ch 3 Market Structure Flashcards
What is the role of derivatives exchanges?
Provide a centralized, regulated, and transparent marketplace to enhance liquidity.
What are the main types of products traded on derivatives exchanges?
Financials (e.g. shares, bonds, FX), Commodities (e.g. metals, energy), and Exotics (e.g. weather, emissions credits).
What are some major derivatives exchanges?
CME Group, ICE Futures Europe, Euronext, Singapore Exchange (SGX), China Financial Futures Exchange (CFFEX).
What are key contract specifications in derivatives trading?
Quality, size, quotation, tick size, tick value, delivery month, and Exchange Delivery Settlement Price (EDSP).
What is the function of an Exchange Delivery Settlement Price (EDSP)?
Used to settle futures contracts at expiry by referencing the spot price.
What are Universal Stock Futures (USF)?
Single stock futures, physically delivered or cash-settled, with contract sizes typically 100 or 1,000 shares.
How do you calculate profit/loss in single stock futures?
Profit/Loss = (Entry Price - Exit Price) × Contract Size × Number of Contracts.
What is the concept of ‘cheapest to deliver’ (CTD) in bond futures?
The most cost-effective bond a short seller can deliver in settlement of a futures contract.
What is a CTD price factor?
A conversion factor used to adjust the futures contract price to the actual deliverable bond price.
How do bond futures help in hedging?
By allowing investors to take positions on interest rate movements, especially using CTD bonds.
What is a Short-Term Interest Rate (STIR) future?
A contract for difference based on a GBP500,000 deposit at a 3-month interest rate.
What is the relationship between STIR futures and interest rates?
Inverse: If interest rates rise, STIR futures prices fall, and vice versa.
How is hedging conducted using interest rate futures?
By taking an opposing position to protect against interest rate fluctuations.
What are the types of exchange membership structures?
General Clearing Members (GCM), Individual Clearing Members (ICM), and Non-Clearing Members (NCM).
What is the role of a General Clearing Member (GCM)?
Clears trades for themselves, their clients, and other exchange members.
What are the key responsibilities of a clearing house?
Acts as a Central Counterparty (CCP), mitigates counterparty risk, and ensures trade settlement.
What is a Dual Capacity member?
A firm that acts as both a broker and a dealer in the market.
What is a cross trade?
A broker matches two client orders without taking a market position.
What is the difference between segregated and non-segregated client accounts?
Segregated accounts keep client funds separate; non-segregated accounts mix them with the firm’s funds.
What are price makers and price takers?
Price makers quote bid/offer spreads (market makers), while price takers trade at quoted prices.
What are the two main types of trading platforms?
Order-driven (electronic trading) and Quote-driven (market makers provide liquidity).
How does liquidity affect derivatives markets?
Greater liquidity lowers transaction costs and reduces price volatility.
What are the key order types in derivatives trading?
Market orders, limit orders, stop orders, stop-limit orders, and day/GTC orders.
What is a market order?
An order executed immediately at the best available price.
What is a limit order?
An order to buy/sell at a specified price or better.
What is a stop order?
An order triggered once the price reaches a predefined level, becoming a market order.
What is a block trade facility?
Allows large transactions off the order book but reported on-exchange.
What is a basis trading facility?
Simultaneous exchange of a financial asset for an offsetting futures position.
What is Exchange Futures for Physicals (EFP)?
Swapping an OTC position for a futures contract to reduce counterparty risk and margin requirements.
What are price limits and position limits?
Price limits prevent extreme price movements; position limits cap open positions to avoid market manipulation.
What is the Mutual Offset Trading Link?
A mechanism allowing traders to clear contracts across exchanges (e.g., CME and SGX).
What is the role of trade reporting?
Ensures price transparency and market integrity by reporting executed trades.
What is the difference between volume and open interest?
Volume = number of contracts traded; Open interest = total outstanding positions.
How does the LME operate?
Uses both open outcry (ring-trading) and electronic order book systems.
