Derivatives Flashcards
Where did derivatives originate from?
Agricultural markets.
What was the first derivatives exchange?
Chicago Board of Trade.
What does CBOT stand for?
Chicago Board of Trade.
What is a derivative?
A financial instrument whose price is based on the price of another asset (an “underlying”).
What are the types of assets that are the underlying in a derivative?
Bonds, shares or commodities such as gold, silver, corn and what.
What are the 4 uses of derivatives?
Hedging, anticipating future cash flows, asset allocation charges and arbitrage.
What are the 4 types of derivatives?
Futures, forwards, options and swaps.
Why would a derivative be used to anticipate future cash flows?
If there is a large inflow of cash expected then futures can be used to fix the price.
How can derivatives be used for hedging?
By buying/selling future contracts, buying put options or selling call options.
What is arbitrage?
When an investment manager tries to derive a risk free profit from buying and selling at the same time on different markets.
Can derivative futures be traded?
Yes.
What is a future derivative?
Where the price of an asset can be traded in the future at a price agreed today.
What type of agreement is a future derivative?
A legally binding agreement.
Where are futures traded?
On exchanges.
Name 2 derivative exchanges.
ICE Europe and the Chicago Mercantile Exchange.
On what terms are futures traded?
Standardized terms eg. only the price is open to negotiation.
What does standardized terms mean?
Only the price is open to negotiation.
What does go long mean when trading futures?
The position taken by the buyer who is committed to buying the underlying asset.
What does go short mean when trading futures?
The position taken by the seller who is committed to delivering the asset.
What is the opening of a future?
The initial trade.