Chapter 5 & 9 Flashcards
______ carry is a term when the price difference btw contracts with two different delivery months equals the full cost of carrying the good from delivery month of 1st contract to the next month.
full carry
3 different types of foreign financial exposures to address when deciding to hedge
- Accounting/Translation
- Transaction/Contractual
- Operation/Economic
what kind of futures contract is an interest-bearing instrument as the underlying asset or debt obligation?
interest rate futures
T-bills, bonds, and Eurodollar futures are examples of ______ futures?
interest rate futures
What futures is among the largest & most diverse?
Interest rate futures
do interest rate futures include BOTH short-term and long-term products?
yes
Name 2 examples of short-term interest rate futures
- Fed Funds (T-billls)
2. Eurodollars
Name 2 interest rate futures that are long-term?
- T-bonds
2. T-notes
Almost all of the activity in US interest rate futures is concentrated on what 2 exchanges?
- CBOT
2. International Monetary Market (IMM) of CME
Which exchange has longer-term interest rate futures?
CBOT
Which exchange has short-term interest rate futures? about 1 month - 10 years money market instruments (T-bills, com paper, banker’s accept, CD, Fed funds, short-term collat loans)
CME
LIBOR stands for______
London InterBank Offer Rate
_____ is the rate at which banks lend funds to other banks in the interbank market? done all electonically and MOST important rate in international finance.
LIBOR
_____ deposits are U.S. dollars held in foreign country’s banks or foreign branches of U.S. banks.
Eurodollars
CME Group offers 30 year _______. most popular contracts traded.
U.S. Treasury BONDS
2, 5, 10 yr ______ also trade on CME GROUP. also very popular is the 10 yr ____ that is traded virtually 24 hrs per day.
U.S. Treasury Notes
_______ allows foreign banks the ability to lend DOLLAR loans to foreign importers (buyers) without incurring currency exchange risks.
Eurodollars
_______ - overnight bank borrowings. are bank reserves at Federal Reserve Banks due to reserve requirements
federal funds
the interest rate loans are made between banks from Fed reserves, fed funds, are called______. not collateralized = unsecured interbank loans.
federal funds rate
what futures derives their value from changes in the yield on T-bills that basically reflect “pure or risk-free” interest rate movements?
Treasury Bill Futures
interest rate futures/swaps that are denominated on the EURO instead of dollars use _____ as reference rate. 3-month euro term deposits, traded on EUREX, trading thru xpresstrade
EURIBOR (European Interbank Offered Rate)
Germany or Swiss’ notional short, medium, long-term debt instrument, different terms, 6% coupon on Euro Schatz, Euro Bobl, and Euro Bund. 4% on Euro Buxi futures.
Euro Bund Futures
_____ UK-government issued debt securities, bonds. issued by UK Debt Management Office (DMO)
Gilts
___ defined as price of money. affect individuals & businesses (mortgage, credit cards, savings account, coupon rates).
Determined by Supply & Demand, feds influence thru monetary policy… key indicators of country’s economic health.
Interest rates
- Ease of Short Selling
- Large Supply of underlying good
- Nonseasonal production
- Nonseasonal Consumption
- Ease of Storage
5 factors that promote ______
full carry (interest rate futures fits this bill)
What INDEX futures contracts is the most widely traded in U.S.
S&P 500
T or F. Stock indexes can’t be traded directly, so futures based on them are primary way of trading stock indexes?
True
____ is a theory that states exchange-adjusted prices on SAME good must be within transaction costs and equal globally.
Law of One Price
what kind of arbitrage exists when 1 currency sells at different prices in 2 different markets (countries)
Geographic Arbitrage
_____rate is exchange rate btw 2 currencies trades that tie in a 3rd currency relatively. Example: dollar to Euro, dollar to Pound.
cross-rate
_____ parity is the notion that the ratio btw domestic & foreign prices should equal the equilibrium exchange rate btw domestic & foreign currencies. In other words, price should be the same in different countries for the SAME good due to exchange rate.
purchasing power parity
_____ effect states that nominal % differential btw 2 countries should = inflation differential btw the these countries. (interest rates affected by inflation)
Fisher Effect
_______ Fisher Effect states that % differences btw 2 countries should be unbiased predictor of future changes in spot rates.
International
____ is a condition where % differences btw 2 countries is approx = to forward differences btw 2 currencies, and thus can’t ‘enjoy’ arbitrage.
Interest-rate parity
true or false. forward rate is an unbiased predictor of FUTURE SPOT rate.
True
- Balance of Payments
- Fixed Exchange Rates
- Other Exchange Rates (free float, dirty float, pegged, joint)
all of these are determinants of _______ Rates
Foreign Exchange
Deficit BOP =
imports > exports (spends more than makes)
Surplus BOP
Exports > Imports (makes more than spends)
