Option Market

Question 1

Future

Answer 1

standarised contract (price)
traded in a exchange
usually range of delivery dates
settled daily (market to market)
margin account
implies agreement to buy/sell something
contract is closed out prior to maturity
virtually no credit risk

Question 2

Forward

Answer 2

private contract between 2 parties (billateral, OTC)
non-standarised contract
usually 1 specified delivery date
settled at end of contract
delivery or final cash settlement usually occurs
some credit risk

Question 3

Futures specification

Answer 3

specified in the future
WHAT --> asset
HOW MUCH --> contract size
HOW --> delivery arrangements
WHEN --> delivery months
WHAT PRICE --> price quotes

Question 4

Specifications

Price Quotes

Answer 4

unit of measures & currency in which the contract is traded
Ex: shares in USD

Question 5

Tick size

Answer 5

minimum amount that price can change (1ct for given share or 1bp for bonds)

Question 6

Tick Value

Answer 6

cash value of one tick

= tick size* contract size

Question 7

Settlement Price

Answer 7

price just before the final bet each day

Question 8

Volume of trading

Answer 8

number of contracts trade in one day

but remember 1 contract can include X amount of assets!!

Question 9

Example:

Tick size & value

Answer 9

future on gold with 100 ounces per contract
Tick size is USD cents per ounces (tick size)
Tick value = 100 ounces * 0..1 USD/ounce
= 10 USD

Question 10

Bond futures

Answer 10

future contract on IR are use to manage risk if IR changes