Chapt 4 Flashcards
Pricing
Daily limits are established by ___ and must be approved by ____.
the Board of Directors; the CFTC
What is the price limit on most exchanges for the current month or spot month?
there is not a daily limit
On the CBOT, what happens when three or more delivery months of a given commodity close at a limit higher or lower?
the daily limit is raised 150% of the current level for all contract months and remain like this for 3 business days. Minimum margin rates are also increased by 150% when price limits are expanded.
Which exchange does not automatically raise margin rates when expanded daily price limits are in effect?
Chicago Mercantile Exchange (CME)
Explain the valuation of a wheat contract on the CBOT:
- 5000 bushels for 1 contract
- prices are quoted in cents and quarter cents per bushel
- the min price fluctuation (tick) is one quarter cent/bushel (AKA $12.50 per contract) 5000 x $.0025 = $12.50
explain the valuation of a soybean contract on the CBOT:
- 5000 bushels/contract
- prices are quoted in cents and quarter cents per bushel
- the min price fluctuation (tick) is one quarter cent/bushel (AKA $12.50 per contract) 5000 x $.0025 = $12.50
explain the valuation of a soybean oil contract on the CBOT:
- 60,000 pounds
- prices quoted in dollars and cents per hundredweight
- daily price limit is 1 cent/pound or $1.00/hundredweight
- expanded limit is $1.50/hundredweight
- min tick is 1/100 of a cent/pound, 1 cent/hundredweight, $6.00 per contract
explain the valuation of a soybean meal contract on the CBOT:
- contract is 100 tons and prices are quoted in dollars and cents per ton
- daily price limit is $10/ton
- expanded price limit is $15/ton
- minimum price fluctuation is $0.10/ton or $10/contract($0.10 x 100 tons = $10.00)
U.S. Treasury Bonds are also referred to as…
T-bond futures
Describe the value and maturing of a T-bond
T-bond futures contract is $100,000 face value of U.S. Treasury bonds maturing at least 15 years from delivery date. T-bonds may not be callable for 15 years after the delivery date
T-bonds call for the delivery of US Treasury bonds which are back by the full faith and credit of the US government, but the futures contracts ____.
are not back by, or obligations of, the US government.
How are T-bond futures prices quoted?
as a % in increments of 1/32 of a point (or tick).
What is the daily price limit of a T-bond futures contract?
96/32nds or $3,000/contract
What is the expanded limit of a T-bond futures contract?
144/32nds or $4500/contract
Bond prices move in an inverted relationship to interest rates. In other words…
when interest rates rise, bond prices drop, and when interest rates drop, bond prices rise.
T-bond futures are referred to as long-term financial futures. What are two other long-term financial futures
Treasury note futures and Government National Mortgage Association Contracts (GNMA futures)
What exchange trades short-term futures contract?
CME
what are the 5 short-term interest rate futures contracts?
- US Treasury bills (US T bills)
- Domestic Certificates of Deposits (CDs)
- Eurodollar Time Deposits
- AMERIBOR
- SOFR
How are US T-bills sold and when do they mature?
sold on a discount basis (less than face value); mature at face value
What is the trading limit for short-term securities?
there is no trading limit
If interest rates decline, what happens to the price of the t-bills contract?
it rises
If interest rates rise, what happens to the price of the t-bills contract?
it declines
What is the face value of a T-bill
$1,000,000.00
what is the minimum tick for a US T-bill?
$25 or (.01%(.0001) x 1,000,000 x 1/4 yr = 25)
the net profit realized in selling the bond futures contract and the using those funds to purchase the bond for delivery
implied repo rate
explain 2 main points about EURODOLLAR futures
- based on a 3 month US dollar London Interbank Offered Rate (LIBOR)
- frequently used to hedge against interest rate changes (for companies that plan to borrow or lend in the future)
explain features of the AMERIBOR
- an alternative to LIBOR
- based on the cost of overnight, unsecured funding across all 50 states and PR
- 7 day and 3 month contracts available on the CBOE
** uses a multiplier of 100, with a pricing convention of 10,000 - (rate x 100) = AMERIBOR
Where are foreign exchange rates established?
in the Interbank Market
involves the purchase and sale of foreign currencies between financial intermediaries, such as commercial and investment banks
Interbank Market - this market is unregulated and decentralized
What is the most common type of transaction that takes place in the foreign exchange market?
spot transactions - which are settled in two business days from the trade date
what type of transaction settles in more than 2 business days on the foreign exchange?
forward transaction
What are the factors that affect supply & demand of a country’s currency?
- demand for raw materials
- country’s balance of payments
- affluence of the population
- level of foreign investment by the country
- government monetary and fiscal policy
- Direct government intervention
**other factors: political atmosphere, threat of war, trade embargoes
was formed to implement monetary policy, conduct foreign exchange operations and operate the system of the Euro
European Central Bank (ECB)
