M6A — CM-SIP: Specified Investment Products (Derivatives and CIS)
Overview of Derivatives
Chapter 1 of CM-SIP sets the vocabulary for everything that follows: what a derivative is, the four building blocks (forwards, futures, options, swaps), exchange-traded versus OTC markets, clearing and margin, the three motives for using derivatives (hedging, speculation, arbitrage) and the core risks. Examiners test whether you can classify a trader's motive, compare linear and non-linear payoffs, and do simple leverage and variation-margin arithmetic.
8 sections·~3 min read
✓Checked against the IBF CMFAS CM-SIP syllabus chapter 1 (IBF examination details page); IBF CM-SIP Summary of Updates Jan 2026 v1.1 (sections 2.3.3.2 and 2.6 on basis); Securities and Futures Act 2001 s.2 and Part 6A (sso.agc.gov.sg); checked 13 Sep 2026. Unofficial prep, not endorsed by MAS or IBF.
★
Must-know for the exam
✓A derivative's value is derived from an underlying: a security, index, interest rate, currency, commodity or credit event (SFA s.2, derivatives contract).
✓Four building blocks: forwards and futures (both sides obligated, linear payoff), options (buyer pays premium for a right, non-linear payoff), swaps (exchange of cash-flow streams on a notional, a strip of forwards).
✓Exchange-traded: standardised, transparent prices, novated to a central counterparty (SGX-DC for SGX derivatives), initial and daily variation margin.
✓OTC: bespoke terms, bilateral credit exposure, harder to exit early. SFA Part 6A requires reporting of specified OTC derivatives to a trade repository and central clearing where MAS specifies.
✓Hedger offsets an existing exposure; speculator takes risk for profit; arbitrageur locks in a mispricing between related instruments.
✓Leverage = notional value / margin. A move of 1/leverage wipes out the margin; losses can exceed the deposit.
✓IBF convention (Jan 2026 update): basis = futures price - spot price. Positive in contango, can turn negative in backwardation, converges to zero at expiry.
✓Notional overstates risk for swaps; exposure depends on mark-to-market value. Gains and losses between the two parties net to zero before costs.
Why this matters in the exam
•Every later chapter (warrants, DLCs, barrier options, structured notes, CFDs) is a combination of these building blocks. If you can tell a right from an obligation, a cleared contract from a bilateral one, and a hedge from a bet, you can reason through unfamiliar products in the case studies.
The four building blocks
•Forward: private agreement today to exchange an asset at a fixed price on a future date. Customised, settled at maturity, counterparty risk on both sides.
•Future: exchange-traded version of a forward. Standard size and expiry, cleared by a central counterparty, marked to market every day.
•Option: buyer pays a premium for the right to buy (call) or sell (put) at the strike. Writer takes the obligation. Buyer's loss is capped at the premium.
•Swap: two parties exchange cash-flow streams (for example fixed for floating interest) on a notional that is usually not exchanged. Economically a series of forwards.
•Linear versus non-linear: a long future gains or loses one-for-one in both directions. A bought option bends at the strike. A long call plus a short put at the same strike recreates a long forward.
CMFASPrep