Chapitre 1 - Manuel

Question 1

Futures contract : definition

Answer 1

Agreement to buy or sell an asset at a certain time in the future (traded on exchanges)

Question 2

Over-the-counter market : participants (4)

Answer 2

• Banques
• Grandes institutions ifnancières
• Entreprises corporatives
• Gestionnaires de fond (fund managers)

Question 3

The number of derivatives transactions per year in OTC market is __ than in exchange-traded markets but ___.

Answer 3

Le nombre de transactions annuelles dans le marché OTC est beaucoup plus petit que dans les marchés boursiers mais ce sont des transactions de plus grande taille.

Question 4

When a nonfinancial company wants to trade a derivative in the OTC market, it contacts a ___

Answer 4

Quand une compagnie non financière veut échanter sur TC, elle contacte un courtier de dérivés (grande banque)

Question 5

Purpose of new regulations following credit crissi and failure of Lehmann Broothers

Answer 5

• Imprve transparency of TC markets
• Reduce systemic risk

Question 6

3 important changes (regulations)

Answer 6

1. Standardized OTC derivatives between two financial insitutions in the USA must be traded as swap execution facilities (SEF’s) whenever possible
2. A central counterpatty (CCP) has to be used for standardized derivatiles between two financial insitutions
3. All trades must be reported to a central repository

Question 7

Swap execution facilities (SEF) : definition

Answer 7

Platforms similar to exchanges where market participants can cntact each other to agree on trades

Question 8

Market size : OTC vs exchange-traded market

Answer 8

OTC maket is much larger than the exchange-traded market

Question 9

Forward contract : definitin

Answer 9

Agreement to buy/sell an asset at a certain time in the future for a certain price (traded on TC market)

Question 10

Options : caracteristics (2)

Answer 10

• Traded n exchanges and OTC markets
• Two types: call (buy) and put (sell)

Question 11

Eurpoean potion vs american option

Answer 11

• European option can be exercised only on the maturity date
• American option can be exercised at any time during its life

Question 12

Futures contract vs option (2 vs 2)

Answer 12

Futures contract

• Holder is committed t obuying an asset at a certain time and price in the future
• Costs nothing to enter a futures contract

Option

• Holder has the choice to buy an asset at a certain time at a certain price in the future
• Has to pay an option premiums for an option

Question 13

3 different types of traders

Answer 13

Hedgers
Use futures, forward and options to reduce the risk from potential future movements in a market variable

Speculators
Use futures, forward and optins to bet on the future direction of a market variable

Arbitrageurs
Take offsetting poositions in two or more instruments to lock in a profit

Question 14

Hedging : forward contracts vs options (1 v 3)

Answer 14

Forward contracts
Forward contracts neutralize risk by fixing the price that the hedger will pay / receive for the uderlying asset

Options
Option contracts provide insurance

Investors can prtect themselves against adverse price movements in the future while still allowing them to benefit from favorable price movements

Payment of an up-front fee

Question 15

Speculation : futures vs options

Answer 15

Futures
Ptential loss and potential gain is very large

Options
No matter how bad things get, the loss is limited to the amount paid for the options

Question 16

Danger of derivatives versaility (hedging, speculation , arbitrage)

Answer 16

Traders who have a mandate to hedge risk or follow an abirtrage strategy becomes speculators

Question 17

Who am I ?

• Market organized by an exchange where traders either meet or communicate electronically
• Contracts can be defined by the exchange

Answer 17

Exchange-traded market

Question 18

Who am I ?

Telephone and computer linked network financial insitutins, fund managers and corporate treasurers where participants can enter any mutually acceptable contracts

Answer 18

Over the counter market

Question 19

Bid quote : definition

Answer 19

Price at which the market is ready to buy

Question 20

Offer price : definition

Answer 20

Price at which the market is ready to sell

Question 21

A stock when it is first issued provides funds for a company. Is the same true of an exchange-traded stock option?

Answer 21

• When a stock is first issued, it is sold by the company and it provides funds to the cmpany
• Exchange-traded stock option do not provide any funds for the company (security sold from an investr to another, company is not involved)