A mining company executive knows that an internal assay report confirming a major ore discovery has not yet been publicly released. She calls her registrant and places a large buy order in the company

B. The executive is trading on material non-public information and the trade is prohibited under insider trading provisions of applicable securities legislation; the registrant who knowingly facilitates such a trade may also face liability.

A trader enters a series of buy and sell orders for a thinly traded security using two accounts he controls, creating the appearance of active trading and causing other investors to buy at an inflated

B. Wash trading and pump-and-dump manipulation, where artificial trading activity inflates a security's price so the manipulator can exit at a profit at other investors' expense.

A client buys one call option on shares of a Canadian bank with a strike price of $130 and an expiry of three months. The current share price is $128. Which statement correctly describes the client's

A. The call option expires worthless because the market price ($125) is below the strike price ($130); the client's maximum loss is the premium paid for the option.

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CIRE practice questions: derivatives (Element 8)

Ten CIRE practice questions on derivatives. Element 8 covers options moneyness and payoffs, put-call parity, futures cost-of-carry pricing, hedging vs speculation, and basis risk. Most candidates struggle with derivatives because the formulas come fast and the diagrams stack quickly. The exam tests intuition more than calculation. If you can sketch the payoff at expiry, you can answer most Element 8 questions.

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1
A mining company executive knows that an internal assay report confirming a major ore discovery has not yet been publicly released. She calls her registrant and places a large buy order in the company's shares. Under Canadian securities law, which of the following is most accurate?
Outcome 8.1 · click for answer
A.The trade is permissible because the executive's account is at an arm's-length dealer and the order was placed verbally.
B.The executive is trading on material non-public information and the trade is prohibited under insider trading provisions of applicable securities legislation; the registrant who knowingly facilitates such a trade may also face liability.Correct
C.The prohibition applies only if the executive is a director or officer of a reporting issuer; a senior employee does not qualify as an insider.
D.The trade is permissible because the executive is buying, not selling, her own company's shares.
Insider trading prohibitions under provincial securities legislation apply to any person in a special relationship with a reporting issuer who trades with knowledge of a material fact or material change that has not been generally disclosed. Senior employees such as executives fall squarely within this definition. The prohibition applies equally to purchases and sales. A registrant who knowingly facilitates insider trading may be found to have tipped or assisted the insider, attracting their own regulatory and civil liability.
2
A trader enters a series of buy and sell orders for a thinly traded security using two accounts he controls, creating the appearance of active trading and causing other investors to buy at an inflated price. He then sells his position at the higher price. Which market integrity violation does this most clearly describe?
Outcome 8.2 · click for answer
A.Front-running, because the trader placed orders ahead of known client flow.
B.Wash trading and pump-and-dump manipulation, where artificial trading activity inflates a security's price so the manipulator can exit at a profit at other investors' expense.Correct
C.Spoofing only, because the orders were not all cancelled before execution.
D.Late trading, because the orders were entered outside regular market hours.
The described scheme involves wash trading, executing offsetting buy and sell orders between related accounts to create the illusion of genuine market activity, combined with a pump-and-dump strategy designed to attract other buyers at an artificially inflated price. Both UMIR and provincial securities legislation prohibit these activities. Front-running involves trading ahead of known client orders, and spoofing involves placing orders with intent to cancel before execution, neither of which is the primary characterization here.
3
A client buys one call option on shares of a Canadian bank with a strike price of $130 and an expiry of three months. The current share price is $128. Which statement correctly describes the client's position at expiry if the shares are trading at $125?
Outcome 8.1 · click for answer
A.The call option expires worthless because the market price ($125) is below the strike price ($130); the client's maximum loss is the premium paid for the option.Correct
B.The client must buy shares at $130 because a call obligates the buyer to purchase.
C.The client's call is in the money and they will receive $5 per share.
D.The option converts to shares automatically because it is an American-style option.
A call option gives the holder the right; not the obligation; to buy the underlying at the strike price. At expiry with the stock trading at $125, exercising the call to buy at $130 would be economically irrational (the client could buy shares in the market for $125). An out-of-the-money call expires worthless. The buyer's maximum loss is the premium paid. A call buyer has the right to buy; a call seller (writer) has the obligation to sell. Automatic conversion to shares occurs only for deep-in-the-money options under some brokerage exercise-by-exception rules, which does not apply here.
4
A call option on a Canadian bank stock has a strike price of $110 and a premium of $4.50. The option expires in 60 days. What is the break-even price for the option buyer at expiry, and under what condition does the buyer profit?
Outcome 8.1 · click for answer
A.Break-even = $110; the buyer's maximum loss is the stock price minus $110.
B.Break-even = $114.50; the buyer profits if the underlying stock price exceeds $114.50 at expiry.Correct
C.Break-even = $105.50; the buyer profits if the underlying stock price is below $105.50 at expiry.
D.Break-even = $110; the buyer profits whenever the stock price exceeds $110 at expiry.
For a call option buyer, the break-even price at expiry equals the strike price plus the premium paid: $110 + $4.50 = $114.50. At expiry, if the stock price equals $114.50, the buyer's profit from exercising (or selling) the option exactly offsets the premium paid. The buyer profits when the stock price exceeds $114.50 because intrinsic value > premium paid. The maximum loss for the buyer is the premium paid ($4.50 per share), regardless of how far the stock falls.
5
Which of the following best describes a key difference between an exchange-listed futures contract and an over-the-counter (OTC) forward contract?
Outcome 8.2 · click for answer
A.Exchange-listed futures contracts are standardized, centrally cleared (reducing counterparty credit risk), and subject to daily mark-to-market margin settlements; OTC forward contracts are customized bilateral agreements that carry counterparty credit risk and are not centrally cleared.Correct
B.Futures contracts have no standardization; the buyer and seller negotiate all terms.
C.Both instruments have identical risk profiles because they both involve an obligation to buy or sell at a future date.
D.OTC forwards are subject to daily mark-to-market settlements because they are tightly regulated.
Futures contracts traded on exchanges (such as the Montréal Exchange) are standardized as to contract size, delivery dates, and specifications, and are centrally cleared by a clearing house (CDCC in Canada). Central clearing substitutes the clearing house for both counterparties, eliminating bilateral credit risk. Daily mark-to-market settlements ensure that gains and losses are settled each day through the margin system. OTC forward contracts are bilateral, customized agreements between two counterparties with no central clearing; each party bears the other's credit risk for the life of the contract.
6
A portfolio manager holds 10,000 shares of a Canadian resource company currently trading at $45. The manager buys put options at a strike of $42 (1 contract = 100 shares, premium = $1.80 per share) as a hedge. What is the maximum loss on the hedged position per share if the stock falls to $30 at expiry?
Outcome 8.2 · click for answer
A.Maximum loss = $15 per share (from $45 to $30); the put has no value because the stock is below strike.
B.Maximum loss = $1.80 per share; only the option premium.
C.Maximum loss = $3 per share because the put strike is $3 below the purchase price.
D.Maximum loss = $4.80 per share: the put is exercised at $42, limiting the effective sale price to $42, and after the $1.80 premium the net proceeds per share are $40.20. Loss relative to entry is $45.00 - $40.20 = $4.80.Correct
The put option grants the right to sell at $42. If the stock falls to $30, exercising the put yields $42 per share regardless of the market price. Net proceeds per share after paying the premium = $42 - $1.80 = $40.20. The loss relative to the original $45 purchase price = $45.00 - $40.20 = $4.80 per share. The put effectively sets a floor: no matter how far below $42 the stock falls, the manager receives $42 from exercise. The premium ($1.80) represents the cost of the insurance and is the additional loss beyond the $3 in-the-money gap.
7
A Canadian wheat farmer expects to harvest 50,000 bushels in four months and is concerned that wheat prices may fall before harvest. Which derivative strategy would most directly hedge this risk?
Outcome 8.3 · click for answer
A.Sell (short) wheat futures contracts at today's price to lock in the current price for delivery in four months, thereby hedging against a price decline.Correct
B.Enter an interest rate swap to convert fixed-rate debt to floating.
C.Buy call options on wheat futures to benefit from a price increase.
D.Buy put options on wheat futures; this obligates the farmer to sell at the strike price.
A producer holding physical inventory who fears a price decline uses a short hedge: selling futures contracts at today's price to lock in a forward sale price. If the spot price falls by harvest, the futures position will have gained in value, offsetting the lower cash price received for the physical wheat. Buying call options would profit from a price increase; the opposite of what the farmer fears. Buying put options would give the right to sell at the strike price, which is a different hedging mechanism more suitable for an investor, and not an obligation as stated in option C. Interest rate swaps are unrelated to commodity price risk.
8
An investor buys a call option on shares of a company when the share price is $50, the strike price is $52, and the premium is $3.00. What is the investor's break-even share price at expiry?
Outcome 8.4 · click for answer
A.$50.00; the purchase price of the shares.
B.$52.00; the strike price.
C.$55.00; the strike price plus the premium paid ($52 + $3).Correct
D.$47.00; the current share price less the premium paid.
For a call option buyer, the break-even point at expiry is the strike price plus the premium paid. Here, the investor needs the stock to be above $52 (strike) by enough to recover the $3 premium; a total of $55. Below $55, the investor has a net loss on the position. At exactly $55, the intrinsic value ($55 - $52 = $3) exactly offsets the premium. Above $55, the investor profits on a dollar-for-dollar basis with each additional point of stock appreciation. The current stock price ($50) and its relationship to the strike ($52) indicate the option is currently out-of-the-money.
9
A client wants to hedge their Canadian equity portfolio against a broad market decline using derivatives. They are choosing between listed index put options and an OTC equity swap. Which key difference should the registrant highlight?
Outcome 8.5 · click for answer
A.OTC swaps are regulated by UMIR and therefore safer for retail clients.
B.Listed index put options are standardized and centrally cleared with no counterparty credit risk; they can be bought in defined contract sizes. OTC equity swaps are customizable to the exact notional amount and exposure but carry bilateral counterparty credit risk and typically require ISDA master agreements.Correct
C.Listed options have unlimited downside while OTC swaps have defined maximum losses.
D.Listed options are only available to institutional investors; retail clients must use OTC derivatives.
Exchange-listed options are standardized contracts cleared through a central counterparty (CDCC), eliminating bilateral credit risk. They are available in defined contract sizes (typically 100 shares per contract for equity options, or fixed notionals for index options). OTC derivatives like equity swaps are bilaterally negotiated, allowing customization of notional, term, and underlying exposure, but they carry counterparty credit risk; each party depends on the other's ability to perform. OTC derivatives are governed by ISDA master agreements and are subject to post-financial-crisis regulations requiring central clearing for standardized OTC derivatives. Both listed and OTC instruments are available to qualifying retail and institutional clients.
10
A trader sells a straddle on a stock trading at $50. She sells a call with strike $50 at a premium of $4 and a put with strike $50 at a premium of $3.50. What is the maximum profit and the two break-even points at expiry?
Outcome 8.5 · click for answer
A.Maximum profit is unlimited because the short straddle benefits from a large move in either direction.
B.Maximum profit = $7.50; break-even points are $43 and $57.
C.Maximum profit = $4 (call premium only); break-even points are $46 and $54.
D.Maximum profit = $7.50 (total premium received); break-even points are $42.50 and $57.50.Correct
A short straddle earns the combined premium when both options expire worthless: $4 + $3.50 = $7.50 maximum profit, achieved when the stock closes exactly at $50 at expiry. Break-even (upside) = $50 + $7.50 = $57.50. Break-even (downside) = $50 - $7.50 = $42.50. Below $42.50, the short put produces losses; above $57.50, the short call produces losses. The maximum loss is theoretically unlimited on the upside (from the short call) and substantial on the downside (from the short put, capped at $42.50 if the stock goes to zero). Short straddles profit from low volatility; the stock staying near $50.

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FAQ

How much math is on Element 8?

Less than candidates expect. The CIRE tests payoff direction and option-strategy logic more than precise option pricing. Memorize: long call = unlimited upside / max loss is the premium, long put = max gain is K minus premium, put-call parity (C minus P equals S minus PV(K)), futures cost of carry (F equals S times e to the (r minus q) t). With those, you can reason through most questions.

Do I need to know Black-Scholes?

You do not need to compute a Black-Scholes price on the CIRE. You should know the qualitative effect of each Greek (delta, gamma, vega, theta) and the inputs that move option premiums (strike, time to expiry, volatility, risk-free rate, dividend yield).

Are options on individual stocks tested differently from index options?

The mechanics are the same. The CIRE tests cash-settled vs physically settled, American vs European exercise, and the practical implications for retail clients. Cash-settled index options never deliver the underlying. American options can be exercised early. European options cannot.

What about futures and basis?

Basis equals spot price minus futures price. A widening basis means the spot is moving up relative to the future, or the future is moving down relative to spot. For a hedger, basis risk is the residual risk after the hedge is on. Hedge ratio (h-star) for minimum variance is rho times sigma S divided by sigma F.

Can I get more derivatives questions?

Yes. Ciroexam includes 71 published questions on Element 8, plus an AI tutor that walks through every wrong-answer payoff diagram. After 30 questions on the element, most candidates report the diagrams stop feeling intimidating.

CIRE practice questions: derivatives (Element 8)

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