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Investment And Portfolio Management > Chapter 6 > Flashcards

Chapter 6 Flashcards

1
Q

Their origins can be traced back to…., where farmers needed a mechanism to guard against price fluctuations caused by gluts of produce

A

agricultural markets

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2
Q

in order to fix the price of agricultural products produce in advance of harvest time, farmers and merchants enter into

A

forward contracts

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3
Q

these set the price at which a stated amount of a commodity would be delivered between a farmer and a merchant at a pre specified future date

A

forward contracts

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4
Q

worlds first derivatives

A

Chicago Board of Trade (CBOT) 1848

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5
Q

are where raw or primary products are exchanged or traded on regulated exchanges

A

commodity markets

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6
Q

is one when not only the amount and timing of the contract conforms to the exchanges norm, but also tge quality and form of the underlying asset

A

stardardized contracts

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7
Q

are sold by producers and purchased by consumers

A

commodities

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8
Q

much of the buying and selling is undertaken via.. which also offer the ability for producers and consumers to hedge their exposure to price movements

A

commodity derivatives

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9
Q

is a financial instrument whose price is based on the price of another asset, known as the underlying

A

derivatives

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10
Q

underlying could be

A

financial asset
commodity
currency
index

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11
Q

examples of financial assets

A

bonds
shares

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12
Q

examples of commodities

A

oil
gold
silver
corn
wheat

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13
Q

can take place either directly between counterparties or on an organized exchange

A

trading of derivatives

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14
Q

when trading takes place directly between counterparties it is referred to as

A

over the counter trading

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15
Q

when it takes place on an exchange, such as the NYSE the derivatives are referred to as being

A

exchange traded

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16
Q

it plays a major role in the investment management of many large portfolios and funds

A

derivatives

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17
Q

derivatives are used for

A

hedging
anticipating future cash flows
asset allocation change
arbitrage

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18
Q

this is a technique employed by portfolio managers to reduce portfolio risk, such as the impact of adverse price movements on a portfolios value

A

hedging

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19
Q

this could be achieved by buying or selling future contracts, buying put options or selling call options

A

hedging

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20
Q

closely linked to the idea of hedging, if a portfolio manager expects to receive a large inflow of cash to be invested in a particular asset, then futures can be used to fix the price

A

anticipating future cash flows

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21
Q

chnages to the asset allocation of a fund, whether to take advantage of anticipated short term directional market movements

A

asset allocation changes

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22
Q

the process of deriving a risk free profit from simultaneously buying and selling the same asset in two different markets when a price difference between the two exists

A

arbitrage

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23
Q

involves assuming additional risk in an effort to make, or increase, profits in the portfolio

A

speculation

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24
Q

forms of derivatives

A

forward
futures
options
swaps

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25
Q

it enabled standardized qualities and quantities of grain to be traded for a fixed future price on a stated delivery date

A

future contract

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26
Q

have subsequently been extended to a wide variety of commodities and are offered by an ever increasing nunber of derivatives exchanges

A

future contract

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27
Q

when was CBOT introduced the worlds first financial futures contract

A

1975

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28
Q

provides a mechanism by which the price of assets or commodities can be traded in the future at a price agreed today

A

derivatives

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29
Q

is a legally binding agreement between a buyer and a seller.

A

future

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30
Q

a future contract has two distinct features

A

It is exchange traded
it is dealt in standardized terms

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31
Q

the exchange specifies the quality of the underlying asset, the quantity underlying each contract, the future date and the felivery location

A

it is dealt on standardized terms

32
Q

key terms that the futures market uses

A

long
short
open
close

33
Q

the term used for the position taken by the buyer of the future

A

long

34
Q

the person who is… in the contract is committed to buying the underlying asset at the pre-agreed price on the specified future date

A

long

35
Q

the position taken by the seller of the future

A

short

36
Q

it is commited to delivering the underlying adset in exchange for the preagreed price on the specified future date

A

short

37
Q

it is the initial trade

A

open

38
Q

it could be buying a future or selling a future

A

open

39
Q

the physical assets underlying most futures that are opened do not end up being delivered thay are..

A

close

40
Q

when does option pricing model start

A

1973

41
Q

did not really start to flourish until two US academics produced an option pricing model

A

options

42
Q

CBOE

A

Chicago Board Options Exchange

43
Q

LIFFE

A

London International Financial Futures and Options Exchange

44
Q

can also be traded off exchange or OTC, where the contract specification determined by the parties is bespoke

A

Options

45
Q

it gives a buyer the right, but not the obligation, to buy or sell a specified quantity of an underlying asset at a pre agreed exercise price, on or before a prespecified future date or between two specified datee

A

option

46
Q

main classes of option

A

call option
put option

47
Q

it is when the buyer has the right to buy the asset at the exercise price, if they choose to

A

call option

48
Q

it is when the buyer has the right to sell the underlying asset at the exercise price

A

put option

49
Q

the seller is obliged to deliver if the buyer exercises the option

A

call option

50
Q

the seller is obliged to take delivery and pay the exercise price, if the buyer exercises the option

A

put option

51
Q

the buyers of options are the owners of those options and they are also referred to qs

A

holders

52
Q

is the money paid by the buyer to the writer at the beginning of the options contract, it is not refundable

A

premium

53
Q

is an agreement to exchange one set of cash flows for another

A

swap

54
Q

are a form of OTC derivative and are negotiated between the parties to meet their different needs, so each tends to be unique

A

swaps

55
Q

are the most common forn of swaps

A

interest rate swaps

56
Q

they involve an exchange of interest payment and are usually constructed

A

swaps

57
Q

one leg of the swaps is the payment of… and the other leg is a payment of

A

fixed rate of interest
floating rate interest

58
Q

the two exchanges of cash flow are known as the

A

legs of the swaps

59
Q

are instruments whose value depends on agreed credit events relating to a third party company

A

credit derivatives

60
Q

defined as including a material default, bankruptcy, a significant fall in an assets value, or debt restructuring for a specified reference asset

A

credit events

61
Q

the purpose of this is to enable an organization to protectitself against unwanted credit exposure by passing that exposure on to someone else

A

credit derivatives

62
Q

can also be usee to increase credit exposure in return for income

A

credit derivatives

63
Q

is actually more like an option

A

CDS

64
Q

distinct groups of derivatives

A

OTC derivatives
exchange traded derivatives

65
Q

are ones that are negotiated amd traded privately between parties without the use of an exchange

A

OTC derivatives

66
Q

example of products that are traded in OTC derivatives

A

interest rate swaps

67
Q

is the larger of the two in terms of value of contracts traded daily

A

OTC market

68
Q

are ones that have standardized features and can therefore be traded on an organized exchange, such as single stock or index derivatives

A

exchange traded derivatives

69
Q

examples of lending derivatives exchanges are

A

CME
ICE
LME
Eurex

70
Q

the main derivatives exchange in the US

A

CME group

71
Q

it is the worlds largest and most diverse derivatives exchanges

A

CME

72
Q

it operates a number of exchanges and trading platforms

A

ICE

73
Q

LME

A

london metal exchange

74
Q

it trades derivatives on non-precious, non-ferrous metals, such as copper, aluminum and zinc

A

LME

75
Q

is based in frankfurt germary

A

Eurex

76
Q

its principal products are german bond futures and oltions, the most well known of which are contracts on the bund

A

Eurex

Investment And Portfolio Management (6 decks)

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