Forward Commitment and Contingent Claim Features & Instruments Flashcards
What is a “Forward Price”?
A forward price represents an agreed upon forward contract to be exchanged upon at the contract’s maturity date, T.
Denoted as: F0(T)
What is a “Linear Derivative”?
Firm commitment derivative contracts in which the payoff/profit function is linear with respect to the price of the underlying.
What is a “Breakeven Point”?
Represents the price of the underlying in a derivative contract in which the profit to both counterparties would be zero.
What are “Futures Contracts”?
Forward contracts with standardized sizes, dates, and underlying’s that trade on futures exchanges.
What is a “Futures Price”?
The pre-agreed price at which a future contract buyer (seller) agrees to pay (receive) for the underlying at the maturity date of the futures contract.
What does “Mark to Market” (MTM) mean?
The practice in which a central clearing party assigns profits and losses to to counterparties to derivative contracts.
In exchange-traded markets, this practice often takes place daily and is often referred to as daily settlement.
What is “Daily Settlement”?
A specific process of mark-to-market by a central clearing party in which the profits and losses of all counterparties to derivatives contracts are determined using settlement prices for each contract.
What is the “Settlement Price”?
The price determined by an exchange’s clearinghouse in the daily settlement of the mark-to-market process.
The price reflects an average of the final futures trades of the day.
What is a future’s margin account?
An account held by an exchange clearinghouse for each derivatives counterparty.
The funds in such an account are used to ensure that counterparties do not default on their contract obligation.
What are “Price Limits”?
Establish a band relative to the previous day’s settlement price within which all trades must occur.
What is a “Circuit Breaker”?
A pause in intraday trading for a brief period if price limit is reached.
What is “Open Interest”?
The number of outstanding contracts.
What is a “Floating-Rate Payer”?
The counterparty paying the variable cash flows in a swap contract.
May also be referred to as the fixed-rate receiver.
What is the “Fixed Rate Payer”?
The counterparty paying fixed cash flows in a swap contract.
What is a “Swap Rate”?
The fixed rate to be paid by the fixed-rate payer specified in a swap contract.
What does “Exercise” mean?
The decision to transact the underlying by an option holder.
What is the “Exercise Price”?
The pre-agreed execution price specified in an option contract.
Sometimes this price is referred to as the “Strike Price”
What is an “Option Premium”?
The amount that is paid upfront from the option buyer to the option seller.
Reflects the value of the option buyers right to exercise in the future.
What are “European Options”?
Options that may be exercised only at contract maturity.
What are “American Options”?
Options that may be exercised at any time from contract inception until maturity.
What is a “Put Option”?
A right to sell the underlying.
What does “In-the-money” mean?
Describes when an option has positive intrinsic value.
What is “Out-of-the-Money”?
Describes an option with zero intrinsic value because the option buyer would not rationally exercise the option.
What is “At-the-money”?
Describes a situation in which the price of the underlying is equal to an option’s exercise price.
Like an out-of-the-money option, the intrinsic value is zero.
What are “Non-linear derivatives”?
Derivatives, such as options, or other contingent claims, where payoff/profit are asymmetrical.
What does “Time Value” represent?
The difference between an option’s premium and its intrinsic value.
What is a “CDS credit spread”?
Reflects the credit spread of a credit default swap (CDS) derivative contract.
As with cash bonds, CDS credit spreads depend on the probability of default (POD) and loss given default (LGD)
What is a “Credit Event”?
An event that defines a payout in a credit derivative.
Events are usually defined as:
(1) Bankruptcy
(2) Failure to Pay an Obligation
(3) Involuntary Debt Restructuring
