types of Trades & Strategies Strategies for 3.3 Spread Trades Futures Markets) 3.3.1 3.3.2 Spread 3.3.3 Condor Spread 3.3.4 TED Spread 3.4 Hedging and Portfolio Management 3.4.1 Identifying and Measuring Risk 3.4.2 Developing an Effective Hedge Program 3.4.3 Determining the Hedge Instrument 3.4.4 Determining the Target Rate for the Hedge 3.4.5 Hedges for Currently Held or Anticipated Positions 3.4.6 Hedge Ratio 3.4.7 Types of Hedges 3.4.8 Hedging -Term Risk 3.4.9 Hedging Equity Risks 3.4.10 Structuring the Hedge 3.4.11 Managing the Hedge 3.4.12 Further Examples of Hedging 3.5 Portfolio Management Techniques 3.5.1 Examples of Portfolio Management Applications 3.6 Arbitrage 3.6.1 Arbitrage Using Interest Rate Futures 3.6.2 Arbitrage using Options 3.7 Summary

4 Options New Sections (Previously 4.5 Factors Influencing Equity Premiums Chapter 8 – 4.5.6 Expected Dividends of Underlying Share during the Option’s Life Options) 4.5.7 Summary of Factors affecting Price Sensitivity of Equity Options 4.6 Maximum Gain, Maximum Loss and Breakeven Point 4.6.1 Buying Call Options

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Chapter Title Summary of changes 4 Options 4.6.2 Selling Call Options (continued) 4.6.3 Buying Put Options 4.6.4 Selling Put Options 4.7 Put-Call Parity Theory 4.7.1 Definition 4.7.2 Arbitrage 4.7.3 Synthetic Positions 4.8 Option Valuation 4.8.1 Black-Scholes Formula2 4.8.2 4.8.3 The Volatility 4.8.4 Delta 4.8.4 Delta 4.8.5 Gamma 4.8.6 Theta 4.8.7 Vega 4.8.8 Rho 4.9 Differences between Exchange-Traded and OTC-Traded Options 4.10 Understanding Option Contract Specifications 4.14 Other Types of Options 4.14.2 Bond Options 4.16 Summary

Updated Sections 4.1 What is an Option? 4.2 Introduction to Options Trading 4.3 Basic Option Concepts 4.3.1 Definitions 4.3.2 Call Options vs Put Options 4.4 Features of Options 4.4.1 4.4.2 Date 4.4.4 Time Value of Options 4.5 Factors Influencing Equity Option Premiums 4.5.1 Changes in the Underlying Share Price 4.5.2 Strike Price (or Price) 4.5.3 Time to Expiration 4.5.4 Price Volatility of the Underlying Share 4.5.5 Current Risk-Free Interest Rate 4.11 Option Strategies 4.11.1 Understanding Diagrams for Options Strategies 4.11.2 Call Buying Strategies 4.11.3 Call Writing Strategies 4.11.4 Put Buying Strategies 4.11.5 Put Writing Strategies 4.12 Market Outlook Strategies 4.12.1 Market Outlook 4.12.2 Straddles 4.12.3 Strangles 4.12.4 Option Spreads 4.13 Trading with Options

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Chapter Title Summary of changes 4 Options 4.14 Other Types of Options (continued) 4.14.1 Equity Index Options 4.14.3 Interest Rate Options 4.14.4 Options on Futures 4.14.5 Currency Options 4.15 Hedging with Options 4.15.1 Using Options to Protect an Equity Portfolio 4.15.2 Using Options to Manage Currency Exposure 4.15.3 Zero-Cost Options

5 Warrants & Other New Sections Investment 5.2 Key Features and Terms of a Issue Products 5.2.7 Investing in Call Warrants (Previously 5.2.8 Investing in Put Warrants Chapter 9 – 5.7 Settlement of Warrants Warrants & Other 5.7.4 Realising Gains from Call and Put Warrants Investment 5.12 Summary Products) Updated Sections 5.1 Introduction 5.1.1 Company Warrants 5.1.2 Structured Warrants 5.2 Key Features and Terms of a Warrant Issue 5.2.1 Conversion Ratio 5.2.2 Exercise or Strike Price 5.2.3 Expiry Date 5.2.4 Issue Price 5.2.5 Physical Delivery or Cash Settlement 5.2.6 Gearing 5.2.9 Delta 5.2.10 Effective Gearing 5.2.11 5.3 Interpreting Trading Names of Structured Warrants 5.4 Warrant Valuation 5.4.1 Intrinsic Value (IV) 5.4.2 Conversion Price (CP) 5.4.3 Premium 5.5 Roles of the Warrant Holder & Issuer 5.6 Market-Making of Structured Warrants 5.7 Settlement of Warrants 5.7.1 Physical Settlement 5.7.2 Cash Settlement 5.7.3 Settlement Procedures 5.8 Corporate Action Adjustments for Structured Warrants 5.9 Exotic Warrant Structures and Features 5.9.1 Index Warrants 5.9.2 Currency Translated Warrants 5.9.3 Basket Warrants 5.9.4 Yield Enhanced Securities 5.9.5 Commodity Warrants 5.9.6 Foreign Exchange (FX) Warrants

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Chapter Title Summary of changes 5.10 Convertible Bonds 5.10.1 Traditional Valuation Approach 5.10.2 Using the Black-Scholes Formula 5.11 Market Outlook and Products

6 Structured New Sections Products 6.1 Introduction (Previously 6.1.1 Growth of Structured Products Chapter 10 – 6.2 Key Features of Structured Products Basics of 6.2.2 Maturity Type Structured 6.2.3 Pay-off on Maturity Products) 6.2.4 Coupon Structure 6.4 Common Strategies Used by Structured Products 6.4.1 Zero Coupon Plus Option Strategy (or “Zero Plus” Option) 6.4.2 Uses and Suitability of Zero plus Option Structured Deposit / Note 6.4.3 Option Strategy 6.4.4 Constant Proportion Portfolio Insurance (CPPI) Strategy 6.4.5 Dynamic Proportion Portfolio Insurance (DPPI) 6.6 Risk-Return Trade-off of Structured Products 6.8 Summary

Updated Sections 6.1 Introduction 6.1.2 Uses of Structured Products 6.2.1 Underlying Asset 6.2.5 Other Features of Structured Products 6.3 Types of Structured Products 6.3.1 Structured Investment-Linked Policies (ILPs) 6.3.2 Other Structured Products 6.5 Other Features of Structured Products 6.5.1 Principal Redemption 6.5.2 Liquidity and Market Access 6.5.3 Restrictions on Underlying Assets 6.7 Suitability of Structured Products for Investors 6.7.1 Needs of Investors 6.7.2 Sales Restrictions 6.7.3 Issuer Oversight

7 Structured Notes New Sections (Previously 7.6 Structured Notes with Embedded Short Options Chapter 12 – 7.6.1 Equity Linked Notes (ELNs) Structured Notes) 7.6.2 “Worst of” Equity Linked Notes 7.6.3 Characteristics of ELNs 7.6.4 Credit Linked Notes (CLNs) 7.6.5 “First to Default” Credit Linked Note 7.6.6 Bond-Linked Notes (BLNs) 7.6.7 Accumulators 7.8 Risks of Specific Structured Products 7.8.1 Equity Linked Notes (ELNs) 7.8.2 Credit Linked Notes (CLNs)

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Chapter Title Summary of changes 7 Structured Notes 7.8.3 Bond Linked Notes (BLNs) (Previously 7.8.4 Risks of Structured Deposits Chapter 12 – 7.11 Summary Structured Notes) Updated Sections 7.1 What is a Structured Note? 7.2 Issuer 7.2.1 Direct Issuance (on Balance Sheet) 7.2.2 Special Purpose Vehicle Issuance (Off Balance Sheet) 7.3 Wrapper 7.3.1 Debentures 7.3.2 Structured Deposits 7.4 Types of Structured Notes 7.5 Yield Enhancement Structures 7.5.1 Range Accrual Notes (RANs) 7.5.2 Variable Maturity – Multi-Callable RAN 7.5.3 Inverse Floater Note 7.5.4 Variations of RANs 7.7 Market Access 7.7.1 Exchange-Traded Notes (ETNs) 7.7.2 Index-Linked Notes 7.7.3 Participatory Notes (PNs) 7.7.4 Access Notes 7.9 Investors of Structured Notes 7.9.1 Assessing Product Suitability for Retail Investors 7.9.2 Factors for Investors to Consider in the Sales Process 7.9.3 Providing After Sales Information 7.10 Documentation Required for Structured Notes 7.10.1 Contents of Product Highlights Sheet

8 Structured Funds New Sections & Structured ETFs 8.1 Structured Funds (Previously 8.2.2 The Global ETF Market Chapter 13 – 8.2.3 Types of ETFs Structured Funds 8.2.4 Replication Methodologies and Structured 8.2.5 ETF Pricing & Valuation Issues Exchange-Traded 8.2.6 ETFs vs Exchange-Traded Notes (ETNs) Funds) 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 8.3 Summary

Updated Sections 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

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Chapter Title Summary of changes 8.1.7 Various Structures and Design 8.1.8 Overview of Common Fund 8.1.9 Examples of Structured Funds Structures 8.1.10 Risks of Structured Funds 8.1.11 Roles & Responsibilities of Fund Managers and Trustees 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? 8.2.11 Risks of ETFs 8.2.12 ETFs After Sales

9 Key Product & New Sections Investment Risks 9.1 Risk-Return Trade-Off (Previously 9.3 Investment Risks of Derivatives Chapter 11 – Key 9.3.1 Risks in Trading Futures Risks) 9.3.2 Risks in Trading Options 9.3.3 Risks of Trading Equity Index Options 9.3.4 Risks of Trading Bond Options 9.3.5 Risks of Trading Currency Options 9.3.6 Risks of Trading Warrants 9.4 Key Risks of Structured Products 9.4.14 Risk of Mis-selling (Incongruence to Investment Strategy) 9.5 Trading Risk Control and Management 9.5.1 Managing Market Risk for Futures 9.5.2 Managing Market Risk for Options 9.5.3 Managing Credit Risk for Options 9.5.4 Managing Settlement Risk for Options 9.6 Summary

Updated Sections 9.2 Generic Investment Risks 9.2.1 Country Risk 9.2.2 Market Risk 9.2.3 Market Disruption Risk 9.2.4 Counterparty Risk 9.2.5 Concentration Risk 9.2.6 Operational Risk 9.4 Key Risks of Structured Products 9.4.1 Risks of Constant Proportion Portfolio Insurance (CPPI) Strategy Products 9.4.2 Market Risk 9.4.3 Credit and Counterparty Risks 9.4.4 Types of Credit Default 9.4.5 Liquidity Risks and Secondary Market Trading 9.4.6 Early Termination Risk 9.4.7 Structure Risk 9.4.8 Reinvestment Risk 9.4.9 Volatility Risk

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Chapter Title Summary of changes 9.4.10 Correlation Risk 9.4.11 Foreign Exchange Risk 9.4.12 Legal Risk 9.4.13 Transactional Risk

10 Comparison of New Sections Different Types of 10.1 Same Wrapper with Seemingly Same Structures but Differences in Structured Features Products 10.1.4 Product Risks – Short Option Positions (Previously 10.4 Summary Chapter 14 – Comparison of Updated Sections Different Types of 10.1 Same Wrapper with Seemingly Same Structures but Differences in Structured Features Products) 10.1.1 Wrappers 10.1.2 Risk-Return Profile of Structured Products 10.1.3 Callable Features 10.1.4 Product Risks – Short Option Positions 10.2 Comparison of Different Forms of Structured Products 10.3 Cross-Product Case Study 10.3.1 Reverse Convertibles 10.3.2 Discount Certificates 10.3.3 Risk-Return Profile of Structured Products

11 Knock-Out New Sections Products 11.8 Summary (Previously Chapter 16 – Updated Sections Knock-Out 11.1 Complex Options Products) 11.2 Barrier Options 11.3 Types of “Knock-Out” Barrier Options 11.3.1 Single 11.3.2 Double Barrier Option 11.3.3 Categories of Barrier Options 11.3.4 Advantages of Barrier Options 11.3.5 Disadvantages of Barrier Options 11.4 Examples of Common Knock-out Products 11.4.1 Knock-Out Warrants 11.4.2 Barrier Capital Preservation Certificate 11.4.3 Barrier Capital Preservation Certificate (Straddle) 11.4.4 Barrier Reverse Convertible 11.4.5 Bonus Certificate 11.5 Callable Bull/Bear Contracts 11.5.1 Price Movement of a CBBC (in relation to the underlying asset) 11.5.2 Lifespan and Mandatory Call Event (MCE) 11.5.3 Gearing Effect 11.5.4 Hedging Instrument (for Bear Contracts)

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Chapter Title Summary of changes 11.5.5 Categories of CBBC 11.5.6 Factors Affecting CBBC Pricing & Valuation 11.5.7 Determination of Residual Value if Mandatory Call Event Occurs 11.5.8 Valuation at Maturity (Expiry) 11.5.9 Capital Adjustments 11.5.10 Other Issues Related to Trading on the Exchange (SGX) 11.5.11 Callable Bull/Bear Contracts (CBBCs) - Examples & Illustrations 11.6 Risks of CBBCs 11.7 Similarities and Differences between Knock-Out Products and Structured Warrants (or Other Products)

12 Contracts for New Sections Differences 12.10 Summary (CFDs) (Previously Updated Sections Chapter 17 – 12.1 History and Origin of CFDs Contracts for 12.2 What Are Contracts for Differences (CFDs)? Differences 12.3 Characteristics and Features of CFDs 12.4 CFD Business Models 12.5 Advantages of CFDs over Other Instruments 12.6 Trading Mechanisms of CFDs 12.6.1 12.6.2 Mark-to-Market 12.6.3 Margin Call 12.6.4 Liquidation 12.6.5 Orders and Stops 12.6.6 Financing 12.6.7 Going Short 12.6.8 Corporate Actions 12.6.9 Comparing CFDs with Futures 12.7 Global Trading Opportunities 12.7.1 Equity CFDs 12.7.2 Index & Sector CFDs 12.7.3 Currencies 12.7.4 Commodities 12.7.5 Government Treasuries 12.7.6 CFDs on ETFs 12.7.7 Others 12.8 CFD Trading Strategies 12.8.1 Trading for Dividends (Dividend Stripping / Capture) 12.8.2 Trading in Pairs 12.9 Risks of Investing in CFDs 12.9.1 Leverage Risk 12.9.1 Market Volatility (Underlying Asset) 12.9.2 Market Volatility (Underlying Asset) 12.9.3 Counterparty Risk 12.9.4 Liquidity Risk 12.9.5 Currency Risk 12.9.6 Financing Costs 12.9.7 Risks Associated With Different CFD Models (Direct Market Access vs Market-Maker)

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Chapter Title Summary of changes 13 Extended New Sections Settlement 13.6 Trading Strategies Using ES Contracts Contracts 13.6.1 Long Hedge (previously 13.6.2 Short Hedge Chapter 18 – 13.6.3 Using ES Contract as a Hedging Tool Extended 13.6.4 Spreads Settlement (ES) 13.6.5 Arbitraging Contracts 13.9 Benefits of Trading ES Contracts 13.10 Comparing ES Contracts with Contra and Margin Financing 13.11 Summary

Updated Sections 13.1 What Is An Extended Settlement Contract? 13.2 Types of Investors Who Invest In ES Contracts 13.3 Risks of Trading ES Contracts 13.3.1 Leverage 13.3.2 Margin Calls 13.3.3 Liquidity 13.3.4 Volatility 13.3.5 Buying-In 13.3.6 Changes in Interests 13.4 Contract Specifications and Trading and Settlement of ES Contracts 13.4.1 Underlying Securities 13.4.2 Margin Requirements 13.4.3 Contract Months 13.4.4 Settlement by Delivery of Underlying Securities 13.4.5 Corporate Actions 13.4.6 Contra Trades 13.4.7 Clearing Fees and GST 13.4.8 ES Location on the Trading Screen 13.5 Calculation of Profit and Loss for ES Contracts 13.5.1 Calculation of Profit and Loss for ES Contracts 13.7 Mark-To-Market and Margining 13.7.1 Daily Mark-to-Market 13.7.2 Key Margining Concepts 13.7.3 Margining on Gross Basis 13.7.4 Margin Calculations 13.7.5 Margins for Positions Which Have Been Offset 13.7.6 Acceptable Forms of Margin Collateral 13.7.7 Margin Calls 13.7.8 Acceptance of Orders during Margin Calls 13.7.9 Excess Margins 13.7.10 Reporting of Under-Margined Accounts 13.8 Managing Positions 13.8.1 New Position Reporting Requirement 13.8.2 Global Position Limits

14 Case Studies New Sections (Previously 14.1 Case Studies on Structured Notes Chapter 19 –Case 14.1.1 Range Accrual Note (RAN) Studies) 14.1.4 Accumulator

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Chapter Title Summary of changes 14.3 Summary

Updated Sections 14.1 Case Studies on Structured Notes 14.1.2 Hang Seng Index (HSI) Daily Range Accrual Note 14.1.3 First-to-Default Credit Linked Note (CLN) 14.2 Case Studies on Structured Funds 14.2.1 Auto-Redeemable Structured Fund ABC 14.2.2 Auto-Redeemable Structured Fund XYZ

Appendix Constant New A Proportion Portfolio Insurance (CPPI) Strategy

Appendix MAS Guidelines New B on the Product Highlights Sheet

Appendix Futures Contracts Updated to match revised study guide C Specifications

Appendix Formulae Sheet Updated to match revised study guide D Appendix Review Questions Updated to match revised study guide E Appendix Essential Updated to match revised study guide F Readings

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