Chapter 1: An Overview of Derivatives
- 1.1 What Is a Derivative?
- 1.2 Common Features of All Derivative Instruments
- 1.3 Types of Derivative Instruments
- 1.4 Key Differences Between Option-Based and Forward-Based Derivatives
- 1.5 Exchange-Traded and Over-the-Counter Derivatives
- 1.6 Key Differences Between Exchange-Traded and Over-the-Counter Derivatives
- 1.7 Types of Underlying Interests (Commodities, Financials)
- 1.8 Why Are Derivatives Useful?
- 1.9 Operational Considerations
- 1.10 Who Uses Derivatives and to What Extent Are They Used?
- 1.11 The New CIRO Regulatory Landscape
- 1.12 Emerging Asset Classes (ESG and Crypto Derivatives)
- 1.13 Technology in Derivatives Trading (Electronic Platforms, Algorithmic Trades)
- 1.14 Overview of Bourse de Montréal and Other Global Derivatives Exchanges
Chapter 2: Basic Features of Forward Agreements and Futures Contracts
- 2.1 A Brief Overview of Forward-Based Derivatives
- 2.2 A History of Forwards
- 2.3 What Is a Forward Agreement?
- 2.4 What Is a Futures Contract?
- 2.5 Organized Futures Markets
- 2.6 Buying and Selling a Futures Contract
- 2.7 Cash Settlement
- 2.8 Margin Requirements and Marking-to-Market
- 2.9 Futures Trading and Leverage
- 2.10 Reading a Futures Quotation Page
- 2.11 Contract Size and the Value of the Underlying Interest
- 2.12 CIRO Oversight and Margin Guidelines for Futures
- 2.13 Key Global Futures Exchanges (Comparison to Bourse de Montréal)
- 2.14 Electronic Order Routing and Market Data Feeds
Chapter 3: Pricing of Futures Contracts
- 3.1 A Brief Overview of Futures Pricing
- 3.2 Futures Market vs. Cash Market
- 3.3 Cost of Carry
- 3.4 Basis
- 3.5 Cash and Carry Arbitrage
- 3.6 Reverse Cash and Carry Arbitrage
- 3.7 Conditions that Facilitate Arbitrage
- 3.8 Inverted Markets
- 3.9 Convergence
- 3.10 Practical Pricing Examples in Canadian Markets (e.g., Interest Rate & Index Futures)
- 3.11 Seasonal Basis Factors & Monetary Policy Impact
- 3.12 Scenario Analysis (Volatility & Interest Rate Shifts)
Chapter 4: Hedging with Futures Contracts
- 4.1 Hedging
- 4.2 Types of Hedges
- 4.3 Imperfect Hedges
- 4.4 Optimal Hedge Ratio
- 4.5 Hedging Canadian Commodities (Energy, Agriculture)
- 4.6 Cross-Hedging Strategies
- 4.7 CIRO Reporting Requirements for Hedging Exemptions
Chapter 5: Speculating with Futures Contracts
- 5.1 What Attracts Speculators?
- 5.2 Types of Speculators
- 5.3 Price Forecasting Techniques (Fundamental Analysis, Technical Analysis)
- 5.4 Risk Management Tools (Stop-Loss Orders, Margin Calls)
- 5.5 High-Frequency & Algorithmic Trading
- 5.6 Leveraged Speculation and Volatility Management
Chapter 6: Basic Features of Options
- 6.1 The History of Options
- 6.2 Key Option Terminology and Definitions
- 6.3 Application of Key Terms and Definitions
- 6.4 Why Investors Buy Options
- 6.5 Why Investors Write Options
- 6.6 Other Related Benefits of Options
- 6.7 Advantages of Exchange-Traded Options vs. OTC Options
- 6.8 Reading Option Quotations
- 6.9 Common Questions Pertaining to the Options Market
- 6.10 Role of CIRO and the Bourse de Montréal in Regulating Listed Options
- 6.11 Retail Growth in Options Markets (Lower Commissions, Educational Platforms)
- 6.12 Introduction to Option Greeks (Beyond Delta)
Chapter 7: Pricing of Options
- 7.1 Pricing of Options
- 7.2 Major Factors that Affect the Price of an Option
- 7.3 Intrinsic Value
- 7.4 Time Value
- 7.5 Delta
- 7.6 Advanced Greeks (Gamma, Theta, Vega, Rho)
- 7.7 Implied vs. Realized Volatility (Vol Skew, Vol Smile)
- 7.8 Black–Scholes–Merton and Binomial Model Overviews
Chapter 8: Over-the-Counter Options
- 8.1 Over-the-Counter Interest Rate Options
- 8.2 Interest Rate Caps, Floors, Collars
- 8.3 Exotic Options
- 8.4 CIRO/CSA Guidelines on OTC Derivatives Reporting & Clearing
- 8.5 Collateralization & ISDA Master Agreements
- 8.6 Other Exotic Options (Barrier, Binary/Digital, Asian)
Chapter 9: Introduction to Swaps
- 9.1 Overview of the Swap Market
- 9.2 What Is a Swap?
- 9.3 Role of the Swap Dealer
- 9.4 History of Swaps
- 9.5 OTC Derivatives Market Reform
- 9.6 CIRO/CSA Requirements for Swap Transactions (Trade Reporting, Clearing)
- 9.7 Bilateral vs. Cleared Swaps
- 9.8 ESG & Sustainability-Linked Swaps
- 9.9 Cross-Border Swaps Considerations
Chapter 10: Interest Rate Swaps
- 10.1 Plain Vanilla Interest Rate Swap
- 10.2 Rate & Day Count Conventions
- 10.3 The Structure of an Interest Rate Swap
- 10.4 Pricing an Interest Rate Swap
- 10.5 Indication Pricing Schedule
- 10.6 Credit Risk
- 10.7 Terminating an Interest Rate Swap
- 10.8 Why Interest Rate Swaps Are Used
- 10.9 Deliverable Interest Rate Swap Futures & Centrally Cleared Swaps
- 10.10 Other Types of Interest Rate Swaps
- 10.11 Swaptions
- 10.12 Transition from CDOR to CORRA in Canada & Global LIBOR Phase-Out
- 10.13 Mandatory Clearing Thresholds for Certain Swaps
- 10.14 Advanced Uses (Hedging Corporate Bonds or Floating-Rate Notes)
Chapter 11: Currency Swaps
- 11.1 The Structure of a Currency Swap
- 11.2 Currency Swaps as a Portfolio of Fixed- and/or Floating-Rate Bonds
- 11.3 Pricing of Currency Swaps
- 11.4 Reasons for Currency Swaps
- 11.5 Managing FX & Settlement Risks
- 11.6 Emerging Markets Currencies (Liquidity, Volatility)
- 11.7 Reporting Cross-Currency Swaps to Trade Repositories
Chapter 12: Credit Swaps
- 12.1 Credit Derivatives
- 12.2 The Role of Credit Derivatives
- 12.3 The Structure of Credit Default Swaps (CDSs)
- 12.4 What are Index CDSs?
- 12.5 Why are CDSs and Index CDSs Used?
- 12.6 New Regulatory Requirements (Clearing/Reporting) for Credit Derivatives
- 12.7 Credit Event Settlement (Bankruptcies, Restructurings)
- 12.8 Standardization via ISDA & Market Trends (Index-Based CDS)
Chapter 13: Other Types of Swaps
- 13.1 Equity Swaps
- 13.2 Commodity Swaps
- 13.3 Equity Total Return Swaps (Uses in Synthetic Prime Brokerage)
- 13.4 Canadian Energy & Agricultural Commodity Swaps
- 13.5 Carbon/Emissions Swaps & Other ESG-Oriented Products
Chapter 14: Mutual Funds
- 14.1 Regulatory Framework for Canadian Investment Funds and Structured Products
- 14.2 Use of Derivatives in Mutual Funds
- 14.3 Risks of Derivatives Use by Mutual Funds
- 14.4 Limits on Derivative Use & Leverage (under CIRO/CSA Rules)
- 14.5 Disclosure of Derivative Strategies in Simplified Prospectuses
- 14.6 Custodians’ Role in Monitoring Exposure
Chapter 15: Alternative Mutual Funds, Closed-End Funds, and Hedge Funds
- 15.1 Use of Derivatives by Alternative Mutual Funds and Closed-End Funds
- 15.2 Hedge Funds Compared to Alternative Mutual Funds
- 15.3 Types of Alternative Strategies
- 15.4 Advantages and Disadvantages of Derivatives
- 15.5 Expanded Hedge Fund Strategies (Global Macro, Managed Futures, Relative Value)
- 15.6 Valuation & Liquidity Challenges in Alternative Products
- 15.7 Operational Due Diligence (Prime Brokers, Service Providers)
Chapter 16: Principal-Protected Notes (PPNs)
- 16.1 Principal-Protected Notes (PPNs) – What Are They?
- 16.2 PPN Structures and the Use of Derivatives
- 16.3 CPPI and Zero-Coupon Bond Plus Call Option Structures – Key Differences
- 16.4 CSA Disclosure Standards for PPNs
- 16.5 Embedded Derivatives & Credit Risk to Issuer
- 16.6 Comparing PPN Structures with Other Structured Notes
Chapter 17: Derivative-Based ETFs
- 17.1 Introduction
- 17.2 Commodity ETFs
- 17.3 Swap-Based ETFs and the Synthetic Replication of Indexes
- 17.4 Leveraged and Inverse ETFs
- 17.5 Risks of Daily Resets in Leveraged ETFs (Path Dependency)
- 17.6 Regulatory Caps on Leverage & Disclosure
- 17.7 Volatility & Sector-Specific Derivative-Based ETFs
Chapter 18: Bullish Strategies
- 18.1 Introduction to Bullish Strategies
- 18.2 The Long Call Strategy
- 18.3 The Married Put (Protective Put)
- 18.4 The Covered Call Strategy
- 18.5 Additional Bullish Strategies: Bull Call Spread & Short Put
- 18.6 Greek Considerations for Bullish Strategies
- 18.7 Suitability, Risk Tolerance, and CIRO Guidance
- 18.8 Risk and Reward Analysis for Bullish Strategies
Chapter 19: Bearish Option Strategies
- 19.1 Understanding the Bearish Outlook
- 19.2 Strategy: Long Put
- 19.3 Strategy: Short Call (Naked Call)
- 19.4 Strategy: Bear Put Spread
- 19.5 Strategy: Bear Call Spread
- 19.6 Protective Call or Synthetic Short
- 19.7 Greek Considerations for Bearish Strategies
- 19.8 Scenario Analysis and Stress Testing
- 19.9 Concluding Remarks and Additional Resources
Chapter 20: Volatility Strategies
- 20.1 Introduction to Volatility Strategies
- 20.2 Long and Short Volatility Approaches
- 20.3 Straddles, Strangles, and Combinations
- 20.4 The Role of Greeks in Volatility Strategies
- 20.5 Volatility Crush & Earnings Plays
- 20.6 Options Stress Testing & Risk-Adjusted Returns
- 20.7 Iron Condors, Butterflies, and Other Volatility Spreads
- 20.8 Additional Resources and Concluding Remarks
Chapter 21: Conduct and Practices
- 21.1 Options Regulation
- 21.2 Individual Registration Categories
- 21.3 Registrant Code of Ethics
- 21.4 Registrant Standards of Conduct
- 21.5 Trading and Sales Practices
- 21.6 Regulations Covering Registrants Employed by CIRO Investment Member Firms or Approved Participants of the Bourse
- 21.7 Conflicts of Interest & Best Execution (CIRO Guidelines)
- 21.8 Client Relationship Model (CRM) Enhancements for Derivatives
Chapter 22: Opening and Maintaining Retail Option Accounts
- 22.1 Completion and Approval of Option Account Application Forms
- 22.2 Significant Items of Information on the Option Account Application Form
- 22.3 Unanswered Questions on the Option Account Application Form
- 22.4 Responsibility for Final Acceptance of an Option Account
- 22.5 Completion of the Derivatives Trading Agreement Prior to Option Transactions
- 22.6 Risk Disclosure Statement
- 22.7 Applying a Suitability Concept to Option Recommendations
- 22.8 Managed Accounts and Simple Discretionary Accounts
- 22.9 Transfer of Option Accounts
- 22.10 Commissions
- 22.11 Digital KYC Processes & Ongoing Suitability Monitoring
- 22.12 Margin Expansion & Frequent Trading Alerts
- 22.13 Electronic Recordkeeping Requirements
Chapter 23: Client Margin Requirements
- 23.1 Basic Margin Terms
- 23.2 Factors Affecting the Amount of Margin Required
- 23.3 CIRO and Bourse de Montréal Minimum Margin Requirements for Equity and Index Option Strategies
- 23.4 Meeting Margin Calls
- 23.5 Capital Requirements for Firm and Market Maker Accounts
- 23.6 Member Firm Clearing Deposit Requirements at the Clearing Corporation
- 23.7 Updates in Margin Rules Post-Pandemic Volatility
- 23.8 Stress Testing Client Positions
- 23.9 Handling Complex Structured Option Spreads and Margins
Chapter 24: Entering Listed Option Orders
- 24.1 Essential Information Required for All Types of Orders
- 24.2 Order Ticket Information Unique to Options
- 24.3 A Generic Order Entry Screen
- 24.4 Types of Buy and Sell Orders
- 24.5 Types of Contingent Orders
- 24.6 Implied Orders and the Bourse de Montréal’s Implied Pricing Algorithm
- 24.7 The Bourse de Montréal’s User-Defined Strategies (UDS) Functionality
- 24.8 Algorithmic & High-Frequency Order Entry Controls
- 24.9 Time-Stamps & Regulatory Reporting Requirements
Chapter 25: Canadian Tax Aspects of Listed Options Trading
- 25.1 Professional vs. Non-Professional Option Traders
- 25.2 Federal Tax Consequences for Non-Professional Traders
- 25.3 Federal Tax Consequences for Professional Traders
- 25.4 Tax Consequences for LEAPS® Investors
- 25.5 Allowable Use of Exchange-Traded Options in RRSPs, RRIFs, and RESPs
- 25.6 Recent CRA Interpretations on Derivatives
- 25.7 Tax Implications of Derivative Overlays in Balanced/Equity Portfolios
- 25.8 Tracking Adjusted Cost Base (ACB) in Complex Strategies
Chapter 26: Opening and Maintaining Institutional Options Accounts
- 26.1 Opening Corporate Option Accounts
- 26.2 Opening Option Accounts for Acceptable Institutions
- 26.3 Know Your Client (KYC) Rule for Institutional Clients
- 26.4 Permissible Option Transactions for Pension Plans, Insurance Companies, and Trust Companies in Canada
- 26.5 Canadian Mutual Funds
- 26.6 Multi-Layer Sign-Offs & Corporate Board Approvals
- 26.7 Additional Documentation (ISDA Protocol for Institutions)
- 26.8 Asset Managers and Pension Plans: Derivatives Governance
Chapter 27: The Role of Clearing Corporations in Listed Options Trading
- 27.1 What Is a Clearing Corporation?
- 27.2 Canadian Derivatives Clearing Corporation (CDCC)
- 27.3 Options Clearing Corporation (OCC)
- 27.4 Functions of a Clearing Corporation
- 27.5 Operational Resilience & Cybersecurity in Clearing
- 27.6 Default Management Procedures
Chapter 28: The Role of Exchanges in Listed Options Trading
- 28.1 What is an Options Exchange?
- 28.2 Providing a Trading Forum
- 28.3 Adding and Deleting Option Classes
- 28.4 Adding and Deleting Option Series
- 28.5 Expiration Cycles on the Bourse
- 28.6 Setting Reporting Levels, Position Limits, and Exercise Limits
- 28.7 Setting Capital and Margin Rules
- 28.8 Developing and Administering Rules Governing the Marketplace and Approved Participants Dealing in Options
- 28.9 Recent Technology Upgrades & Matching Engines
- 28.10 Cross-Border Coordination with U.S. Exchanges
Chapter 29: Listed Options Trading
- 29.1 The Bourse de Montréal Inc.
- 29.2 The U.S. Exchanges
- 29.3 Interlisted Options & Arbitrage Opportunities
- 29.4 Trading Hours Extensions and Impact on Liquidity
Chapter 30: A Day in the Life of a Market Maker
- 30.1 Obligations of Market Makers
- 30.2 How Market Makers Reduce or Eliminate Their Exposure
- 30.3 Algorithmic Quoting & Risk Parameters
- 30.4 Dynamic Hedging of Option Portfolios
Chapter 31: The Impact of Stock Splits, Dividends, and Rights Issues on Option Contracts
- 31.1 Adjustments for Stock Splits
- 31.2 Adjustments for Stock Dividends
- 31.3 Cash Dividends
- 31.4 Impact of Dividends on Option Premiums
- 31.5 Rights Issues
- 31.6 Handling Spin-Offs & Special Dividends
- 31.7 Bourse de Montréal Adjustment Procedures
Chapter 32: Advanced Derivatives Strategies and Applications
- 32.1 Introduction to Derivatives
- 32.2 Key Differences Between Exchange-Traded and Over-the-Counter Products
- 32.3 Exchange-Traded Options: Pricing, Hedging, and Speculating
- 32.4 OTC Options: Caps, Floors, Collars, and Exotic Options
- 32.5 Swaps: Basic Features, Role of the Swap Dealer, and Types of Swaps
- 32.6 How Investment Funds and Structured Products Use Derivatives
- 32.7 The Function of Exchanges and Clearinghouses
- 32.8 OTC Forwards and Other Futures Contracts
- 32.9 Determining Client Suitability
- 32.10 Strategies Based on Market Outlook and Risk Tolerance
- 32.11 Entering Orders
- 32.12 Executing Orders on Exchanges
- 32.13 Payment for Options, Exercise Assignment, or Option Expiry
- 32.14 Tax Implications of Listed Options Trading
Chapter 33: CURRENCY OPTIONS
- 33.1 Exchange Rate Quoting Convention
- 33.2 Selecting the Right Option
- 33.3 Unique Characteristics and Risks of North American Listed Currency Options
- 33.4 Trading Non-G10 Currencies (Liquidity & Volatility Considerations)
- 33.5 CIRO/CSA Reporting Obligations for Currency Options

Chapter 29: Listed Options Trading

In this section

The Bourse de Montréal Inc. - Your Guide to Canada's Premier Derivatives Exchange
Explore the structure, operations, and unique features of the Montréal Exchange—Canada’s top marketplace for equity, index, and currency options. Learn about CIRO oversight, electronic trading systems, best practices, and more.
The U.S. Exchanges
Discover how U.S. derivatives exchanges like Cboe, NYSE Arca, and NASDAQ PHLX operate, their regulatory environment, margin rules, and what cross-border investors need to consider.
Interlisted Options & Arbitrage Opportunities
Explore the mechanics, risks, and rewards of trading options listed on multiple exchanges, and discover how to leverage pricing discrepancies while staying compliant with cross-border regulations.
Trading Hours Extensions and Impact on Liquidity
Explore how extended trading hours in listed options markets influence liquidity, volatility, and risk management strategies, with practical examples and regulatory references.

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