Futures Flashcards by Shiyi Zhou

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

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Any profit from reverse cash-and-carry arbitrage strategy would be a ____ profit

arbitrage

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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

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Any profit from reverse cash-and-carry arbitrage strategy would be a ____ profit

arbitrage

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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)

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Futures price = ?

Futures Price = Spot price + Net cost of carry of the asset till the contract expiry

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Basis in Futures Contracts

Basis = Spot - Futures

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Basis in Hedging situation

Basis = Spot price of asset to be hedged - Futures pric of contract used

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The price of short-term interest rate futures is ____

P = 100 x (1-R), here R = annualized interest rate for that period

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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

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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)

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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.

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What are examples of price-weighted equity index?

STI Index, American Dow Jones Industrial Average and Nikkei 225 Index

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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

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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.

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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

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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

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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

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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)

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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

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Value of hedged position = （method using hedge ratio)

Security Price + Futures Price * Hedge Ratio

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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

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of Contracts used to hedge =

= - hegde ratio * (Loan value / contract size)

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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 _____

1. Different commodities 2. Different exchanges 3. Contract mature in different delivery monthsy (They can be on the SAME commodity) 4. 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.

1. Time horizon stretches beyond the tenor of the last traded contract 2. Time horizon straddles 2 expiry dates 3. 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