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CFA Level I > Derivatives > Flashcards

Derivatives Flashcards

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CFA flashcards
1
Q

Derivative

A

financial instrument that ~derives~ it’s value from the performance of an underlying asset (equities, fixed income, currency, commodities); always a winner and a loser

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2
Q

Underlying Asset

A

value with risk whose performance determines the value of the derivative (equities, fixed income, commodities, currency)

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3
Q

Long

A

buyer of the derivative; holds the long position

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4
Q

Short

A

seller of the derivative; holds the short position

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5
Q

Forward Commitment

A

type of derivative; forces 2 parties to interact in the future at a price previously agreed upon

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6
Q

Option/Contingent Claim

A

right but NOT the obligation to transact in the future at a previously agreed upon price

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7
Q

Risk mangement

A

process that an organization defines the level or risk it wishes to take and measures the level of risk it’s taking, then adjusts; doesn’t get rid of risk

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8
Q

Exchange Traded Commodities

A

matches sellers and buyers; rules/regulations; NYSE

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9
Q

OTC Securities Markets

A

rules and regulations; bring sellers and buyers together in a physical location; not standardized, less regulated

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10
Q

Clearing

A

process where exchange verifies execution of transactions and records them

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11
Q

Settlement

A

exchange transferred money is transferred from one party to another

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12
Q

Credit Guarantee

A

if the loser of a derivative trade can’t pay the clearing house will pay

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13
Q

Margin/Performance Bond

A

cash deposit required by the clearing house for the contract participants

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14
Q

Transparency

A

full information of all transactions is disclosed to exchanges and clearing houses; exchange markets trait

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15
Q

International Swaps and Derivatives Association (ISDA)

A

worldwide organization of financial institutions that engage in derivative transactions (mostly as dealers)

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16
Q

“Lay Off”

A

get rid of

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17
Q

Dealer Markets

A

dealers informally agree to buy/sell various derivatives

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18
Q

Forward Commitments

A

~have~ to transact at the expiration date

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19
Q

Fixed Price

A

forward price; price at which the underlying will be exchanged

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20
Q

Forward Contract

A

OTC contract at a fixed date and price

21
Q

Non-Deliverable Forwards/Cash-Settled Forwards/ Contracts for Differences

A

cash is exchanged at the end of the contract ~not~ the underlying asset; cash given gives the long enough money to buy the underlying at market value

22
Q

Futures

A

standardized forward contracts that trade on futures exchanges

23
Q

Characteristic of Future Exchanges

A

highly regulated; specific underlying assets, expirations, settlement instructions, quantities

24
Q

Futures Price

A

agreed upon price of the future exhange

25
Q

Mark to Market

A

daily settlements; aggregate average of identical future trades that is then the settlement price

26
Q

Margin Account

A

both long and short deposit money into the account to cover losses if one can’t deliver; ex: short can’t deliver, the long is paid out of the margin account

27
Q

Maintenance Margins

A

amount of money each party needs to retain in the margin account after the trade is initiated

28
Q

Margin Call

A

if one party’s loss is so great their margin account < maintenance margin they have to deposit enough to cover the initial margin account (not just the maintenance margin)

29
Q

Price Limit

A

limit based on band relative to the previous day’s settlement price

30
Q

Limit Up

A

trading stops b/c one party wants to trade above the price limit until the parties agree to a price lower than the price limit

31
Q

Lower Limit

A

trading stops because one party wants to trade at a price below price limit; starts when they agree on a price above the lower limit

32
Q

Locked Limit

A

when market hits the limits and trading stops

33
Q

Call

A

right to buy

34
Q

Put

A

right to sell

35
Q

American

A

can be called/put at any time before the expiration date

36
Q

European

A

can only be called/put on expiration date

37
Q

Exercise/Strike Price

A

fixed price where underlying can be sold/bought

38
Q

Option Premium

A

fair price of the option in a well functioning market

39
Q

Well-Functioning Market

A

transparent information and free trade

40
Q

“In the Money”

A

underlying value > exercise price

41
Q

“Out of the Money”

A

underlying value < exercise prices

42
Q

Payoff Amount

A

value of option at expiration

43
Q

“At the Money”

A

underlying value = exercise price

44
Q

Credit Derivatives

A

contract between 2 parties with a credit protector buyer and a credit protection seller

45
Q

Total Return Swap

A

buyer pays the seller the TR (principal and interest payments) of the underlying and the seller pays the buyer a fixed or floating rate of interest; if there’s a default on the underlying the seller doesn’t get the interest payments but still has to pay buyer the interest

46
Q

Credit Spread Option

A

underlying is a credit (yield) spread; buyer chooses strike price and pays premium to seller; if option is in the money seller pays buyer established pay off

47
Q

Yield Spread

A

difference between the bond’s yield and the yield on a benchmark default-free bond; shows prediction of risk

48
Q

Credit-Linked Note (CLN)

A

buyer holds default risk on the underlying and issues a new security (CLN); if the underlying defaults the payoff on the CLN is also reduced; CLN insures credit risk of underlying

49
Q

Credit Default Swap CDS

A

protection buyer makes regular payments to seller, seller doesn’t make any payments until a credit event occurs

CFA Level I (8 decks)

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