First-Week Flashcards
Difference between Discrete and Continuous Compounding?
Continuous is compounding every ‘milisecond’ and the FV is ALWAYS higher than Discrete
What is the Formula for Discrete FV?
FV = PV* (1+r)^t
PV = FV/(1+r)^t
Formula for Continuous FV?
FV = PV * e^rt
PV = FV * e^-rt
What is Long Selling?
Traditional ‘buy low sell high’ where you will BUY the goods first and then SELL the goods at a higher price later for a profit
What is Short Selling?
Selling goods for HIGHER PRICE first and then speculating price will drop, so you later repurchase the goods when the prices fall, therefore making a profit too.
What is Arbitrage
2 of the same things in EVERY ASPECT but have diff prices –> iPhone 15pro at JB vs iPhone 15pro at HN for $1400 and $1500 respectively.
What is an ‘Arbitrage Opportunity’
When u can make profit without having ANY risk // having a riskless rate of interest
What is a derivative?
Financial product that derive its price based on sth else
What are the 4 types of derivatives?
Forward Contracts
Future Contracts
Options
Swap
What is a Forward Contract?
Contract to buy or sell a good at a specified price on a specified date
What is a Future Contract?
Contract to buy or sell an asset or instrument at a specified price on a specified date?
What is the Long and Short Parties to a contract?
Short Party = counterparty selling
Long Party = counterparty buying
Who benefits if price increases and decreases in a forward contract?
If price decreases –> short party will be favoured
If price increases –> long party will be favoured
Where do Forward Contracts occur?
OTC
Characteristics of a Forward Contract
More informal –> more risk burdened upon counterparties
Characteristics of Future Contracts
- More formal as trade done ‘Organised Exchange’
- B/c its formal, there is NO RISK on parties defaulting
Advantages of Future Contracts
- NO need to find counterparty
- NO default risk
What are the 2 Settlement Procedures for Future Contracts?
- Holding position right to expiry
- Close-out prior to expiry
What does it mean to ‘Hold position right to expiry’
- Physical Delivery at expiry = RARE, but delivery upon delivery date –> usually this process is a write-off
- Cash Settlement at expiry = cannot distribute the right proportion in a given portfolio –> cash settlement
What does it mean to ‘Close out prior to expiry’
Stay in contract at same magnitude but opposite direction
