Ch 1 Intro to Derivs Flashcards
What is a futures contract?
An agreement to buy or sell an asset at a future date for a price agreed today.
What is a forward contract?
An OTC agreement similar to futures but customized and not exchange-traded.
What is a contract for difference (CFD)?
A cash-settled contract based on the price difference of an asset.
What are the main uses of futures?
Speculation, hedging, and arbitrage.
What is the profit/loss profile of a long futures position?
Profits in a rising market, losses in a falling market.
What is the profit/loss profile of a short futures position?
Profits in a falling market, losses in a rising market.
What does ‘zero-sum game’ mean in futures trading?
One party’s gain equals another party’s loss.
What is counterparty risk in futures trading?
The risk that the counterparty may default on obligations.
What is liquidity risk?
The risk of being unable to enter/exit positions at fair prices.
What is speculation in futures trading?
Taking on risk to profit from price movements.
What is hedging with futures?
Taking an opposite derivatives position to offset price risk.
What is open interest in futures trading?
The number of outstanding contracts that have not been closed.
What is volume in futures trading?
The number of contracts traded during a specific period.
What is a hedge ratio?
The number of futures contracts needed to hedge an exposure.
What is the relationship between beta and hedging?
Beta measures portfolio volatility, affecting the number of contracts needed to hedge.
What is an option?
A contract giving the right, but not the obligation, to buy/sell an asset at a fixed price.
What is the difference between American and European options?
American options can be exercised anytime; European only at expiry.
What is intrinsic value in options?
The difference between the strike price and the asset price when ITM.
What is time value in options?
The additional premium reflecting potential future price movements.
What is the profit/loss profile of a long call option?
Unlimited profit potential in rising markets, limited loss to premium paid.
What is the profit/loss profile of a short call option?
Limited profit to premium received, unlimited downside risk.
What is the profit/loss profile of a long put option?
Profits in a falling market, limited loss to premium paid.
What is the profit/loss profile of a short put option?
Limited profit to premium received, high downside risk if the asset falls.
What is the put-call parity theorem?
C - P = S - K, ensuring no arbitrage between synthetic positions.
What is a synthetic long futures position?
Long call + short put with the same strike price.
What is a synthetic short futures position?
Short call + long put with the same strike price.
What is gearing in derivatives trading?
Leverage that allows greater exposure for a smaller capital outlay.
What is a FLEX option?
An exchange-traded option with customizable OTC-like features.
What are options on futures?
Options where the underlying asset is a futures contract, commonly used in commodities.
How do corporate actions affect options?
Bonus and rights issues adjust contract sizes and strike prices.
How do dividends affect option pricing?
Higher dividends reduce call option values and increase put option values.
How do interest rates affect options pricing?
Higher interest rates increase call values and decrease put values.
