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ACI operations > Chapter 9 Derivatives > Flashcards

Chapter 9 Derivatives Flashcards

1
Q

Derivatives definitions

A

Instruments with a price which is depended upon or derived from one of more underlying financial values

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2
Q

Derivatives characteristics

A
  1. Used to hedge (credit) risk
  2. Can be traded on exchange or OTC
  3. Must be reported to trade repositories
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3
Q

Contracts for Difference (CFD)

A

Most derivatives are cash settled; no transfer of underlying value
Examples are: FRA, NDF and STIR Futures

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4
Q

Forward Rate Agreements (FRA)

A
  • OTC derivative
  • Traded on Money market
  • 2 parties enter in a mutual obligation to settle the difference between an interest specified in the contract and the interest on fixing date.
  • Hedging interest risk
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5
Q

Buyer of a FRA

A

Betting on an increase of the reference rate

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6
Q

Seller of a FRA

A

Betting on a reference rate that is lower than the contract rate on fixing date

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7
Q

FRA contract

A 
1. Notional amount
2, Reference interest rate (EURIBOR/LIBOR)
3. Contract interest date 
4. Fixing date
5. Settlement date
6. Underlying period
7. Who the buyer/seller is
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8
Q

Contract term FRA

A

Contract date to the fixing date

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9
Q

Underlying period FRA

A

Starts on settlement date

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10
Q

Fixing FRA

A

2 days before start date of underlying period (=trade date)

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11
Q

Settlement FRA

A

Start date of underlying period

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12
Q

Effective rate FRA

A

Always the forward rate

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13
Q

Money Market Future (STIR Future)

A

Same instruments as FRA but traded on a exchange

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14
Q

Standardized conditions STIR Future

A
  1. Underlying periods 1 or 3 months
  2. Contract amounts
  3. Daycount convention 30/360 over all currencies
  4. Start dates (IMM dates) Third wednesdays in March, Jun, Sep, Dec.
  5. Contract term is period before start date
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15
Q

Opening buy or sell

A

If a member has no other contracts and is selling/buying a future

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16
Q

Closing buy or sell

A

Later transacting the opposite transaction

- The first contract is offset

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17
Q

Exchange traded process

A
  1. Banks sends an order
  2. Exchange sends conf.
  3. Exchange sends details to CCP
  4. CCP sends details on value and margin payments to bank
  5. If the value decreased the bank has to make a payment to CCP margin account
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18
Q

MM Future Short Sterling

A
  • Unit: GBP 500.000
  • Tick: 1 bp
  • Traded on NYSE ICE
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19
Q

MM Future Eurodollar

A
  • Unit: USD 1 mio
  • Tick: 0.5 bp (0.25 bp)
  • Traded on NYSE ICE, CME , SGX
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20
Q

MM Future EURIBOR

A
  • Unit: EUR 1 mio
  • Tick: 0.5 bp
  • Traded on NYSE ICE- Unit: GBP 500.000
  • Tick: 1 bp
  • Traded on NYSE ICE, EUREX, CME
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21
Q

MM Future EuroSwiss

A
  • Unit: CHF 1 mio
  • Tick: 1 bp
  • Traded on NYSE ICE, CME
22
Q

MM Future Euroyen

A
  • Unit: JPY 100 MIO
  • Tick: 0.5 bp
  • Traded on TFX, CME
23
Q

Price of MM Future

A

100 -/- implied forward rate

Price goes up if the forward rate goes down

24
Q

Buyer of a STIR Future

A

Speculating on the fall in the interest rate

25
Seller of a STIR Future
Speculating on the rise in the interest rate
26
Implied forward rate
100- underlying benchmark rate (LIBOR, EURIBOR etc))
27
Last trading date STIR future
2nd working day before 3rd wednesday (11.00 am)
28
Exchange Delivery Settlement Price (EDSP)
Fixing price STIR Future
29
Interest rate swaps
- OTC contract in which 2 parties enter in a reciprocal oblogation to exchange coupons - Used to covert a floating coupon for a fixed and viceversa - Same function as FRA, but can be used over a longer period
30
Price of IRS
- Fixed rate | - Spread over the yield of government bonds
31
Buyer (Payer) of an IRS
- Pays the fixed rate | - Profits from increase
32
Seller (Receiver) of an IRS
- Pays to floating rate | - Profits from a drop
33
Cash flows of a receiver's IRS
1. Plain vanilla: Paying fixed, receiving floating 2. ISDA: fixed coupons netted against floating 3. Fully synchronized
34
Asset swap
Combination of a fixed rate bond and an IRS
35
Overnight index swap (OIS)
OTC derivative in which 2 parties agree to exchange interest payments in the same currency with the floating coupon based on an overnight interest rate index (EONIA, SONIA etc) - Floating coupon is not paid daily but at the end of contract term or anually
36
Options
1. Financial instruments that give one party a unilateral right to enter into a transaction at a specific future date: physical transfer 2. To receive a payment if certain conditions are met at a future date: cash settlement
37
Why use options?
1. Speculation: limited loss potential, unlimited profit potential 2. Hedging: no opportunity loss, no obligation if the underlying position is uncertain
38
Call option
Right to buy
39
Put option
Right to sell
40
Strike price
Predetermined price or interest rate in an option contract
41
Cut-off times
1. Interbank Europe, US: 10 am NY time | 2. Interbank Pacific: 3 pm Tokyo
42
European expiration style
The buyer is only entitled to exercise his right on the expiry date - OTC
43
American expiration style
Buyer can exercise his right at any time | - Stock exchange
44
Bermudan expiration style
Buyer can exercise his right on specific moments
45
Delta
The relationship between an absolute change in the option price and an absolute change in the underlying value 2. The chance that the option will be exercised-
46
Long straddle
An option strategy (more than 1 option)
47
Interest rate guarantee
Option on either a bought or sold FRA
48
Floor / CAP
Consists of a number of consecutive interest rate guarentees with the same exercise price
49
Collar
Buy a cap and sell a floor: long collar | Sell a cap, buy a floor: short collar
50
Swaption
Option for an IRS

ACI operations (11 decks)

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