Chapitre 2 - Manuel Flashcards
When does trading usually cease in futures contract ?
Some time during the delivery period
Futures : who chooses when delivery is made ?
Short position
Majority of futures contracts initiated do not ___
Majority of futures contracts initiated do not lead to delivery
Futures: When do most traders choose to close out their position?
Prior to the delivery period
Futures contract : The exchange must specify in detail the exact nature of the agreement between two parties. What does that include? (4)
- Asset
- Contract size
- Where delivery can be made
- When delivery can be made
Definition : treasury bond contract
Any US Treasury bond that has a maturity between 15-25 years on the first day of the delivery month
Definition: 10-year treasury note futures contract
Underlying asset is any treasury note with a maturity between 6.5-10 years on the first day of the delivery month
Contract size : definition
Amount of the asset that has to be delivered under one contract
What happens if contract size is too large?
Traders who wish to hedge small exposure or take small speculative positions will be unable to use the exchange
What happens if contract size is too small?
Trading may be expensive because there is a cost with each contract traded
Futures contract are specified by ?
Delivery month
The delivery months vary and are chosen by ___
The delivery months vary and are chosen by the exchange t omeet the needs of markket participants
Who specifies the last day of trading ? When does trading cease ?
- The exchange specifies the last day of trading
- Trading ceases a few days before the last day f delivery
Limit down vs limit up vs limit move: definition
Limit down
Price moves down from the previous day’s close by an amount equal to the daily price limit
Limit up
Price moves up from the previous day’s close by an amount equal to the daily price limit
Limit move
Move in either direction = daily price limit
Limit up: definition
Price moves up from the previous day’s close by an amount equal to the daily price limit
Trading ceases for the day once ___
Trading ceases for the day once the contract is limit up or limit down
Why the exchange has the authority to change the limits ?
Prevent large price movements from occuring because of speculative excesses
Position limit : definition
Maximum number f contracts that a speculator may hold
Whe the delivery period is reached, the futures price ___ the spot price
Whe the delivery period is reached, the futures price equals the spot price
Explain why futures price converges to the spot price as the elivery period is approached
Futures price > spot price
- Traders can sell futures contract, buy the asset and make delivery
- Profit = futures price - spot price
- As traders exploit this arbitrage opportunity, the futures price will fall ((futures offer increase = futures price fall)
Futures price < spot price
- Companies will buy a futures contract and wait for delivery
- The futures price will then rise as they do so (increase demande = futures price go up)
Suppose you lost 1800$ in a long position. What happens ?
Long has to pay the exchange clearing house 1800$ and the money is passed to the broker of an investor with a short position
Suppose you gain 1800$ in a long position. What happens ?
Broker for parties with short position pay money to the exchange clearing house and brokers for aprties with long position receive money from the exchange clearing house
When does the investor receive a margin call ? What does he have to do ?
When margin account < maintenance margin : has to top-up the margin account to the initial margin level the next day
What do brokers pays to investors ?
Interest on the balance in a margin account
Why doesn’t balance in the margin account represent a true cost ?
Interest rate is competitive with what could be earned else where
What can investor do to satisfy the initial margin requirements ? What is accepted also in lieu of cash (2)?
Can deposit securities
Also accepted in lieu of cash:
- Treasury (90% of their face value)
- Shares (50% of their market value)
Forward contract (1)vs futures contract (3)
Forward contract
Settled at the end of its life
Futures contract
- Settled daily
- At the end of each day, investor’s gain/loss is added/substracted from the margin account (bringing the value of the cntract back to 0)
- Futures contract is closed out and rewritten at a new price each day
Minimum levels for the initial and maintenance margin are set by ?
Exchange clearing house
Minimum margins determined by ___
Minimum margins determined by the variability f the price of the underlying asset (higher variability, higher margin levels)
Hedger has ___ margins requirements than a speculator because ___
Hedger has lower margins requirements than a speculator because there is less risk of default
Day trade : definition
Traders announce to the broker an intent to close out the position in the same day
Spread transaction: definition
Trader simultaneously buys a contract on an asset for one maturity month and sells a contract on the same asset for another maurity month
Do day trade and spread transaction require lower or higher margin than hedge transactions?
Higher
OTC : who provide initial margin and daily variation margin ? What are they required to contribute to also?
- Members of the CCP
- Have to contribute to a guarantee fund
OTC: When CCP accepts the transaction, becomes the ___
OTC: When CCP accepts the transaction, becomes the cunterparty to A and B
OTC transactions that are not cleared through CCPs are cleared __ + (2)
OTC transactions that are not cleared through CCPs are cleared bilaterally
- 2 companies enter into a master agreement covering all their trade
- Includes an CSA (credit supprt annexe) - -requiring A and B to provide collateral
Bilateral clearing : what happens if
A) Transaction between A and B increase in value to A by X (decrease in value to B by X)
B) Transaction between A and B increase in value to B by X (decrease in value to A by X)
A) B is required to provide X of collateral to A
B) A is required to provide X of collateral to B
Futures trades vs OTC trades
Futures trades
Initial amrgins earn interest
Daily variation margin provided by a clearing house memebr does not earn interest because variation margin = daily settlement
OTC trades
Daily variation margin provided by a member of a CCP earns interest (cash)
Trading volume vs open interest
Trading volume : number of contracts traded in a day
Open interest : number of contracts utstanding (number of long/short positins)
Normal market vs inverted market
- Normal market : futures market where futures price increases with maturity
- Inverted market: futures market where futures price decreases with maturity
Notice of intention to deliver states : (3)
- How many contracts will be delivered
- Where delivery will be made (commodity)
- What grade will be delivered (commodity)
Rule: pass the notice of intention to deliver on to the party with __
Rule: pass the notice of intention to deliver on to the party with the oldest outstanding long position (must accept delivery notices)
What happens if you do not meet the margin call ?
Broker closes out the position
What are the 3 critical days for delivery
First notice day
First day a notice f intention to make delivery can be submitted to the exchange
Last notice day
Last t day a notice f intention to make delivery can be submitted to the exchange
Last trading day
Few days before the last notice day
To avoid the risk of having to take delivery, a trader with a long position should ___
To avoid the risk of having to take delivery, a trader with a long position should close out his contracts before the first notice day
Forward vs futures cntracts (6)
Forward
- Private contract between two parties
- Not standardized
- One specified delivery date
- Settled at the end of contract
- Delivery / final cash settlement takes place
- Some credit risk
Futures
- Traded on an exchange
- Standardized contract
- Range of delivery dates
- Settled daily
- Contract usually closed out prior to maturity
- Virtually no credit risk
How do speculators add liquidity to the market?
- By absorbing excess risk that other participants do not want
- By buing or selling when no other participants are not available
When will open interest :
A) Increase by 1
B) Decrease by 1
C) Stay the same
A) Both sides enter a new contract
B) Both sides close out an existing position
C) One party enters a new contract and one party closes out an existing position
Lequel des énoncés suivants décrit le modèle d’évaluation des actifs financiers (CAPM ou MEDAF)?
A. Modèle qui détermine le montant du capital nécessaire dans des situations particulières B. Modèle utilisé pour déterminer le prix des contrats futures
C. Modèle utilisé pour le calcul du rendement d’un actif à l’aide du rendement d’un indice boursier
D. Modèle utilisé pour déterminer la volatilité d’un indice boursier
C
