CH6 - DERIVATIVES Flashcards
What are the advantages of investing with derivatives?
Enables suppliers to secure future delivery & cashflow.
Hedge risk
Speculate on a wide range of assets
What are the disadvantages of investing with derivatives?
Exposed to unlimited losses.
Very volatile
Counterparty default risk in OTC markets.
What uses do derivatives have?
Anticipating future cash flows
Arbitrage
Hedging
Asset allocation changes
What are the two distinct features of futures contracts?
Exchange traded
Standardized terms
What does it mean to be a covered future seller?
Seller has the underlying asset that will be needed for delivery.
Who are the two participants in an options trade?
The holder and the writer.
What is an interest rate swap?
Agreement to swap one set of cash flows for another.
When are interest rate swaps used?
Replacing fixed interest with floating interest.
Switching financing between currencies.
What are interest rate swaps used for?
To hedge exposure to interest rate changes.
What is a credit default swap?
Instruments whos value depends on credit events relating to a third-party company.
What are credit default swaps used for?
Enables companies to protect themselves against credit exposure. Insurance for debt essentially.
What are the 3 main derivatives exchnages?
ICE - Intercontinental Exchange
Eurex
LME - London Metal Exchange
What market are freight and plastics traded on?
Commodity
What is the name of the major UK market for trading in derivatives?
ICE Futures Europe
