Exotic Options Flashcards
For a call barrier option, _____ is the call price. The call price is ______ the strike price.
For a put barrier option, _____ is the call price. The call price is ______ the stike price.
Barrier level, higher
Barrier level, lower
For Up & In calls and Down & In puts, these barrier options are like ______ until ____.
For Up and Out calls and Down & Out puts, these barrier options are like ______ until ____.
OTM European-style options until the barrier level is reached.
ITM European-style options until the barrier level is reached
Callabale Bull/Bear Contracts (CBBCs) are traded on the _______ with settlement on ____ days, just as that for a _____
Cash market of the exchange
T+3
Stock
______ issue CBBC.
CBBCs are independent of ______
Investment Banks
Underlying asset and the exchange on which they are listed
Changes in price of a CBBC is _______ with the changes in the ______ as ______
The magnitued of relative movement depends on the ____, which is _____.
very much in accordance with the changes in the underlying asset as the delta of the CBBC is approximately equal to 1.
Conversion ratio which is the number of underlying assets that each unit of CBBC is required to buy or sell.
What does 5:1 mean (conversion ratio of CBBC)?
5 units of a CBBC control 1 unit of the underlying asset
For a Bear CBBC Contract, the MCE (mandatory call event) occurs if ______
For a Bull CBBC Contract, the MCE (mandatory call event) occurs if ______
Spot price touches or moves above the Call Price
Spot price reaches or declines below the Call Price.
The Effective Gearing of CBBC is the same as ______ because _____
Simple gearing because delta is equal to 1.
Gearing Ratio of CBBC =
Underlying Asset Price / (Price of CBBC x Conversion Ratio)
If the effective gearing of CBBC is 5 times, it means _____
1% change in underlying price will result in increase/decrease of the CBBC price by 5%
Gearing ratio is higher if _________
the strike price is closer to the spot price of a CBBC’s underlying asset, leading to more flucutuations in the price and higher risk of the CBBC being called
What’s N-CBBC
Call price = Strike PRICE
Residual value on termination is zero
What’s R-CBBC?
Call price is different from strike price, and a small amount of cash is paid as residual value on termination
What are the characteristics of CBBCs?
Bull Contract: Market View, Call Price & Strike Price, Mandatory Call Event Occurs (knock-out)
Bear Contract: Market View, Call Price & Strike Price, Mandatory Call Event Occurs (knock-out)
What are theoretical factors affecting CBBC pricing? (3)
Price movement of underlying asset
Strike Price
Financial cost
Financial Costs include ______. (3 types) These costs are ____ for CBBCs with _____, and passed on to the _____.
Issuer’s cost of borrowing, adjustments for dividends, and the issuer’s profit margin.
higher for CBBCs with longer maturity
investor by the issuer
What’s theoretical price of a bull/bear contract?
Bull Contract = [(Underlying Asset Price - Strike Price) + Financial Cost] / Conversion Ratio
Bear Contract = [(Strike Price - Underlying Asset Price) + Financial Cost] / Conversion Ratio
What are market factors affecting CBBC pricing? (3)
Liquidity of the underlying asset
Demand and supply of the CBBC
Issuer related factors
What’s the delta for Bull/Bear CBBC Contracts?
Bull: +1
Bear: -1
if MCE occurs
Residual Value for a Bull CBBC Contract =
Residual Value for a Bear CBBC Contract =
(Settlement Price - Strike Price) / Conversion Ratio
(Strike Price - Settlement Price) / Conversion Ratio
if there’s no MCE, the investors can hold the CBBC until maturity. At maturity,
Matuiry value for a Bull CBBC Contract =
Matuiry value for a Bear CBBC Contract =
(Settlement Price - Strike Price) / Conversion Ratio
(Strike Price - Settlement Price) / Conversion Ratio
The MCE Settlement Price in a Bull Contract is _____
The MCE Settlement Price in a Bear Contract is _____
not lower than the minimum trading price of underlying asset between the period of MCE up to the next trading session
not lower than the maximum trading price of underlying asset between the period from the MCE up to the next trading session.
For CBBC expires at maturity, the MCE Settlement Price =
Closing price of the udnerlying asset on settlement day
Similarities and Difference between Knock-Out products and Structured warrants or other products
Underlying Asset
Trading method
Bullish View
Bearish View
Strike Price
Call Price
Mandaotry call mechanism
Implied Volatility
Maturity
Holding Cost
Margin Requirement
Duration
Maximum Loss
What’s the impact of implied volaitility on CBBCs vs. Structured Warrants?
CBBCs: Insignificant to pricing
Structured Warrants: Impacts pricing
Wht’s holding cost of CBBCs vs. Structured Warrants?
CBBCs: Financial costs are deducted daily
Structured Warrants: Time dcay
When early termination (mandatory call mechanism) occurs for CBBCs?
Bull: Underlying asset price < Call Price
Bear: Underlying asset price > Call Price
Brokerage commissions and finance charges are _____ for CFDs.
In Singapore, no _____ be paid on CFD contracts.
Low and competitive
Stamp duty
CFDs has ____ Expiry Date.
NO
CFDs are settlted _____
always in cash only
What are three main business models used by CFD providers?
Market-maker model
Direct market access model
Exchanged-traded CFD model
What’s the mostly used CFD business model in Singapore?
DMA
Exchange-Traded CFDs is _____ model that is available in _____
Uncommon
Australia
All CFD orders are considered to be ______
GTC
What are three types of orders for equity CFDs in Singapore?
Limit orders
Market-to-limit orders
Market orders
Stop Entry orders of CFDs can be used to _____
Exist a short CFD position.
For a short CFD investor, a stop order or a BUY Stop can set a ____ on the position at a price ____.
On the other hand, a long CFD investor can place a Buy Stop order to _____
stop-loss target
above the existing price
enter the market at a price above the existing price, i.e. on a breakout.
Those who are long CFDs ____ a financing cost, while those who are short on CFD contracts _____ financing.
incur
get a financing charge benefit
For short CFD positions, the investors receive interest for _____
Deferring of the sale proceeds
Difference betwen CFDs and Futures
- Trading Plarform
- Maturity & Expiry date
- Financing Cost
- Dividends
What’s CFDs pair trading strategy?
It involves _____
This’s a _____ strategy that aims to _____
One long and One short position in CFDs
Market-neutral strategy that aims to exploit a percevied deviation in the underlying share prices from historical trends and expectation of a reversion of the price to the normal trend in the short-term.
The two positions of CFDs pair trading ____ the risks, and the investor gains if _____
offset the risk
profit on one position is more than the loss on the other
ES (Extended Settlement) Contract Specifies _____
Quantity
Security
Price for final settlement
Future date for contract maturity or expiry
If an ES contract is held to maturity without an offsetting position, the settlement is by _______
physical delivery
Hedgers can use ES contracts for ______ by _______ to ______
Arbitrageurs can ______
Managing their cash market exposure by a long position in the underlying stock and a short position in the ES contracts to lock in prices.
Take advantage of market inefficiencies by taking simultaneous trades that offset each other to capture risk-free profits.
The buy-in of ES starts on the day ______
It starts at _____ (price)
after the due date, i.e. last trading day or LTD+4 day by Central Depository Pte Ltd
two min. bids above the previous day’s closing price, the current last done price or the current bid, whichever is the highest.
SGX set ____ margins in fxied tiers based on ____.
Members may set _____
Outright and spread margins
Volatility of the stock
higher margin requirements
_____ are important criteria for SGX selecting stocks for ES.
Trading volume and market cap
ES contracts commence trading on ____ (day).
Each ES series has a tenor of _____ days.
This ensures _____ to enable customers to ____.
25th of the month preceeding the spot month
35
overlap period to enable customers to roll over their positions
For margins imposed by Member to customer on ES contracts, _____ are exlcuded from margining.
Despite this, the margin calculation by ____ includes _____ because _____
Contra contracts
CDP includes the contra contracts because settlement between CDPand Member for the contracts occurs only on LTD+3
Apart from the brokerage fees, ES contracts are also subject to the following charges_____ (2 types)
A clearing fee of 0.04% of the contract value, limited SGD600
GST on brokerage and clearing fees
ES contracts provide opportunities for arbitraging between _____
the ES market and the ready market
Investors of ES are able to trade spreads between ____ more easily than in the _____
stocks
ready market
Initial Margins for the new trade of ES may be deposited _____ (when)
in advance or within 2 market days from the trade date if the trading member or representative beleives that the margin will be deposited within such time.
The initial margin of ES is calculated as ______
By multiplying the maintenance margin by the IM:MM ratio stipulated by SGX or the Member
Maintenance Margin is calculated by ______ based on ____ (price)
multiplying the margin rate with the value of the ES contract based on the last traded price of the underlying in the ready market
Variation Margins are not required for _____
contra trades
or if the Member allows the customer to book a gain or loss after executing an offsetting trade in an existing position
____ is a must for ES contract
Outright margin
Spread Margining is referred to _____
If an investor holds both a long and a short position in ES contracts of different contract months of the same underlying security, he’s only required to deposit one side of the maintenance margin and not two separate maintenance margin amounts
Acceptable forms of ES margin collateral (5 types)
Cash
Government Securities
Bank Certificate of Deposit
Gold Bars or approved Gold Certificate
Selected common shares
Valuaiton of the collateral for ES is based on ____ prescribed by _____
hiar-cut rates
SGX
Differences among ES Contracts with Contra and Margin Financing
- Leverage
- Financing Cost
- Short Selling
- Borrowing Cost
Knock-in barrier options are ideal for ____
Knock-out barrier options are ideal for _____
Speculating Large market moves
Speculating small moves in a sideways market
Barrier Reverse Convertibles appeal to investors _____.
Looking for income.
The Barrier Reverse Convertibles contain ____, and the investor is taking ___ risk.
Investors are effectively long a bond/money market instrument and short a knock-out put option.
Selling the put option, the investor is is taking downside risk
Investors of Barrier Reverse Convertibles are paid _____ at maturity if _____
principal plus coupon
the barrier is never breached
The coupon in a Barrier Reverse Convertible is paid _____
regardless of market direction of the underlying
Investors of a Barrier Reverse Convertible have a ____ view on direction of the underlying.
They expect ____ and do not expect _____
Neutral
falling volatility
underlying to breach the barrier during product lifetime.
Investors in bonus certificates are generlaly _____ on underlying but are looking for ____ if markets are flat or slightly down.
bullish
yield enhancement
Bonus of Bonus certificates is available as long as _____
the underlying is above the barrier
If underlying of a bonus certificate is below the barrier, investors have ____ exposure to the downside.
1:1
The exposure in a bonus certificate is similar to _____ with the benefit of a bonus if ____
Direct investment in the underlying, with the benefit of a bonus if underlying performance is flat or slightly negative.
In a bonus certificate, Barrier is usually observed ____ throughout the term of the product.
Continuously
In the bonus certificate, if underlying is below the barrier, investors have ____ exposure to the downside.
1:1
Generally, the ____ the strike price is to the spot price of a CBBC’s underlying asset, the ____ will be the gearing ratio of the CBBC.
closer
higher
For category N-CBBC, the call price is equal to its ___.
The CBBC holder will not ______
strike price.
The CBBC holder will not receive any cash payment once the underlying asset price reaches or exceeds the call price (when MCE occurs and the CBBC is called).
Price of a Callable Bull/Bear Contract is NOT adjusted for ____ because ____
regular share dividends
they’re taken into account by the issuer as part of the funding cost
At the end of each day, all open positions in ES contracts will be revalued or marked to their respective ____ prices by ____
Valuation
CDP
In arriving at the Valuation Price of an Extended Settlement (ES) contract BEFORE the LTD, the SGX will take into account _____
After the LTD, when the ES contract has stopped trading, _____ will be used for marking-to-market.
the last traded price, the bid-offer spread at the close of the market and price data derived from pricing models, as selected or established by SGX from time to time
the closing price for the underlying
Excess Margin in case of a customer for an Extended Settlement Contract is the Customer Asset Value in excess of ____
The sum of Initial margin and Variation margin (Additional Margins)
Memebers may allow their customers to withdraw Excess Margins provided such withdrawal will not _____
cause the deposited collateral or Customer Asset Value to be less than zero
A 6-month (125 business days) accumulator with a strike price of S$1.60, with daily observation and 1,000 shares to be acquired per day may help an Investor to get ____ shares for _____
1251,000=125,000 shares for $1.6125,000=$200,000.
A Range Accrual Note (RAN) based on interest rate is a ____
If the closing interest rate on a parrituclar day is ____ of the range, ___ interest may accrue.
Structured fixed income product
If the closing interest rate on a particular day is below the lower end of the range, a lower or zero interest may accrue
RAN basd on the HSI:
The range is the range between ____ barrier and ____ barrier
The range is based on ____
___ volaility in HSI may lead to ____
Knock-out barrier and accrual barrier
Spot price
Higher volatility may lead to higher expected yield
The contract size for Eurodollar Futures is ____.
USD 1,000,000
The upside of RAN is _____
Limited to the maximum coupon rate
Credit Linked Notes (CLNs) are constructed based on ____
The credit default swaps linked to one or more reference entities (a company or companies).
CLNs are ____ (type) products. The principal sum is ____.
They can be settled by ____
OTC
Not guaranteed
cash or physical delivery
Auto-callable structured products normally offer ___ yields to investors to ____.
Auto-callable structured products normally offer HIGHER yields to investors to compensate for the risk of the product being called before maturity.
Auto-callable structured products can be constructed using _____ options (type)
American / Bermudan
What’s the common requirement for both Equity CFDs and Equity Futures contracts?
Margin and Leverage requirements
Investors and directors of listed companies must also note that ES transactions can amount to a change _____, and should comply with ____.
Interest in the underlying security
Companies Act (especially sections 164-166)
SFA (Division 2 and 3 of Part VII)
Listing Rule 704 of the SGX-ST Listing Manual.
The trading schedule of ES contracts is _____.
Fixed
ES contracts are ____ products (type)
Leveraged
The First Trading Day of ES Contract is _____
25th of the month that is immediately preceeding the contract month
