Brainscape's Knowledge GenomeTM

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


See full index

IMC Unit 2 > Chapter Seven > Flashcards

Chapter Seven Flashcards

1
Q

You own a portfolio of gilts and are concerned interest rates may rise in the near future. What could you employ to protect the value of your portfolio?

A

Sell a long gilt future - a ten year gilt future

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

What is a long gilt future?

A

It allows investors to speculate on or hedge against the future price movements of long-dated UK government bonds, known as gilts.

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

If a call option with an exercise price of £3 is purchase for £1, what is the maximum loss?

A

£1 as when buying an option, the most the holder can lose is the premium paid

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

What is margin commitment?

A

Initial margin is a refundable good faith deposit on the worst probable one day’s loss. It is calculated as a net figure by the clearing house

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

If the underlying share is at £1.30, what is the intrinsic value of a £1.50 call which was bought for a premium of 20p when the underlying share was trading at £1.65?

A

Nil, since the call option is out the money it will have no intrinsic value. All of the premium is time value

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

What will an equity put option contract specify?

A
  1. The number of shares to be sold
  2. The exercise price for the shares
  3. The expiry date
  4. The particular share on which the contract is based
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is a put option?

A

It gives the holder the right to sell a standard quantity of a specified asset on a fixed future date at a price agreed today

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

If you are depositing cash in August and are worried that rates will fall, what would be an appropriate hedging transaction?

A

Buy September short sterling as it relates to future interest rates for three months from September. By purchasing September short sterling futures, you are essentially betting that interest rates will fall in the future. If interest rates do decrease, the value of the short sterling futures contract is likely to increase.

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

Is a future standardised?

A

Yes

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

Do futures involve obligations to buy or sell an asset?

A

A future involves an obligation to buy or sell an asset

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

Does a future require delivery of an asset?

A

Yes, for physical delivery or also cash settlement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Is a long future equivalent to a long put/short call at the same exercise price

A

No, as a long put/short call position would create a synthetic short future position

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

A call option is in the money if?

A

The exercise price is below the asset price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is LCH?

A

London Clearing House

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

What does the clearing house do in the market for exchange traded derivatives?

A

To ensure the credibility and liquidity of the market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What will the clearing house guarantee?

A

The fulfilment of each contract and becomes the formal counterparty for both the buyer and seller of the derivatives contract

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

What risks are the clearing house and the buyer/seller exposed to?

A

Buyers and sellers are unaware of each other’s identity and are not exposed to the credit risk of the other individual but only to the risk of the clearing house. The clearing house is exposed to the respective credit risk of the buyer and the seller

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

If a warrant on its expiry date has the right to subscribe for a share at a price of £3 and the share price is £5, what is the time value?

A

Since the warrant is on its expiry date, it has no potential to make any further profit in the future and as a result would have no time value

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

Which index is used as the basis for a ICE Futures Europe stock index future?

A

The FTSE 100 Index future is a vailable for trading on ICE Futures Europe and cash is settled at £10 per index point

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is the minimum amount a FTSE 100 Index future can move?

A

The minimum the contract can move is 0.5 of an index point. The value of a tick is £5

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

Delivery months of a FTSE 100 Index future?

A

March, June, September, and December

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is true when a warrant is out the money?

A

Its exercise price is more than the underlying price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What are interest rate swaps based upon?

A

SONIA and a fixed rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Can interest rate swaps be based upon two different currencies?

A

Yes

25
Q

What are interest rate swaps in their simplest forms?

A

Exceedingly liquid instruments

26
Q

Are interest rate swaps used commonly by companies and individuals?

A

There is no role for an individual in the swaps market as the principals involved are generally large amounts of money mainly used by institutions

27
Q

Where do covered warrants trade?

A

They trade on the London Stock Exchange in the UK and settlement is carried out through CREST

28
Q

Who issues covered warrants?

A

Typically issued by investment banks rather than the company themselves, who issue ordinary warrants

29
Q

What are the two types of covered warrant?

A

Call and put warrants

30
Q

What is Theta?

A

The sensitivity in the option price with respect to the passing of Time

31
Q

What is Delta?

A

With respect to a change in the underlying asset price

32
Q

What is vega?

A

With respect to a change in the volatility

33
Q

What is Rho?

A

With respect to a change in interest rates

34
Q

What rights does a warrant give to the holder?

A

The right to buy a new share

35
Q

Are forwards standardised?

A

No they are not as they are OTC products

36
Q

What is a feature of currency swaps?

A

They have an exchange of principal at the outset which is returned at the end of the swap contract agreed term

37
Q

When can American options be exercised?

A

Before or at expiry

38
Q

How much of the contracts required to hedge an accurate tracker of the same value does a portolio with a beta of 0.8 need?

A

80%

39
Q

What is a CDS?

A

A credit default swap is a form of credit insurance.

40
Q

What is a CDO?

A

A collateralised debt obligation which is a securitised investment vehicle into which risky assets can be transferred

41
Q

Which currency swaps require an exchange of principal?

A

Only currency swaps that are not wholly sterling require an exchange of principal

42
Q

An investor who has a short straddle position expects what?

A

A price volatility decrease is the motivation for a short straddle, it is not a directional strategy

43
Q

An investor wishes to headge a £30 million deposit against a fall in interest rates, what action should the investor take with the Short Sterling future

A

Depositors go long to hedge. One contract hedges £500,000 principal so 60 contracts are needed to hedge £30 million

44
Q

What does an increase in interest rates do to the value of a call and put option?

A

Increases the value of a call option but reduces the value of a put option

45
Q

What is intial margin?

A

A returnable deposit based on the worst probable one day price movement

46
Q

How must variation margin be paid?

A

In cash

47
Q

Who must pay initial margin for futures?

A

Both the buyer and seller

48
Q

What are the characteristics of futures?

A

Standardisation of:
1. Quantitites
2. Delivery dates
3. Assets

49
Q

What is the unit of trade for the short sterling future?

A

£500,000

50
Q

What is the tick size on the FTSE 100 index future?

A

0.5

51
Q

How is the long gilt future contract settled?

A

It is physically settled through the delivery of £100,000 nominal of gilts

52
Q

Can the time value exceed total premium?

A

Time value can never exceed the total premium

53
Q

What is a CDO?

A

A collateralised debt oligation issues various tranches of securities.

54
Q

What do CDOs involve?

A

They involve packing up a collection of revenue generating assets (e.g. bank loans) and issuing a bond backed by these assets. These bonds can be sliced into tranches of varying degrees of credit risk

55
Q

What us a synthetic CDO?

A

If a CDO is made up of credit derivatives, it is called a synthetic CDO. They invest in high quality debt and boost income by selling CDSs, increasing return at an increased risk

56
Q

What does a protective put position entail?

A

An investor is long in the put, long in the stock. The put option increases in value if the share price falls, thus protecting the portfolio value in total

57
Q

When does nake put writing occur?

A

When the writer does not have sufficient cash in their brokerage account to purchase the stock if required. The writer of a put option is required to buy the stock if the holder exercises their option

58
Q

What is the variation margin paid in respect of a futures position based on?

A

The price movement of the previous day. It is a daily marking to market procedure, ensuring that losses on derivative positions are paid on the exchange

59
Q
A

IMC Unit 2 (11 decks)

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