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.
5 min read·8 sections
✓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.
▸On this page · 8 sections
⚠
Traps that cost marks
→Candidates confuse market statistics such as open interest with the source of value.
→Assuming an underlying must be deliverable or listed.
→Mixing up derivative building blocks with the underlying assets or corporate actions.
→Treating futures margin as if it were an option premium.
→Reversing the OTC and exchange-traded labels.
→Describing a forward instead of a swap.
→Forgetting that swaps bind both parties at every settlement, unlike options.
→Thinking linear means low risk; a linear payoff can lose heavily in either direction.
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