Chap 14- Wordy

Question 1

Forward

Answer 1

Agreement between 2 parties to buy/sell at agreed price and date
Tailored
Privately negotiated

Question 2

Hedging

Answer 2

Reduces risk of future price rises / currency rises

Question 3

Speculate

Answer 3

Profit if price is low - buy

Question 4

Market risk

Answer 4

Market conditions - adverse price change

Question 5

Credit risk

Answer 5

Other party default

Question 6

Futures

Answer 6

Standardised exchange traded contract for asset at given price and date

Question 7

Spot price

Answer 7

Goods provided immediately

Question 8

Future price

Answer 8

Agreed now for future date

Question 9

Initial margin

Answer 9

Small amount of original price
Marketed each day - impacts exchange account
Prevents default

Question 10

Margin call

Answer 10

Triggered - more needed in initial margin

Question 11

Long futures

Answer 11

Buyer

Question 12

Short

Answer 12

Seller

Question 13

Types of futures

Answer 13

Bond - wish to issue own
Stock - takeover
Currency - trading with other country
Interest - expect increase

Question 14

Options

Answer 14

Right but not obligation to buy or sell
Other party has to honour the option
Seller charges a premium to buyer

Question 15

Call option

Answer 15

Right to buy

Question 16

Put option

Answer 16

Right to sell

Question 17

European options

Answer 17

Only exercised on expiry date

Question 18

American option

Answer 18

On or before expiry

Question 19

Swaps

Answer 19

Contract between 2 parties to exchange series of payments for another
E.g interest, currency