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BU423 Options, Futures, & Swaps > C.2 Futures Markets and Central Counterparties > Flashcards

C.2 Futures Markets and Central Counterparties Flashcards

1
Q

Characteristics of futures contracts

A
  • Available on a wide range of underlyings
  • Exchange traded
  • Specifications need to be defined
  • Settled daily
  • Standard contract
  • Range of delivery dates
  • Almost always closed out before delivery/final cash
  • Virtually no credit risk
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2
Q

Specifications for futures

A
  1. What can be delivered
  2. Where it can be delivered
  3. When it can be delivered
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3
Q

Futures and spot price relationship

A

As the contract approaches the maturity date, the futures price converges to the spot price

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4
Q

What is the margin

A

Is a cash or marketable securities deposited by an investor with his/her broker. The balance is adjusted to reflect daily settlement

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5
Q

What is the margin’s purpose

A

To minimize the possibility of a loss through a defaulted contract

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6
Q

What does the balance have to be in the margin account

A

Retail traders put in an “initial margin” and if the margin falls below “maintenance levels” then the retail trader must provide “variation margin” to bring the balance up to the initial margin

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7
Q

How do you close out a futures position

A

You enter into an offsetting trade

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8
Q

The margin cash flow when futures price increases

A

Short trader

  • > Broker
  • > Clearing House Member
  • > Clearing House
  • > Clearing House member
  • > Broker
  • > Long trader
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9
Q

Bilateral Clearing

A

Transactions governed by an agreement, typically an ISDA Master Agreement, between two sides

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10
Q

Credit Support Annex (CSA)

A

Defines the collateral that has to be posted by each side in a bilateral clearing

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11
Q

Central Counterparties (CCP)

A

Following the 2007-2009 crisis, standardized OTC transactions between financial institutions have to be cleared centrally through clearing houses known as CCPs

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12
Q

How does a CCP function

A

Similarly to an exchange clearing house. Members must provide an initial margin and variation margin, and if a company is not a member, they can clear its transactions through a member

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13
Q

Open interest

A

The total number of contracts outstanding (equal to the number of long positions or short positions)

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14
Q

Settlement price

A

The price just before the final bell each day

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15
Q

Volume of trading

A

The number of trades in one day

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16
Q

Delivery

A

When the contract isn’t closed out before maturity, then the delivery for the assets underlying the contract are delivered to settle. If there are alternatives to where/what/when, the short party chooses

17
Q

Cash settlement delivery

A

Contracts are traded until a predetermined date. At that date, all are considered to be closed out.

18
Q

Futures price patterns

A
  • An increasing function of maturity: normal market
  • A decreasing function of maturity: inverted market
  • Partly normal, partly inverted
19
Q

Trading volume vs open interest

A

If there is a large amount of trades completed (i.e. traders who enter into a position and close out on the same day) then a daily trading volume can > than either the beginning of day or end of day open interest

20
Q

Types of orders

A
  • Market order
  • Limit
  • Stop-loss
  • Stop-limit
  • Market-if touched
  • Discretionary
  • Time of day
  • Open
  • Fill or kill
21
Q

Market order

A

Simplest order. A request that a trade be carried out immediately at the best price available

22
Q

Limit order

A

A order can only be executed at this price or at a more favourable one

23
Q

Stop-loss (Stop order)

A

An order that is executed at a particular price or less favourable one to stop losses

24
Q

Stop-limit order

A

Combo of stop-loss and limit. The order becomes a limit as soon as a bid or offer is made at a price equal to or less favourable than the stop price

25
Q

Stop-and-limit order

A

If stop price and limit price in a stop-limit order are the same

26
Q

Market-if-touched (MIT)

A

Executed at the best available price after a trade occurs at a specified price or more favourable price. Basically becomes a market order once a specified price has been hit. aka board order

27
Q

Discretionary order

A

Aka market-not-held. Like a market order except the broker can delay the trade in an attempt to get a better price

28
Q

Open order

A

Aka good-til-canceled order. Is in effect until executed or until the end of trading in the contract.

29
Q

Fill-or-kill order

A

Must be executed immediately on receipt or not at all

30
Q

Purpose of regulating futures

A

Designed to protect public interest by preventing sketchy trading practices in individuals on the floor, the exchange, or outside groups

31
Q

Corner the market

A

Investor group takes a huge long futures position and also tries to exercise some control over the supply of the underlying commodity. They don’t close out their long position at maturity, such that those in short positions don’t have enough commodity for delivery and become desperate to close out their positions which leads to large rise in futures and spot prices = $$$ for those in long positions

32
Q

Hedge accounting

A

The gains or losses are generally recognized for accounting purposes in the same period in which the gains or losses from the item being hedged are recognized. This is unlike if it is not a hedge, where accounting standards would require changes in the market value of a futures contract to be recognized when they occur.

33
Q

Is daily settlement for future or forward contracts

A

Futures

34
Q

Characteristics of forward contracts

A
  • An OTC agreement to buy/sell an agreement at a future time at a certain price
  • Between two parties
  • Non-standard contract
  • Usually 1 specified delivery date
  • Settled at end of contract
  • Delivery or final cash settlement usually occurs
  • Some credit risk
35
Q

Foreign exchange quotes: futures vs forwards

A
  • Futures: Exchage rates are quoted as the number of USD per unit of foreign currency
  • Forward: Quoted in the same way as spot exchange rates. For the pound, euro, AUS dollar, NZ dollar, the forward quotes are the same futures (ie number of USD per unit of foreign currency). For every other currency, the forward quotes the number of units of the foreign currency per USD dollar

BU423 Options, Futures, & Swaps (3 decks)

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