Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

investments > Chapter 17 - futures markets and risk management > Flashcards

Chapter 17 - futures markets and risk management Flashcards

1
Q

forward contract

A

An arrangement calling for future delivery of an asset at an agreed-upon price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

futures makets

A

Establish contract size, acceptable grade of commodity, contract delivery dates, etc.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Key differences between futures and forwards:

A
  • futures contracts are standardized, traded on organized exchanges, and settled on a daily basis
  • forward contracts are customized, traded over the counter, and settled at the expiration of the contract
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

basics of futures contracts

A
  • Calls for delivery of a commodity at a specified delivery date, for an agreed-upon price
  • Place and means of delivery are specified
  • Parties to the contract much more commonly close out their positions before contract maturity
  • Taking gains/losses in cash
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

futures price

A

The agreed-upon price to be paid on a futures contract at maturity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

long position of futures

A
  • The futures trader who commits to purchasing the asset
  • Profit = spot price and maturity - original futures price
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

short position in futures

A
  • The futures trader who commits to delivering the asset
  • Profit: original futures price - spot price and maturity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

“zero-sum game” of futures

A

losses/gains to all positions netting out to 0

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

futures categories

A

agricultural, metals/minerals (includes energy), foreign currencies, and financial (fixed-income and equities)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

single stock futures

A

A futures contract on the shares of an individual company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

clearing house

A
  • Established by exchanges to facilitate trading, an intermediary between two traders
  • The only party that can be hurt by the failure of any trader to honor the obligations of the contract
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

open interest

A
  • the number of contracts outstanding
  • long/short position are not counted separately
  • Can be defined as the number of long or short contracts outstanding
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

marking to market

A
  • The daily settlement of obligations on futures positions
  • E.x. Clearinghouse credits/debits the accounts of the long/short position of the futures price rises
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

margin

A

a security account consisting of cash/equivalents (such as T-bills) that ensures the trader will be able to satisfy the obligations of the futures contract

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

maintenance margin

A
  • An established value below which a trader’s margin may not fall
  • Reaching the maintenance margin triggers a margin call
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

margin call

A

requires the margin account be replenished or the position be reduced to a size commensurate with remaining funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

convergence property

A

The convergence of futures prices and spot prices at the maturity of the futures contract

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

cash settlement

A

The cash value of the underlying asset (rather than the asset itself) is delivered to satisfy the contract

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

federal commodity futures trading commission (CFTC)

A
  • regulates futures markets
  • Sets capital requirements for member firms, authorizes trading in new contracts, and oversees the maintenance of daily trading records
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

general rule of capital gains

A

60% of futures gains/losses are treated as long-term cap gains and 40% as short term

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

speculator

A

uses a contract to profit from movements in futures prices

22
Q

hedger

A

uses a contract to protect against price movements

23
Q

short hedge

A

taking a short futures position to offset risk in the sales price of an asset

24
Q

why futures?

A
  • Transaction costs are far small in futures markets
  • Leverage because of margin
25
Q

cross-hedging

A

hedging a position using futures on another asset

26
Q

basis

A

The difference between the futures price and the spot price

27
Q

basis risk

A

Risk attributable to uncertain movements in the spread between a futures price and a spot price

28
Q

futures spread

A

taking a long position in a futures contract of one maturity and a short position in a contract with a different maturity

29
Q

Spot-futures parity (cost-of-carry relationship)

A
  • Describes the theoretically correct relationship between spot and futures prices
  • Violation of the parity relationship gives rise to arbitrage opportunities
  • F0 = S0(1+rf)^T
  • S0 = F0/(1+rf)^T
30
Q

spot-futures parity (cost-of-carry relationship) if there is a dividend

A
  • F0 = S0(1 + rf - d)^T
  • If d < rf, the futures price will exceed the spot price and by greater amounts for longer times to contract maturity
  • If d > rf, the income yield on the stock actually exceeds the forgone (risk-free) interest that could be earned on the money invested
  • The futures price will be less than the spot price and by greater amounts for a longer time to contract maturity
31
Q

contract size

A

the multiplier used to calculate contract settlements

32
Q

synthetic stock positions

A

Index futures let investors participate in broad market movements without actually buying/selling a large number of stocks

33
Q

timers

A
  • Attempt to shift from bills intro the market before market upturns and shift back into bills to avoid market downturns
  • Using futures contracts makes trading costs much lower
34
Q

index arbitrage

A
  • Strategy that exploits divergences between actual futures prices and their theoretically correct parity values to make a riskless profit
  • If the futures price is too high, short the futures contract and buy the stocks in the index
  • If too low, buy futures and short the stocks
35
Q

program trading

A

Coordinated buy orders and sell orders of entire portfolios, often to achieve index arbitrage objectives

36
Q

hedging foreign exchange risk and Ex

A
  • can be hedged through currency futures or forward markets
  • E.x. if you know you will receive £100,000 in 60 days, you can sell those pounds forward today in the forward market and lock in an exchange rate equal to today’s forward price
37
Q

direct quotes

A

the number of US dollars required to purchase some unit of foreign currency

38
Q

direct quotes

A

the number of US dollars required to purchase some unit of foreign currency

39
Q

indirect quotes

A

the amount of foreign currency needed to purchase $1

40
Q

Major US interest rate contracts

A
  • Eurodollars, Tbills, Tnotes, and Tbonds
41
Q

interest rate futures

A

Allow traders to hedge against interest raet risk in a wide spectrum of maturities

42
Q

treasury contracts

A
  • call for delivery of a T-bond, bill, or note
  • If interest rates rise, the MV of the security at delivery will be less than the original futures price, and the deliverer will profit
  • The short position in the interest rate futures contract gains when interest rates rise and bond prices fall
43
Q

Price value of a basis point (PVBP)

A
  • The change in the value of a fixed-income security resulting from a one-basis-point change in its yield to maturity
  • PVBP = change in portfolio value / predicted change in yield
44
Q

hedge ratio (H) =

A

= PVBP of portfolio / PVBP of hedge vehicle

45
Q

cross-hedging

A

Hedging a position in one asset by establishing an offsetting position in a related, but different asset

46
Q

swaps

A

Multiperiod extensions of forward contracts

47
Q

foreign exchange swaps

A
  • An agreement to exchange a sequence of payments denominated in one currency for payments in another currency at an exchange rate agreed to today
  • Exchange of currencies on several dates
48
Q

interest rate swap

A

Contracts between two parties to trade cash flows corresponding to different interest rates

49
Q

notional principal

A

Principal amount used to calculate swap payments

50
Q

swap dealer

A
  • Typically a financial intermediary such as a bank
  • Finds people looking to take opposite sides of a swap so its preposition is effectively neutral
  • Charges a bid-ask spread on the transaction

investments (14 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions