Chapter 1 - introduction

Question 1

What is Dodd-Frank

Answer 1

Consumer protection act in the aftermath of the financial crisis. Aim was to improve transparancy and financial stability.

Question 2

Elaborate on the sentiment of derivatives

Answer 2

Derivatives make negative headlines, but rarely positive. This is misleading because derivatives exists primarily to provide some kind of hedge or risk management.

Question 3

Define a derivative

Answer 3

A derivative is a security that has a price that is determined by the price of some other asset.

Question 4

When is a derivative risk inducing?

Answer 4

It is all about the context in which the derivative is used. The context determines whether it serves as risk managemnt or as a simple bet

Question 5

Elaborate on the process of a trade

Answer 5

4 discrete steps

1) The buyer and seller must locate each other and agree on a price. Typically done by exchanges.

2) Once agreed, the price must be cleared. In other words, the obligations are specified. For instance, in a stock trade, one party is pbligated to deliver teh shares, the other party is obligated to deliver the cash.

3) the trade must be settled, meaning that the buyer and seller must derliver the obligations within specified time.

4) once complete, ownership records are updated.