Derivatives Flashcards
What are derivatives?
Derivatives are leveraged instruments where participants put up a small amount of money and obtain the gain or loss on a much larger position
What are derivatives used for?
Speculation and Hedging
What is speculation?
Buying or selling a derivative contract in order to earn a leveraged rate of return
What is hedging?
Entering into a derivatives contract to reduce the risk associated with positions or commitments in their line of business – getting rid of risk
A ____ contract is an agreement to transact involving the immediate exchange of assets and funds
Spot
A ____ contract is a non standardized agreement to buy or sell an asset in the future with the terms of the deal set when the contract is created
Forward
A ____ contract is a standardized exchange traded version of a forward contract
Futures
How do future contracts differ from forwards contracts?
They are marketable, have reduced counterparty risk, employ margin requirements and daily making to market
How are futures contracts traded?
They are traded in pits using an open outcry auction among exchange members
Professional traders trade for their ___ accounts
Own
What are some future contract terms?
- trading unit - deliverable grades
- tick size - price quote
- contract months - last trading day
- last delivery day - delivery method
- trading hours - ticker symbols
- daily price limit
A ___ position is the purchase of futures contract
long
A ___ position is the sale of a futures contract
short
A ___ is the unit that oversees trading on the exchange and guarantees all trades made by the exchange
clearinghouse
__ ____ is the total number of the futures, put options, or call options outstanding at the beginning of the day
Open interest
When you are long on stock you are?
Happy
When you are short on stock you are?
Sad
A ____ margin is a deposit required on futures trades to ensure that the terms of the contracts will be met
initial
The ____ margin is the margin a futures trader must maintain once a futures position is taken
maintenance
A ___ is a contract that gives the holder the right but not the obligation to buy or sell the underlying asset and the specified price within a specified period of time
option
A ___ option in an option that gives the purchaser the right, but not the obligation to buy the underlying security form the writer of the option at a specified exercise price on a specified date
Call
A ____ option is an option that gives the purchaser the right, but not the obligation, to sell the underlying security to the writer of the option at a specified exercise price on a specified date
put
If you have an option as long as stock stays a certain amount you keep money, and once it goes above a price you lose money. What type is this?
Written the call option
out of the money is when a stock is ___ the strike price
below
The Black Scholes option pricing model s a function of ___ (name a few)
- The spot price of the underlying asset
- the exercise price on the option
- the options exercise date
- the price volatility of the underlying asset
- the risk free rate of interest
The intrinsic value of an option is the difference between an options____ price and the ____ ___ price
exercise, underlying asset
Most option traders care most about ___
volatility
A ___ option can be exercised at any time before and one the expiration date
American
A ___ option can ve exercised only on the expiration date
European
The underlying asset on a futures option is a ____ contract
futures
A digital default option pays a stated amount in the event of a ___ default
loan
The value of a credit spread call option ____ as the default risk premium or yield spread on a specified benchmark bond of the borrower ____ above some exercise spread
increases, increases
A ___ is an agreement between two parties to exchange assets or a series of cash flows for a specific period of time at a specified interval
swap
A ___ ____ ___ is an exchange of fixed interest payments for floating interest payments by two counterparties
interest rate swap
A ____ swap is a periodic exchange of one currency for another between parties
currency swap
Credit default swaps (CDS) allow financial institutions to
hedge credit risk
Are swap markets standardized contracts?
No
A ___ is a call option on interest rates often with multiple exercise dates
Cap
A ___ is a put option on interest rates, often with multiple exercise dates
floor
A ___ is a position taken simultaneously in a cap and a floor
collar
