ch 8 Trading; Hedging and Investment Strategies Flashcards
What are the two types of futures spreads?
1) Intra-market spreads, 2) Intermarket spreads.
What are the key motivations for intra-market spreads?
Speculation, reducing outright risk, arbitrage, and rolling over existing contracts.
What is the difference between intra-market and intermarket spreads?
Intra-market trades futures of the same asset but different expiries, intermarket trades different but related assets.
What is the impact of contango on intra-market spreads?
Spread narrows: Buy near dated, sell far dated. Spread widens: Sell near dated, buy far dated.
How does an inter-market spread help portfolio allocation?
Allows exposure adjustment without selling underlying securities (e.g., selling FTSE 100 futures, buying gilt futures).
What are the key applications of index futures?
Used for speculation and hedging, including basic hedging and beta hedging.
What is beta hedging?
Adjusting a portfolio’s exposure based on its beta to minimize market risk.
How do you calculate the breakeven point for a vertical spread?
Call spread: Low strike + net initial debit. Put spread: High strike - net initial credit.
What is the primary goal of a covered call strategy?
To generate income by selling calls against a long stock position while limiting upside potential.
What is a protective put?
Buying a put option while holding the underlying asset, protecting against downside risk.
What is the difference between a synthetic long and a synthetic short?
Synthetic long = Long call + Short put. Synthetic short = Short call + Long put.
What is a bull call spread?
Long a lower strike call, short a higher strike call, limited upside profit with lower premium cost.
What is a bear call spread?
Short a lower strike call, long a higher strike call, benefits from a declining market.
What is a bull put spread?
Long a lower strike put, short a higher strike put, earns premium while benefiting from rising prices.
What is a bear put spread?
Long a higher strike put, short a lower strike put, benefits from falling markets while reducing premium costs.
How does a horizontal spread differ from a vertical spread?
Horizontal spreads use the same strike but different expiries, vertical spreads use different strikes with the same expiry.
What is a long straddle?
Buying a call and a put with the same strike and expiry, profiting from volatility.
What is a short straddle?
Selling a call and a put with the same strike and expiry, profiting from low volatility.
What is a long strangle?
Buying a call and a put with different strikes but the same expiry, profiting from larger market moves.
What is a short strangle?
Selling a call and a put with different strikes but the same expiry, profiting from low volatility.
How do synthetic positions relate to options?
They replicate traditional positions using options (e.g., long stock = long call + short put).
What is the purpose of delta hedging?
To neutralize directional exposure by adjusting positions based on option delta.
How can a hedge fund use derivatives?
For speculation and hedging across asset classes to maximize returns and manage risk.
What is the primary objective of a sovereign wealth fund using derivatives?
To enhance portfolio returns while managing risk exposure across different asset classes.
How do corporate treasurers use derivatives?
Primarily for hedging currency, interest rate, and commodity price risks.
What is an example of an intermarket spread?
Selling FTSE 100 futures while buying gilt futures to adjust asset allocation.
What is the impact of a widening spread in an intra-market spread trade?
Traders sell the spread by selling the near-dated future and buying the far-dated future.
What is the maximum profit in a bull call spread?
Difference between strikes minus net initial debit paid.
What is the maximum loss in a bear put spread?
The net initial debit paid when entering the spread.
