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FINN 3053 > Chapter 10 > Flashcards

Chapter 10 Flashcards

1
Q

___: trade today
___: trade tomorrow
___: might trade tomorrow

A

spot; forward/future; option

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2
Q

intertemporal securities which ‘derive’ their value from the underlying asset

A

derivatives

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3
Q

An agreement between two parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the future.

A

derivative security

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4
Q

agreement made between a buyer and a seller at time 0 for the seller to deliver the asset immediately and the buyer to pay for the asset immediately

A

spot contract

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5
Q

agreement between a buyer and a seller at time 0 to exchange a non-standardized asset for cash at some future date. the details of the asset and the price to be paid at the forward contract expiration date are set at time 0.

  • the price is fixed over the life of the contract
A

forward contract

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6
Q

agreement between a buyer and a seller at time 0 to exchange a standardized asset for cash at some future date. Each contract has a standardized expiration and transactions occur in a centralized market

  • the price changes daily as the market value of the asset underlying the futures fluctuates
A

futures contract

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7
Q

Describes the prices on outstanding futures contracts that are adjusted each day to reflect current futures market conditions.

A

marked to market

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8
Q

US treasury futures settlement procedures

A

settlement

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9
Q

A purchase of a futures contract.

A

long position

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10
Q

A sale of a futures contract.

A

short position

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11
Q

The unit that oversees trading on the exchange and guarantees all trades made by the exchange traders.

A

clearinghouse

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12
Q

___ requirements on futures that act as a security bond should a counterparty default

A

margin

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13
Q

A deposit required on futures trades to ensure that the terms of any futures contract will be met

A

initial margin

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14
Q

The margin a futures trader must maintain once a futures position is taken. If losses on the customer’s futures position occur and the level of the funds in the margin account drop below the maintenance margin, the customer is required to deposit additional funds into their margin account, bringing the balance back up to the initial margin.

A

maintenance margin

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15
Q

An investment in which traders post and maintain only a small portion of the value of their futures position in their accounts. The vast majority of the investment is borrowed from the investor’s broker.

A

leveraged investment

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16
Q

if losses on the customer’s futures position occur and the level of the funds in the margin account drops below a stated level, the customer receives a ___ ___

A

margin call

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17
Q

a long position in the futures market produces a profit when the value of the underlying T-bond ___

A

increases

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18
Q

a short position in the futures will produce a profit when the value of the underlying t-bond ___

A

decreases (i.e. interest rates rise)

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19
Q

the amount of the margin varies according to the type of contract traded and the ___ of futures contracts traded (e.g. 5% margin of the value of the underlying asset)

A

quantity

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20
Q

A contract that gives the holder the right, but not the obligation, to buy or sell the underlying asset at a specified price within a specified period of time.

A

option

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21
Q

An option that gives a purchaser the right, but not the obligation, to buy the underlying security from the writer of the option at a prespecified exercise price on or before a prespecified date.

A

call option

  • owner is long the underlying, writer is short
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22
Q

if, as the option expires, the price of the stock underlying the option, the buyer makes a profit
–> which is the difference between the __ __ and the ___ ___ of the option ___ the ___ ___ ___ to the writer of the option

A

stock’s price; exercise price; minus; call premium paid

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23
Q

the higher the underlying sock’s price at expiration, the ___ the profit on the exercise of the option

A

larger

(as the underlying stock’s price rises, the call option buyer has a large profit potential)

24
Q

buying a call option is an appropriate position when the underlying asset’s price is expected to ___

A

rise

25
Q

if the underlying sock’s price at expiration is ___ the exercise price, the call buyer is not obligated to exercise the option

the buyers losses are limited to the amount of the __ __ payment made to purchase the call option

A

below; up-front premium

26
Q

in writing a call option on a stock, the writer or seller receives an up-front fee or premium and must stand ready to ___ the underlying stock to the purchaser of the option at the exercise price

A

sell

27
Q

as the underlying stock’s price falls, the potential for a call option writer to receive a positive payoff (or profit) ___

A

increases

28
Q

as the underlying stock’s price ___, the call option writer has unlimited loss potential

A

rises

29
Q

if the underlying stock’s price is ___ than the exercise price at expiration, the call option buyer will exercise the option, forcing the option writer to __ the underlying stock at its high market price and then ___ it to the call option buyer at the lower exercise price

A

greater; buy; sell

30
Q

An option that gives a purchaser the right, but not the obligation, to sell the underlying security to the writer of the option at a prespecified price on or before a prespecified date.

A

put option

  • owner is short the underlying, writer is long
31
Q

The difference between an option’s exercise price and the underlying asset’s price.

  • payoff if the option was exercised right now
A

intrinsic value of an option

32
Q

The difference between an option’s price (or premium) and its intrinsic value.

  • value in excess of intrinsic, from time to expiration
A

time value of an option

33
Q

An option that can be exercised at any time before and on the expiration date.

A

American option

34
Q

An option that can be exercised only on the expiration date.

A

European option

35
Q

the underlying asset on a ______ is the value of a major stock market index (e.g. the DJIA or the S&P 500 index)

A

stock index option

36
Q

the difference between a stock option and a stock index option is that at expiration, the stock index option holder ___ settle the option contract with the actual purchase or sale of the underlying stock index, instead they are settled in ___

A

cannot; cash

37
Q

the underlying asset on a ___ ___ contract is the stock of a publicly traded company

A

stock option

38
Q

one option generally involved ___ shares of the underlying company’s stock

A

100

39
Q

regulates all securities traded on national securities exchanges, including several exchange-traded derivates

A

SEC

40
Q

has exclusive jurisdiction over all exchange-traded derivative securities and regulates all national futures exchanges, as well as all future and options contracts

A

Commodities Futures Trading Commission (CFTC)

41
Q

An agreement between two parties to exchange a series of cash flows for a specific period of time at a specified interval.

A

swap

42
Q

An exchange of fixed-interest payments for floating-interest payments by two counterparties.

A

interest rate swap

43
Q

By convention, a party that makes the fixed-rate payments in an interest rate swap transaction.

A

swap buyer

44
Q

By convention, a party that makes the floating-rate payments in an interest rate swap transaction.

A

swap seller

45
Q

A swap used to hedge against exchange rate risk from mismatched currencies on assets and liabilities.

A

currency swap

46
Q

fastest-growing types of swaps have been those developed to better allow financial institutions to hedge their credit risk

A

credit default swap

47
Q

the ___ ___ __ was an important factor leading to the global financial crisis of 2008, which witnessed the after-effects of poor loan underwritting, shoddy documentation and due diligence, failure to monitor borrower activity, and fraudulent activity on the part of both lenders and borrowers

A

loosening of incentives

48
Q

A call option on interest rates, often with multiple exercise dates.

A

cap

49
Q

buying a cap means buying a call option or a succession of call options on ___ ___

A

interest rates

50
Q

A put option on interest rates, often with multiple exercise dates.

A

floor

51
Q

buying a floor is similar to buying a ___ ___ on interest rates

A

put option

52
Q

A position taken simultaneously in a cap and a floor.

A

collar
(the idea is that the firm wants to hedge itself against rising rates but wants to finance the cost of the cap)

53
Q

you can ‘offset’ a futures contract by entering into an ___ ___

A

opposite contract

(both contracts expire at the same time, the gold purchased from the ‘long’ contract is sold to the ‘short’ contract)

54
Q
  • owner/buyer of the contract chooses if future trade happens
  • writer/seller of the contract has no choice
  • everything else is fixed
  • owner buys the option from the writer, paying them a premium
A

option to trade

55
Q

option to trade (call vs. put):

  • transaction price:
  • expiration date:
  • quantity:
A
  • transaction price: strike/exercise price
  • expiration date: 3rd friday of the month
  • quantity: 100 shares
56
Q
A

FINN 3053 (14 decks)

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