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Investment Practice > Derivatives and other instruments > Flashcards

Derivatives and other instruments Flashcards

1
Q

future long positions and short positions make money

A

rising market
falling market

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2
Q

fair value of future

A

cash price of underlying asset bought today + costs of carry

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3
Q

costs of carry

A

interest rates
storage
insurance

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4
Q

basis

A

cash price - futures price

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5
Q

contango

A

basis is negative
> cash price < futures price

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6
Q

backwardation

A

basis is positive
> cash prcies > future price
temporary shortage of supply
benefit of carry - divided yield on equity or equity index higher than interest rate

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7
Q

forward and futures differences

A

forward:
traded on OTC
more flexible
counter party risk
no central market place (tough to value the contract and price it)
futures:
traded on exchange
contracts are standardised

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8
Q

roll contract used by fund managers (commodity contracts)

A

manager does not wwant to proceed to making or taking delivery and they
close out the current contract
open a position in longer-dated

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9
Q

differences between options and futures

A

option:
seller of option has a potential obligation, buyer has choice
buyer of option pays premium
futures (on exchange):
both parties have the obligation
no premium paid

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10
Q

premium =

A

intrinsic value (profit neglecting costs) + time value

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11
Q

delta =

A

change in the price of the option premium / change in the price of underlying

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12
Q

delta for calls and puts

A

positive for calls (0 to1)
negative for puts (-1 to 0)

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13
Q

time value influencing factors (amount over and above the intrinsic value that an investor will pay for an option)

A

> volatility of underlying asset (vega) - more volatile higher time value
interest rates (rho) - call r incr. time value inc. / put r incr. time value decr.
remaining life of option (theta) - more time higher time value. less time time value decays faster

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14
Q

protective put

A

holding the asset and buying puts to hedge a position

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15
Q

number of otpions to buy to hedge

A

value of portfolio / value of index option * beta

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16
Q

covered call

A

short OTM call option + long position
> in static market
> yield enhancement strategy

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17
Q

protective put

A

long position + long put option
> hedge against a falling market

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18
Q

long straddle

A

increase in volatility
long in call and put with same strike

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19
Q

long strangle and short strangle

A

increase in volatility
decrease in volatility
OTM option

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20
Q

interest rate swaps

A

principal amount notional
agreements to swap cash flow
payments can be netted (have same currency)
compounded fixed rate and the other is variable TSRR

21
Q

currency swap

A

no netting
notional principal exchanges hand in the beginning

22
Q

credit default swap for an index

A

pay premium
firms receive proportional compensation
continues even after default event
first loss ( full payment on first loss)or tranche loss

23
Q

constant maturity default swaps

A

premiums are variable
risk of failure increases hen higher premium

24
Q

synthetic CDO

A

no physical transfer of bonds or loans
CDO gains exposure by selling CDS to credit institution
receives cash
wider variety of loans become accessible because of no physical transfer

25
Q

credit linked notes

A

funded credit derivative
linked to debtors or pool of debtors
price depends on risk debtor
coupons linked to interest payed and redemtpion value
issuer not obligated to pay coupons or repay debt if a specified event occurs

26
Q

unfunded credit derivative

A

b/een 2 parties
make payments
settlement no recourse to other assets

27
Q

funded credit derivative

A

protection seller makes initial payment used to settle potential credit events

28
Q

ETC

A

open ended companies
gain exposure to commodities through derivatives
fund mngrs roll on their positions
don’t exactly mimic commodity values

29
Q

precious metals and base metals perfrom better when

A

economy is in uncertainty
economy is expanding

30
Q

where do they trade
softs and agricultural
metals
energy products
exotics (weather and emissions)

A

UK ICE Futures europe
uk london metals exchange
uk intercontiental exchange us new york mercentalie exchange
chicago mercentile exchange

31
Q

commodity derivative indices

A

S&P GSCI
BCOM
RICI
TR/J CRB

32
Q

S&P GSCI

A

components:
liquidity
weighted by global production levels
24 commodities
60% energy
15% agricultural
11% base metals
livestock + precious metal

33
Q

BCOM

A

liquidity
dollar adjusted production levels avg over 5 yrs
15% individual commodites
33% sectors

34
Q

RICI

A

38 commodities from 9 international exchanges in 4 countries
commodities for inclusion decided by RICI committee
used if play role in consumption for developed and developing countries
diverse

35
Q

TR/J CRB

A

commodity futures price index
19 commodities quited on NYMEX, CBOT, LME, CME and COMEX
4 groups of liquidity with different weights

36
Q

contract siZe for the FTSE 100

A

£5 per half index point
delivery dates : March, June, September, December

37
Q

theta

A

measures the sensitivity of an option premium relative to change in the remaining life of the option

38
Q

option is at the money

A

made up of time value alone and time value is high because of increase d uncertainty

39
Q

number of option to buy to hedge

A

(value of portfolio/value of index option )* beta

40
Q

cheapest to deliver

A

> notional bond
short chooses bond from list of DELIVERABLE BONDS
contract physically delivered

41
Q

ICE Futures Europes STIR

A

traded on ICE
bet on the interest paid on £500k deposit
> 3 month term starting at a futur date
> speculation or hedging
> settle for cash
> tick size 1 bp
tick value: 12.50

42
Q

swap market

A

> financial organisations and money market institutions
OTC
series of transactions at set intervals for a fixed period in the future
CFD exchange of cashflows at the end of each interval

43
Q

equity swap

A

> avoid costs
equity leg (gains/losses and dividends)
interest leg (LIBOR) – deposit

44
Q

types of commodity

A

softs and agricultural (ICE Futures europe)
metals precious in economic uncertainty, base when economy is expanding) (Londons metal exchange)
energy products (Intercontinental exchange UK , US New york mercantile exchange)
exotics (weather (Chicago Mercantile Exchage) and emission

45
Q

LCH.Clearnet

A

> independent
owned by member firms
clearing process for 3 London derviative exchanges

46
Q

long gilt future ( ICE Futures Europe)

A

profit/loss = number of ticks moved * tick value * number of contracts traded

tick: 0.01BP
tick value = 10

47
Q

bond futures key facts

A

> based on notional gilt
gilt delivered is form basket of deliverables
exchange chooses basket
short chooses gilt to deliver form basket
gilt is the cheapest

48
Q

ICE Futures Europe’s FTSE 100 future

A

> cash settled
contract quotation: £10 per point 1
delivery dates: March june september december

Investment Practice (17 decks)

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