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CFA Level 2 COPY (930) > Futures and Forwards > Flashcards

Futures and Forwards Flashcards

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1
Q

NDFs

A

Nondeliverable forwards

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2
Q

Total return index

A

Dividends are reinvested into the underlying index

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3
Q

Eurodollar

A
  • US dollar deposits held outside the USA. Based on the LIBOR
  • The long position locks in a fixed rate
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4
Q

FRA payoff

A
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5
Q

FRA quotation

A

A * B

  • Contract expires in A months
  • At expiration the tenor is (B - A)
  • Total duration is B
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6
Q
  • FRA price
  • FRA valuation
A
  • Amount to pay in order to enter the FRA
  • Amount to pay or receive in order to exit once held
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7
Q

Forward value at initiation - formula

A
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8
Q

Forward value at time t - formula

A
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9
Q

Off-market FRA

A

The initial value isn’t necessarily set at 0

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10
Q

F(0, T) for an underlying paying dividends

A

PV(D, 0, T) = present value of dividends (actualized from the ex-dividend dates or the actual dividend payment date)

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11
Q

Continuously compounded risk-free rate

A
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12
Q

Discrete to continuous

A
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13
Q

Price of a forward paying a constant dividend at rate deltac

A

S0 is discounted at the dividend yield rate and equals the present value of the stock without the dividends

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14
Q

F(0, T) on a coupon-paying bond

A
  • PV(CI, 0, T) = present value of the coupons
  • T = time to expiration
  • Y = remaining time to maturity at expiration
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15
Q

Vt (0, T) for a coupon-paying bond

A
  • The contract expires in T days
  • After expiration, the bond has a tenor of Y days
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16
Q

FRA notation

A
  • g - an arbitrary day prior to expiration
  • h - the expiration day
  • h + m - time until the maturity of the Eurodollar instrument on which the FRA is based
  • Li (j) - the rate on a j-day LIBOR deposit on day i
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17
Q

FRA payoff using notation

A
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18
Q

FRA (0, h, m) in function of the Libor rate - formula

A
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19
Q

FRA - Vg (0, h, m) formula

A
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20
Q

F (0, T) - Interest rate parity

A
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21
Q

F (0, T) for a continuously compounded currency forward

A
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22
Q

Vt (0, T) for a currency forward

A
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23
Q

Vt (0, T) for a continuously compounded currency forward at time t

A
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24
Q

Variation margin

A

The margin that must be deposited to get back to the inital margin requirement

25
Q

Price limits

A
  • Limit move - when the price is frozen at one of the limits
  • Limit up, down
  • Limit locked - when the transaction can’t take place
26
Q

EFP

A

Exchange For Physical

27
Q

Scalper

A

A trader that attempts to profit from buying at the bid price and selling at the higher ask price

28
Q

Conversion Factor

A

A factor used to equate the price of T-bond and T-note futures contracts with the various cash T-bonds and T-notes eligible for delivery. This factor is based on the relationship of the cash-instrument coupon to the required 6 percent deliverable grade of a futures contract as well as taking into account the cash instrument’s maturity or call

29
Q

Cheapest-to-deliver

A

In a futures contract, the cheapest security that can be delivered to the long position to satisfy the contract specifications. The cheapest to deliver security is relevant only for contracts which provide that a variety of slightly different securities may be delivered

30
Q

Futures values

A
31
Q

In general, the futures price is the spot price compounded over the life of the contract, T years, at the annual risk-free rate, r

A

f0(T) = S0(1 + r)T

32
Q

f0 (T) including cash flows

A
33
Q

f0 (T) including storage costs

A
34
Q

Futures price including the cost of carry

A

CB = costs of storage - non-monetary benefits (convenience yield)

35
Q
  • Contango
  • Backwardation
  • Normal Contango
  • Normal Backwardation
A
  • Futures price are above the spot price
  • Futures price are below the spot price
  • Futures price above the expected spot price
  • Futures price are below the expected spot price
36
Q

S0 in function of the present value of ST and FV(CB, 0 , T)

A
37
Q

S0 in function of E [ST] plus a risk premium

A
38
Q

FV(CB,0,T)

A

Costs of storage – Nonmonetary benefits (Convenience yield)

39
Q
  • r0d (h)
  • r0d (h + m)
A
40
Q

B0 (h) and B0 (h + m) in function of the discount rate

A
41
Q

f0 (h) in function of r0df (h)

A
42
Q

T-bill futures at expiration

A
43
Q

Relationship between f0 (h) and B0 (h + m)

A
44
Q
  • r​df0 (h)
  • f0 (h)
  • B0 (h)
A
  • implied discount rate on day 0 of a futures contract expiring on day h, where the deliverable instrument is an m-day T-bill
  • price on day 0 of a futures contract expiring on day h
  • price on day 0 of the T-bill maturing on day h
45
Q

The implied repo rate

A
46
Q

Implied discount rate by the futures price as a ratio of (h + m) and (h) T-bill maturities

A
47
Q

B0c (T + Y) price

A
48
Q

B0c (T + Y) when considering the conversion factor

A
49
Q

f0 (T) for a coupon paying bond

A
50
Q

f0 (T) for a coupon paying bond when considering the conversion factor

A
51
Q

f0 (T) for a stock index paying dividends

A
52
Q

Definition of delta as the dividend yield

A
53
Q

f0 (T) using delta

A
54
Q

f0 (T) using delta*

A
55
Q

Deltac - continuous to add-on

A
56
Q

Formula to use to find the arbitrage-free exchange rate

A
57
Q

The rates implied by Eurodollar futures will differ from the forward rates implied by T-bills because

A

Eurodollar securities have add-on interest and T-bills are discounted

58
Q

Roll return relation to backwardation and contango

A
  • Positive if the market is in backwardation
  • Negative if the market is in contango

CFA Level 2 COPY (930) (13 decks)

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