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Infi > Essentials > Flashcards

Essentials Flashcards

1
Q

Forward contract

A

Customized contract between two parties to buy or sell an asset at a specified price on a future date.

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2
Q

Future contract

A

Futures are (standardized) derivative financial contracts that obligate (!) the parties to transact an asset at a predetermined future date and price.

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3
Q

Direct quotation

A

HC/FC: units of domestic currency per unit of foreign currency. Base currency= FC/Pricing currency= HC

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4
Q

Indirect quotation

A

FC/HC

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5
Q

Exchange rate name vs dimension (direct quotation)

A

FC/HC: value of the first currency expressed in the second currency –> S= HC/FC (direct quotation): units of HC per unit of FC

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6
Q

Bid rate

A

Rate at which the bank buys from you (bidding you money) - you sell!

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7
Q

Ask rate

A

Rate at which bank sells to you (asking you for money) - you buy!

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8
Q

Spread rate

A

Difference between ask and bid (ask > bid)

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9
Q

Primary rates

A

Exchange rates against the USD

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10
Q

Cross rates

A

Rates not involving the USD

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11
Q

Synthetic contract

A

Combination of two or more transactions that yields the same outcome as the originial contract (e.g. synthetic cross rate)

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12
Q

Exchange rate (S)

A

Price of one currency (base) in terms of another (pricing)

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13
Q

Swap rate

A

Difference between forward and spot rate (F-S)

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14
Q

Forward discount

A

Forward rates are below the spot rate at all maturities (discount for FC)

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15
Q

Forward premium

A

Forward rates are above the spot rate at all maturities (premium for fc)

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16
Q

CIP (covered interest rate parity)

A

Relationship between interest rates and spot and forward currency values of two countries are in equilibrium: (1+i)=(S/F)​∗(1+i*​)

  • -> no opportunity for arbitrage using forward contracts
  • -> CIP and UIP are the same when forward and expected spot rates are the same
17
Q

UIP (uncovered interest rate parity)

A

The difference in interest rates between two countries will equal the relative change in currency foreign exchange rates over the same period: F0​=S0∗(​1+i1)/
(1+i2)​​ –> higher interest rate at home predicts a depriciation of HC

18
Q

Difference UIP and CIP

A

CIP involves using forward or futures contracts to cover exchange rates (hedging). UIP involves forecasting rates and not covering exposure to foreign exchange risk (no forward rate contracts, since it uses only the expected spot rate)
–> no theoretical difference between CIP and UIP when the forward and expected spot rates are the same

19
Q

Meese-Rogoff-Result

A

Random walk is the best forecast model for exchange rates –> current exchange rate is “optimal predictor” of future spot rate and summarizes market expectations

20
Q

Disconnect puzzle

A

Past and current macro fundamentals don’t explain/forecast exchange rates

21
Q

Engel and West

A

Exchange rates as assets: Driven by current and expected future fundamentals. –> Thus, predictability does not mean that exchange rates are disconnected from fundamentals.

22
Q

Call

A

Right (option) to buy a stock

23
Q

Put

A

Right (option) to sell a stock

24
Q

Long

A

Buying (e.g.option/forward). Betting on rising prices

25
Q

Short

A

Selling (e.g. option/forward). Betting on falling prices

26
Q

Long call

A

Buying the right (option) from someone to buy a stock for a given price

27
Q

Long put

A

Buying the right (option) from someone to sell a stock for a given price

28
Q

Short call

A

Selling the right (option) to someone to buy a stock from you for a given price (thus you are selling)

29
Q

Short put

A

Selling the right (option) to someone to sell a stock to you for a given price (thus you are buying)

30
Q

Strike price

A

Price at which a derivate contract can be bought

31
Q

A/R

A

Accounts Receivable: money which is owed to a company –> right to receive those accounts because of former delivery of product/service

32
Q

A/P

A

Accounts Payable: debts that a company must pay off –> e.g. short-term debt to suppliers

33
Q

ATM

A

At the money: strike price is identical to the price of the underlying security

34
Q

OTM

A

On the money: strike price is higher (lower) than the market price of the underlying asset for a call option (put option) –> no intrinsic value (worthless at expiry)

35
Q

ITM

A

In the money: strike price is favorable in comparison to the market price of the underlying asset (call: buying below current price; put: selling above current price)

Infi (1 decks)

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