Chapter 11 part 2 forwards Flashcards
what are future contracts
a standardized exchange-traded contract in which the seller agrees to deliver a commodity to the buyer at some point in time
What is a clearing corporation
a company that is responsible for reducing the credit risk of futures contracts and option contracts and for making sure that delivery takes place
what is margin
a good faith deposit with a clearing house that is made by both the buyer and the seller to ensure they complete the transaction
what is initial margin
a relatively small deposit made with the clearinghouse, usually between 2 and 10% of the value of the contract
what is maintenance or variation margin
a minimum amount that must be maintained in a margin account
what is margin call
a requirement to add money and increase an equity postion to a minimum level
what is daily resettlement
marking to market and adjusting inveotrs’ equity position
what is settlement price
the price used to settle futures contracts
- usually the daily closing price
what is notional amount
the dollar amount upon which a contact is valued
what is offsetting
cancelling a futures position by making an equivalent but opposite transaction
futures contracts are like what
like are forwards (buy from banks only)
forwards involve what
credit risk which is why investors need a line of credit with their bank before they can purchase
futures are what
standardized Forwards , something needs to be standardized in order to be tradable so that people know exactly what they are getting
the dramatic growth in the development of futures markets occurred because of what problems
- credit risk (borrower won’t pay) if he suffers a loss
problem solved: all futures are made with futures exchange, not with an individual
what is the clearinghouse in canada
Canadian derivatives clearing corporation (CDCC) of the Montreal exchange
what two types of margins does CDCC enforce
- initial margins and
2. a maintenance or variation margin
how is the margin set and by who
it is set by CDCC and it is based on the risk involved in the underlying asset: the riskier the asset the higher the margin
new or smaller clients have a higher margin?
yes
does the underlying asset and the contract need to both be standardized
yes
what are the most commonly delivered months
March, June, Sept, December
in practice does physical delivery take place?
no , most positions are closed o9ut with an offsetting transaction before the final day of trading which is generally a couple of days before delivery
what is the general term for most futures and what does this mean for investors
a rolling 18 month term
investors can normally buy and sell futures on the same commodity with 6 different maturity dates
is there a lot of trading that takes place on Canadian exchanges
no
What is open interest
the number of contracts that are outstanding
- the true amount of futures market activity
what is basis risk
the risk associated with a hedged position that is attributable to the fact that the asset to be hedged is not identical to the asset used as the hedge
when do individuals have to report to the MX (montreal exchange)
when they have 250 or more contracts
why is there a maximum of contracts someone can have
the maximum is 37,575
this is to make sure that no single institution dominates trading
with more futures contracts, the underlying asset is clearly specified, and the party responsible for delivering the asset has no choice. however, bond futures generally provide what
a choice
if interst rates increase then the market value of the bond will
fall , causing a loss in their value
whther the gain on futures contact exactly equals the loss on the long Canada bond portfolio depends on what
how sensitive both are to interst rate changes
if the bond portfolio’s value changes exactly minimc those of the asset underlying the CGB contract, the portfolio will be what
completely hedged
when a portfolio is not completely hedged the investor is
exposed to basis risk
what is an advantage of forward contracts
is that they can be structured to minimize (or even eliminate) basis risk
this is because, unlike futures, forwards are not standardized and can therefore be tailored made with respect to underlying assets and maturity dates
for bonds, how can basis risk be reduced
by adjusting the number of bond futures sold to create a weighted average hedge
