Every structured product and structured fund wraps one or more derivatives around a bond, deposit or basket, so this chapter drives the rest of M8A. You need the SFA definitions, the exchange-traded versus OTC distinction, and working arithmetic for forwards, futures, options, swaps, warrants and daily leverage certificates. Expect calculations (margin calls, breakevens, put-call parity, swap net payments) and reasoning on why an exotic option costs more or less than a vanilla one.
9 sections·~4 min read
✓Checked against the SCI M8A syllabus chapter 3 (checked 13 Sep 2026); SFA 2001 s.2(1) and Parts 6A-6C (sso.agc.gov.sg, as at 13 Sep 2026); MAS FAA-G09 (28 Jun 2021); MAS Notice SFA 04-N12 (4 Jan 2019); SGX DLC product guide (Nov 2020); SGX-DC Clearing Rules ch.7; MAS Code on CIS (2 Jul 2026) App 1. Unofficial prep, not endorsed by MAS or SCI.
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Must-know for the exam
✓SFA s.2(1): a derivatives contract = performance at a future time + value derived from an underlying. Excluded: securities, CIS units, spot contracts, deposits, insurance contracts.
✓SFA s.2(1) exchange-traded = organised market + clearing facility substituting its own credit + standardised terms other than price. All else is OTC, including a bilateral swap later cleared.
✓SFA Part 6A reporting to trade repositories; Part 6B central clearing; Part 6C trading on organised markets.
✓A margin call restores the account to INITIAL margin. Balances above initial margin can be withdrawn.
✓Equity index F = S x (1 + (r - q) x t). Commodity F = S x (1 + r x t) + storage.
✓Hedge contracts = beta x portfolio value / (index level x multiplier).
✓Long call breakeven = K + premium; long put breakeven = K - premium.
✓Put-call parity: call + PV(strike) = put + share.
✓Knock-in + knock-out = vanilla. Barrier and Asian options are cheaper than vanilla, a basket call is cheaper than separate calls, and lookbacks are dearer.
✓CDS cash settlement = notional x (1 - recovery rate). Downgrades are not credit events.
✓Warrant gearing = share price / (warrant price x conversion ratio); effective gearing = gearing x delta.
✓SGX DLCs: fixed daily leverage up to 7x, no margin, no volatility or time decay effect, loss limited to amount invested, compounding over several days.
What a derivative is, in law and in use
•Under SFA s.2(1), a derivatives contract is one where a party is or may be required to perform at a future time, and whose value is derived from or varies with an underlying thing. Five classes are excluded:
•Securities
•Units in a collective investment scheme, even one holding derivatives
•Spot contracts
•Deposits, so a structured deposit is a deposit (FAA-G09), not a derivatives contract
•Insurance contracts
•A s.2(1) futures contract is an exchange-traded contract to transfer an underlying at a set future time and price, or settle the difference. It includes an exchange-traded option on such a contract.
•Underlyings include shares, indices, rates, currencies, commodities and credit risk. Classify the purpose by what the user already holds:
•Hedging offsets an existing exposure, such as a fund long shares selling index futures
•Speculation takes on risk for an expected move, with no offsetting holding
•Arbitrage uses offsetting trades to lock in a price gap between identical or linked instruments
•A forward or futures hedge fixes the price, so it gives up upside too. A bought option keeps the upside for the premium.
•Trap: the same trade can hedge one investor and be speculation for another.
•Takeaway: Future performance plus value from an underlying. Securities, CIS units, spot, deposits and insurance are excluded.
Exchange-traded versus OTC, and Singapore's OTC reforms
•SFA s.2(1) makes a contract exchange-traded only if it is executed on an organised market, cleared by a facility that substitutes its own credit for the parties' (novation), and standardised in all terms except price. Everything else is OTC.
•Terms: exchange contracts fix size, expiry and underlying; OTC contracts can match a bespoke basket or date
•Counterparty: after novation you face the clearing house, which margins daily; OTC, you face the dealer
•Transparency: exchange prices and volumes are public; OTC values come from models or dealer quotes
•Exit: identical contracts pool liquidity and you close with an opposite trade; an OTC exit is a negotiated unwind
•Settlement: index futures are cash-settled; forwards used to obtain an asset are physically settled
•OTC counterparty exposure is roughly the contract's positive mark-to-market value. A bought option moving deep into the money increases it. Only the option buyer is exposed; in a forward, either side can be.
•SFA Part 6A requires specified contracts to be reported to licensed trade repositories, giving MAS visibility of exposures. Part 6B imposes central clearing and Part 6C trading on organised markets.
•Trap: a bilaterally executed swap later novated to a clearing house is still OTC.
•Takeaway: Organised market, credit-substituting clearing, standard terms. Parts 6A, 6B, 6C: report, clear, trade.
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