Future Markets and EFTs

Question 1

Underlying Asset

Answer 1

Refers to the real financial asset or security that a financial derivative is based on.

Question 2

Derivatives

Answer 2

Financial instruments whose value is derived from an underlying asset.

Question 3

Types of Derivatives

Answer 3

• futures
• options
• swaps

Question 4

Options

Answer 4

Options give holders the right, but not the obligation, to buy or sell an underlying asset at a specified price (strike price) within a predetermined time frame.
The asset can be:
- stocks
- bonds
- commodities
- currencies
- indices

Question 5

Call Option

Answer 5

Gives the holder the right to buy the underlying asset at the specified strike price before the option expires.

Question 6

Put Option

Answer 6

Gives the holder the right to sell the underlying asset at the specified strike price before the option expires.

Question 7

Forward

Answer 7

An agreement to buy or sell a fixed quantity of a given asset at a specific date in the future at a certain price agreed upon today.

Question 8

Future Contract

Answer 8

A forward with standardised terms in terms of:
- contract size
- expiration dates
- other specifications
enabling contracts to be fungible and easily traded.

Question 9

Future Example

Answer 9

Let’s say an investor enters a futures contract to buy 100 barrels, 60 (unknown currency) per barrel, with a delivery rate three months into the future.
If the price of barrels increases during this waiting period, the buyer benefits since 60 was the agreed price. but if the price lowers, the seller benefits.

Question 10

Rollover

Answer 10

You may need to exit your current positions from an expiring contract and enter a new position in the next available contract as liquidity tails towards the old contract expiration date.

Question 11

Continuous Contract

Answer 11

Glues one contract to another.

Question 12

Back-Adjust

Answer 12

Adds price gaps onto earlier prices.

Question 13

Exchange-traded Funds

Answer 13

A type of investment fund and a popular vehicle for investors to gain exposure to a diversified portfolio of assets such as stocks, bonds, commodities, or a combination.

Question 14

Trading Mechanisms

Answer 14

The set of rules and procedures that govern the buying and selling of financial instruments within a financial
market.

Question 15

Trading Mechanism Instances

Answer 15

Dealers - buy/sell financial instruments directly from their inventory to clients.
Brokers - act as intermediaries between buyers and sellers but do not take ownership of the securities.
Broker-Dealers - do both roles.
Limit Order Books.
Dark Pools