Futures Flashcards
What’s a cash-and-carry arbitrage?
Borrows money
Sells future contract
Buys the underlying commodity
Delivers the commodity against the futures contract
Recovers the money and pays off the loan
Any profit from reverse cash-and-carry arbitrage strategy would be a ____ profit
arbitrage
What’s a reverse cash-and-carry arbitrage strategy?
Short sells the commodity
Lens money received from short sale
Buys futures cotnract
Accepts delivery from futures contract
Uses the commodity received to cover the short sale
Any profit from reverse cash-and-carry arbitrage strategy would be a ____ profit
arbitrage
Formula for Cost of Carry Model
Current Spot Price = Current futures price for delivery of the product at time t * (1 + Percentage cost required to store (or carry) to time t)
Futures price = ?
Futures Price = Spot price + Net cost of carry of the asset till the contract expiry
Basis in Futures Contracts
Basis = Spot - Futures
Basis in Hedging situation
Basis = Spot price of asset to be hedged - Futures pric of contract used
The price of short-term interest rate futures is ____
P = 100 x (1-R), here R = annualized interest rate for that period
The price of long-term interest rate futures is _____
(1 + # of Days in the 1st Period * interest rate for the 1st Period/360) x (1 + # of Days in the 2nd Period * interest rate for the 2nd Period/360) = 1 + # of Days in the entire period * interest rate for the entire period / 360
Interest rate parity theory formula
Forward (Futures) rate = Spot rate x (1+ annualized interest rate of counter currency * # of days / 360) / (1+ annualized interest rate of base currency * # of days / 360)
The interest rate parity theory states that _____
The forward or futures premium or discount between 2 currencies is equal to the difference in the domestic interest rates for securities of the same maturity.
What are examples of price-weighted equity index?
STI Index, American Dow Jones Industrial Average and Nikkei 225 Index
What are examples of market-value-weighted indexes?
What’s market-value-weighted indexes?
The market cap-weighted index is generated by determining the total market capitalization of all stocks in the index and dividing by the total number of shares of all stocks.
SGX All Share Index
Australian ASX 200 Index
American States S&P 500 Index
What ar examples of equally-weighted average index?
Eqaully-weighted average index is generated by _____
Value Line Composite Average
In an equally weighted index, all stocks will have the same weightage regardless of their prices and market value. Index return/change is determined by % of change stock price on average.
The fair value price of an equity index futures = (3 ways)
Futures Price = Spot or cash price + Financing cost - Income from stock
Futures price = Spot price + Interest - Dividend
Fair value of futures = Spot price * (1+annualised financing rate / money market yield * time to expiry / 360) - value of dividends paid before expiry
In the calendar spread strategy, what to do if the yield curve is expected to steepen / flatten?
Steepen: Buy the near contract and sell the far contract
Flatten: Buy the far contract and sell the near contract
What’s a calendar spread?
A future position where a long and short position is taken simultaneously on the same underlying asset, but with different delivery months
What is the Target Rate for the Hedge?
Value of the hedged position =
Target Rate for Hedge = Futures Rate + Target Rate Basis
Value of the hedged position at time t = Ending security price + Futures gain
Value of the hedged position at time t = Security or spot price at time t + (Initial futures price - Futures price at time t)
Value of the hedged position at time t = Initial futures price + Ending basis = Futures price at time t + (Security or spot price at time t - Futures price at time t)
The hedge ratio defines ____
Expected movement in value of the cash instrument being hedged, if there is a particular movement in the value of the hedging instrument, i.e. the futures contract
Value of hedged position = （method using hedge ratio)
Security Price + Futures Price * Hedge Ratio
Hedge ratio =
Hedge Ratio (h) = Change in Security Price / Change in Futures Price
h = (Change in Value of hedged position - Change in Security Price) / change in futures price
of Contracts used to hedge =
= - hegde ratio * (Loan value / contract size)
Hedge ratio for long-term interest rate
Hedge ratio = PVBP of hedge security / PVBP of most deliverable bond * Conversion factor for most deliverable bond
PVBP = Change in price for a single point change in yield
of contracts to hedge equity portfolio risk
of contracts = Current value of Porftolio / (value per tick * current futures quote ) * beta of portfolio
What’s difference between an MIT (Market if Touched) sell order and a Stop sell order?
An MIT sell order is placed ABOVE the current market price, and a stop sell order is placed BELOW.
Session State Orders (SSO) may not be _____ (type or order)
Session State Orders (SSO) may be _____ (type or order)
SSC can be _____
GTC
Limit and stop orders
SSC can be market order
A futures pack is a type of futures order enabling ____
Purchase of a predefined number of future contracts in 4 consecutive delivery months.
e.g. Eurodollar packs are the simultaneous purchase of an equally weighted, consecutive series of 4 Eurodollar futures.
A futures bundle is a type of futures order that ____
An order can contain _____
allows investors to buy a predefined number of futures contracts in each consecutive quarterly delivery month of 2 or more years.
All the quarterly futures contracts within the standard 2, 3, or 5-year bundle periods.
e.g. A Eurodollar bundle consists of the simultaneous sale or purchase of one each of a series of consecutive Eurodollar futures contracts.
Why there’re no 1-year futures bundles?
Because these are effectively packs
The first contract in any futures bundle is typcially the ____ contract in ____
Futures bundles can be constructed starting with ____
FIRST quarterly contract in the Eurodollar stip
any quarterly contract
Difference between ___ and ___ is the cost of carry.
Futures price and Cash price (NOT cash minus futures)
The cost of carry is ______
Difference between futures price and cash price = Futures price - cash price
A bond can be purchased in the cash market at $50, while the futures price is $52. The coupon is $2.5 and the financing cost is $1.5. Ignoring time value of money, advise whether it is better to buy a 1 year futures contract for a bond or buy the bond in cash?
Buy bond in cash: The investor earns $2.5 - $1.5 = $1 by investing $50.
The futures cost is $52. Futures don’t pay coupon.
So cash is better
Basis =
Spot Price - Futures Price
The net cost and the basis are ____ correlated. The ___ the net cost of carry, the ___ the basis.
Positively
Greater, Greater
FTSE ST All-Share Index is ____ weighted index.
Nikkei 225 is ____ weighted.
STI is ____ weighted.
Value Line Composite Average is ____ weighted.
DJI is ____ weighted.
Australian ASX 200 Index is ____ weighted
Market capitalisation weighted
Price-weighted
Market-value-weighted
Equally-weighted
Price weighted
Market-value weighted average
Contract IMM (International Money Market) Index or Contract Price =
Contact Interest rate here is _______
100 - contract interest rate
Here, Contract interest rate = interest rate per annum on three-month unsecured bank borrowing, for spot settlement on 3rd Wednesday of contract Delivery Month
The steepning of the curve resulted in ____ in the short calendar spread position.
loss
The main investment and trading strategies used in the futures markets are ____ (4)
Outright trades
Hedging
Basis trades
Spread trades
Inter-commodity spread is on ____ .
Inter-market spread trades, the legs of the spread trade are on _____
Inter-delivery spreads, _____
A calendar spread (also known as a horizontal or time spread) is a position established with _____
- Different commodities
- Different exchanges
- Contract mature in different delivery monthsy (They can be on the SAME commodity)
- futures contracts by simultaneously entering a long and short position on the SAME underlying asset but with different DELIVERY MONTHS
In the case of butterfly spread, if the nearby spread increases by 10 tickets and the distant spread widens (becomes more negative) by 5 tickets, the profit/loss of the long trader upon unwinding is _____
A profit equal to 5 times the value of one basis points for the contract
The raito for purchase of a butterfly spread is +1 : -2: +1, for example
BUY 1 x September 2019 contract 1 x 72.33;
Sell 2 x December 2019 contracts 2 x 72.08
Buy 1 x March 2020 contracts 1 x 71.92
The nearby spread is (72.33-72.08) * 100 = 25 ticks
The distant spread is (71.92 - 72.08) * 100 = - 16 ticks
On a net basis, the spread is 25 - 16 = 9 ticks
If the nearby spread increases by 10 ticks: 25 + 10 = 35
If the distant spread widens (negatively) by 5 ticks ; -16 - 5 = -21
Net spread changes to 14 ticks, widen by 5 ticks = A profit equal to 5 times the value of one basis points for the contract
The spread ratio of a condor spread is _____
+1 : -1 : -1 : +1
A condor spread is similar to a butterfly spread because ______.
The difference is ______
A condor has a combination of ____
It also combines a bear and bull spread.
The difference is that there’s no common middle month, as the expiration dates of the futures contracts are all different.
A condor has a combination of 4 contracts with equally distributed delivery months.
What’s called a cross hedge?
Hedging a security with another instrument where the two are positively correlated and have similar price movements
The basis risks in selling Treasury bond futures to hedge corporate bond exposures will be ____ when the basis between the two ____
Greater
widens
In the form of anticipated hedge, the hedge appropriate hedge ratio is _____ an exact dollar match because
NOT
Margin calls on the long futures position must be financed
An extrapolative hedge is used when _____
An interpolative hedge is used when _____
When there’s a mismatch of the time horizon and expiry date, ____ OCCURS.
- Time horizon stretches beyond the tenor of the last traded contract
- Time horizon straddles 2 expiry dates
- Basis risk
Strips use _____ to ______
Stacks use____ to ______
Strips use successive futures contract months to match delivery dates on the futures contracts with the rollover dates or tenor on a cash loan
Stacks use the deferred contract months to match the rollover dates or tenor on a cash loan
Unlike the use of interest rate futures for hedging, which is straightforward, using bond futures to hedge a bond portfolio is more complicated, inter-alia, because _____
The conversion factor for deliverable bonds may require the underlying security to be hedged by a number of futures contracts that is not a round number.
Because of _____, the pricing of bond futures is normally _____ than that implied by the cash and carry arbitrage.
Convergence
Lower
Regarding hedging long-term interest rate risk with bond futures, the extra contract will need to be closed ____ the delivery date.
Before
Arbitraging involves ______
Simultaneous buying in one market and selling in the other market whenever prices are out of line.
A forward rate agreement (FRA) is equivalent of _____
OTC equivalent of FUTURES
In IRS (Interest Rate Swap), the payment made by one party is calculated by _____ and the payment made by the other party is calculated by _____
FLOATING rate of interest (such as LIBOR)
determined based on a FIXED interest rate or a different floating rate.
For an IRS, arbitraging is possible whenever _____
When this happens, the arbitrageur can _____
the market price differs from the strips
buy or sell the IRS, and sell or buy the futures cotnracts that are used to calculate the strips
Arbitrage between futures and FRAs is risk-free only when _____
The value dates of the two CORRESPOND
When the arbitrage is between futures and FRAs with different value dates, there will always be ______ or ______ risks
Residual basis risks or fixing risks
A Singapore company is about to take a 6-month USD 50 million loan at the existing rate of 2.15%. The September Eurodollar Futures contract is currently at 98.15. When taking the hedge position, the price of September Eurodollar futures is 98.65. The interest rate on the loan has a correlation of 1 with the Eurodollar, and company wants to fully hedge the interest rate exposure using September futures. Calculate the number of contracts required for the hedge?
The basis point value of a 6-month USD50,000,000 loan = USD 50,000,000 * 0.01% * 180/360 = USD2,500
The basis point value of a Eurodollar futures contract = US$25.
Therefore, the number of contracts required = US$2,500/US$25 = 100 contracts
