Futures Markets and Hedging

Question 1

LIFFE

Answer 1

Established in the early 1980s. ‘The London International Financial Futures and Options Exchange’

Question 2

STIR

Answer 2

Short Term Interest Rate

Question 3

Specifications of a Futures Contract

Answer 3

• The asset
• The contract size
• Delivery arrangements
• Delivery months
• Price quotes
• Price and position limits

Question 4

Spot prices and futures prices tend to converge in the …….. ……

Answer 4

Delivery month - this is due to the pressures that arise from arbitrage

Question 5

Broadly speaking arbitrage is the ability to make a profit without taking ….

Answer 5

Risk

Question 6

In equilibrium, even though arbitrage opportunities may exist, as these opportunities are being taken advantage of by investors, the opportunities ……….

Answer 6

Disappear

Question 7

A big difference between forward contracts and future contracts is that …… contracts are settled on a daily basis

Answer 7

Future

Question 8

Margins …….. the possibility of a loss through default on acontract

Answer 8

minimise

Question 9

Initial margin

Answer 9

The down payment made by the counterparties to cover any losses at the end of trading. Initial margin is usually calculated by taking the worst probable loss that the position could sustain, and can be paid in either cash or collateral (e.g Treasury Bills)

Question 10

Variation margin

Answer 10

The additional (top-up) payment that has to be made if the margin account falls below a specific threshold (maintenance margin)