Chapter 10 Flashcards
What is a currency cross hedge
Transaction in which a MF substitute its exposure to one currency risk for an exposure to another one
To qualify as a hedge the derivative must:
Reducing, offsetting another position
Negative corrolation with the value of another position
Not have an expected offset > than the change in the value of the hedged position
MF use derivative to
Protect against exchange trade risk
Equity manager use derivative
To manage Beta
Margin paid on a standard future or forward is
An account receivable
There is a greater risk with OTC derivative
As compared with a Exchanged traded one
Returns received from a derivative
Are taxed as regular income
Naked writer are
Not permitted in MF writer does not have the security they are obligated to sell
Minimum rating for OTC derivative
A
Underlying asset can be
Financial asser or commodity
The margin paid or deposited on a future or forward is
An account recevable or a current asset
The easiest way to hedge a position is to do what?
To take a position in a derivative contract with a payoff that is the opposite or offsett by the position being hedged
What is a down side of hedging a position ?
Opportunity cost
Derivatives can be uses for non-hedging purposes such as:
Write or sell a call or a put option to earn additional income (premium)
Gain exposure to a market (with options, forwards, futures)
Reduce exposure (buying an option contract to offsett one that was written)
Advantage of using derivatives in a portfolio
Reducing risk (hedging)
Ease of execution
Lower costs
Greater asset allocation
Opportunity to earn
