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CISI Capital Markets Programme: Derivatives > Chapter 3: Market Structure > Flashcards

Chapter 3: Market Structure Flashcards

1
Q

Which Platforms are Used on the London Metals Exchange?

There are 4.

A
  • Select
  • Sword
  • Ring-Trading
  • LME Clear
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2
Q

Which Platforms are Used on the ICE Futures Europe?

How many versions are there of this.

A

ICE Clear and ICE Connect (6 versions)

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3
Q

Which Platforms are Used on the CME Group?

There are 3 for CME…….

A
  • CME Globex
  • CME Direct
  • CME Clearing
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4
Q

Which Platforms are Used on the Euronext?

A
  • Optiq
  • LCH and EuroCCP
  • Euronext Clearing
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5
Q

Which Platforms are Used on the Singapore Exchange?

DC heros on a quest?

A
  • SGX Quest
  • SGX-DC
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6
Q

Which Platforms are Used on the China Financial Futures Exchange?

A
  • CFFEX Order Book
  • CFFEX CCP
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7
Q

What are the Contract Specifications of a Derivatives?

Q S Q T T D E

A
  • Quality
  • Size
  • Quotation
  • Tick Size
  • Tick Value
  • Delivery Month
  • Exchange Delivery Settlement Price (EDSP)
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8
Q

What are Components of the Delivery Month for a Derivative?

What can this comprise of?

A
  • Notice Days
  • Delivery Days
  • Last Trading Days
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9
Q

What is the Tick Size?

A

The minimum price movement of a contract i.e. 1 pence, 1 basis point etc.

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10
Q

What is the Tick Value?

A

The profit or loss for one tick movement.

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11
Q

What are the Components of a Long Gilt Future?

What does this mean for the tick size and tick value?

A
  • Contract size: GBP 100,000NV 4% Gilt
  • Quotation = GBP100NV
  • Valuation = GBP10 (Tick Value) per GBP 0.01 (Tick Size) per GBP100NV (Contract)
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11
Q

What are the Components of a Universal Stock Future?

ie. What is the Tick size? Valuation method? etc.

A
  • A single stock future
  • Global Product
  • Contract specs
    (Physically delivered or cash settled)
    (Contract size: typically 100 shares or 1000 in UK or Italy)
  • Valuation: Price per share
  • Tick Size: 1 penny
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11
Q

What is Convergence, When Pricing Derivatives?

A

When the fair value of the future converges with the cash price, as it approaches delivery.

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12
Q

What is Meant by the Cheapest to Deliver Bond?

Where do these come from?

A

Many long bond contracts are based on a basket of deliverable bonds. At any point in time one will be cheaper than the other, known as the Cheapest to Deliver

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13
Q

What is the Cheapest to Deliver Price Factor?

A

Where the prices are brought in line as often, the price of the deliverable bond and the contract bond might not be the same.

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14
Q

How does one Hedge with Bond Futures, What Formula is Used?

A

No. Contracts Required = Nominal Value of CDT Holding / Nominal Value of Contract X CTD Price Factor

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15
Q

Do You Round the Number of Contracts When Hedging?

A

Absolutley Not!!

Always use the whole number

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16
Q

What are the Factors of a Short-Term Interest Rate Future (STIR)?

What is the Quotation and Value e.g X GBP per basis point etc.

A
  • Contract for Difference
  • 500,000GBP at 3 month short term interest rate e.g. SONIA
  • Quotation: 100 - Implied Interest Rate
  • Valuation: 12.50 GBP per basis point (tick size)
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17
Q

What Would A Speculator Do With STIR Futures if he Thinks Rates Will Rise?

Why?

A

Short them, as when rates go up, prices go down.

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18
Q

What is the Equation for Hedging with STIRs?

Long or short and why?

A

Contracts = Value of Exposure / Value of Contracts

Whether long or short depends on ones concern.

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19
Q

What is the CISI Equation for Hedging with STIRs?

What must you consider for this?

A

No. Contracts = Price Change in the Portfolio given a 1 basis point change in Yields / Price Change in the Contract given a 1 basis point change in yield (Tick Value)

Futures are 3 months and 1 basis point in 0.01%

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20
Q

What is a Dual Capacity Market Participant AKA?

A

Broker Dealers?

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21
Q

What is a Cross Trade?

How does this work?

A

Taking opposite pricipal trades from 2 clients, and reporting them on their own book to the exchange.

22
Q

What are the 3 types of Clearing Members?

GIM

A
  • GCMs (General Clearing Members)
  • ICMs (Individual Clearing Members)
  • NCMs (Non Clearing Members)
23
Q

What Privileges do GCMs Have?

Who can they arrange clearing of trades on behalf of.

A

They can arrange clearing of trades on behalf of themselves, clients, and other clearing house members.

24
Q

What Privileges do ICMs Have?

Who can they arrange clearing of trades on behalf of.

A

They can arrange trades to be cleared on behalf of themselves and other clients.

25
Q

What Privileges do NCMs Have?

Who can they arrange clearing of trades on behalf of, if not who?

A

They cannot arrange for trades to be cleared therefore they must “give up” trades to GCMs for clearing. (they can only have a miximum of 2 agreements)

26
Q

What is a “Give Up”?

Regarding clearing.

A

When the executing broker and clearing broker are different.

27
Q

What are Characteristics of Quote-Driven Markets for Derivatives?

What are these best at selling?

A

For Illiquid contracts.

  • Price Makers
  • Bid / Offer Spreads
  • Screen and Phone calling based
  • Open Outcry
28
Q

What are Characteristics of Order-Driven Markets for Derivatives?

What are these best at selling?

A

More Liquid contracts.

  • Negotiated prices
  • Electronic trading
29
Q

What is STP?

What does this mean?

A

Straight through processing.

Where the order is filled and booked electornically and then sent straight to the clearing house.

30
Q

What are the Steps to Open Outcry Trading?

Before it is submitted to the clearing house?

A

Client > Broker (order slip) > Booth Clerk (dealing slip) > Pit Trader (dealing slip) > Booth Clerk > Broker > Clearing House.

31
Q

Who are Pit Officials in Open Outcry Trading?

A

Take dealing slips and are responsible for official prices, that are then submitted to price vendors.

32
Q

What is an Out Trade in Open Outcry Trading?

A

When the dealing slips do not match, this could casue the trade to fail, or could mean the details need to be reconfirmed.

33
Q

Does the LME Operate on an Order Book or Open Outcry?

34
Q

What is the LME Order Book Called?

What times do these trade between?

A

LME Select

01:00 AM - 19:00 AM

35
Q

What is the LME Quote Driven Market Called?

A

24 Hour inter-office market.

36
Q

How Does the LME Open Outcry Trading Day Operate?

The structure.

A
  • 4 ring sessions per day (each metal trades for 5 minutes)
  • 2 Kerb sessions (all metals are trading together)
37
Q

What is Significant About Session 2 of the LME Open Outcry Day?

What does this also provide?

A

This provides the official LME prices for the day.

It also provides the prices for EDSP.

38
Q

What are Example of Order Driven Trading Systems?

A

ICE Connect, CME Globex, LME Select

39
Q

What is Quoted in the Touch Strip?

A

The highest priced buy and sell orders.

40
Q

What is Level 2 in the Market Order Book AKA?

What is this?

A

Market in Depth.

All other order below the touch strip.

41
Q

What is the Price Limit on the Limit Order AKA?

e.g. Sell 600 at 210

A

No worse than price. i.e they will not take a price less that 210.

42
Q

What is an Immediate or Cancel Order?

Fill-or-Kill

A

A limit order that cannot be partially filled, it is either executed or cancelled.

43
Q

What is a Market-if-Touch Order?

A

A market order with an activation price. This holds off the market order until the touch strip shows the price.

44
Q

What is a Stop-Loss Order?

A

Where a market order is automatically placed when the price falls below a certain level, in order to close out a position quickly.

45
Q

What is a Stop-Limit Order?

Why is this different to a stop loss order and why can this be bad?

A

Where a limit order is automatically placed when the price falls below a certain level, in order to close out a position quickly and guarantee a price.

Some positions may stay open causing further loss.

46
Q

What is a Good Till Cancelled Order?

A

Where the order is not cancelled at the end of the day, it instead stays open until filled or otherwise specified.

47
Q

What is a Day Order?

A

An order that is placed but then also cancelled at the end of the trading day if it is not filled.

48
Q

What is a Limit or Market-on-Close Order?

A

A limit order that is automatically transformed into a market order at the end of the day, if it is not filled at the specified price.

49
Q

What are the Characteristics of a Block Trading Facility?

Wholesale Trading Facilities

What does this mean?

A
  • Large order arranged bilaterally off order book but on-exchange
  • Gives certainty or pricing and execution (not always book price)
  • Trade details are reported to exchange (5 minutes ICE futures)
  • Published trade details destinguished from order book execution (to show block trade).
50
Q

What is a Basis Trading Facility?

Wholesale trading activities.

A
  • Transactions involving the simultaneous trading of the financial asset and offsetting number of futures.
  • Agreed off order book but on exchange.
  • Trade details reported to the exchange (15 mins ICE futures)
51
Q

What do COMEX, NYMEX, CBOT and PHLX Trade?

COMEX sub is made from? PHLX is a Flex

A
  • COMEX - Metals
  • NYMEX - Oil Derivatives
  • PHLX - Financial Contracts
  • CBOT - Agricultural and financial contracts.
52
Q

What is Exchange Futures for Physical?

What are the conditions of this?

A

An exchange of an OTC position for a futures position.

  • Non financial (commodities)
  • Has to be similar in value or quantity
53
Q

What are the Cons of EFPs?

m2m

A

Operational risk due to daily mark to market accounting and margins.

53
Q

What are the Pros of EFPs?

A
  • Reduced credit risk for OTC position
  • Reduced margin requirements
  • 24 hour trading

CISI Capital Markets Programme: Derivatives (11 decks)

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