Principles of OTC derivatives Flashcards
Which of the following bodies sets out processes and documentation for the OTC derivatives markets?
AInternational Capital Markets Association BInternational Accounting Standards Board CInternational Swaps and Derivatives Association DFinancial Conduct Authority
International Swaps and Derivatives Association,
ISDA set-out the processes and documentation required for the OTC derivatives markets.
A firm that has a master agreement benefits in which of the following ways?
AIt allows confirmations to be considerably shorter BIt eliminates the need for confirmations CIt permits the firm to trade electronically DIt promotes the use of a central counterparty
It allows confirmations to be considerably shorter ,
A master agreement sets out the general terms of business between two counterparties. It is referred to in confirmations, allowing them to be shorter. Confirmations also make use of ISDA definitions, again to reduce the length of these documents.
Which of these would protect against price rises but limit gains from price falls?
ABeing a receiver in a FRA. BBuying a cap. CSelling a floor. DBuying a collar.
Buying a collar.,
Buying a cap and a collar would protect you from rises but only a collar would limit gains from price falls.
Which of the following is a characteristic of a forward FX contract?
AIt is centrally cleared BIt is exchange-traded CIt is physically delivered DIt settles T + 2
It is physically delivered ,
Forward FX contracts are physically settled over-the-counter foreign exchange contracts.
The long-term objective of FpML is:
ATo have all trade information in a readable format BTo bring OTC information processing in-line with exchange protocols CTo act as a master agreement for OTC trades DTo bring liquidity to OTC trades
To bring OTC information processing in-line with exchange protocols ,
FpML is a standardised electronic language for the communication of financial information.
A fund manager believes the FTSE 100 will increase in value and enters into a receiver total return swap, where equity returns are swapped for a floating rate. During this period of time the index falls in value.
Which of the following will the fund manager have to do?
AMake floating rate interest payments to the swap dealer and receive payments in compensation for the decrease in the index BMake floating rate interest payments and payments to the swap dealer for the decrease in the value of the index CMake increased interest payments to the swap dealer until the index increases in value beyond the net value point DMake payments to the swap dealer based on the value of the index in return for the floating rate of interest
Make floating rate interest payments and payments to the swap dealer for the decrease in the value of the index ,
Normally the fund manager would pay a fixed rate of interest to a swap dealer and in return receive the return on the index. As the index has fallen he will have to make his interest payments plus pay an amount to the swap dealer.
Which of the following is false concerning Bermudan options?
AThey can only be exercised on specified dates BThey can be exercised before expiry CThey are generally over-the-counter products DThey can be exercised more than once
They can be exercised more than once,
A Bermudan option can be exercised on expiry or on specified dates before expiry. However, they can only be exercised once.
If you were a borrower and were concerned that interest rates will rise, which of the following contracts would you enter into?
ALong FRA BShort plain vanilla swap CLong STIR future DShort cap
Long FRA ,
If you were concerned that rates are going to rise, you would enter into a long FRA, as you would receive the difference between the floating rate and the fixed rate. To short a swap is to pay out the floating rate at reset dates. To go long a future would be beneficial if rates were going to fall. To sell or short a cap would cause you to pay out if rates rose.
Which document is negotiated and signed by the buyer and seller of OTC contracts and can cover different contracts in different currencies?
ALong-form confirmation BShort-form confirmation CInstrument of incorporation DMaster agreement
Master agreement,
The master agreement allows all contracts covered to be treated equally should default occur by one of the parties involved.
Confirmation cover information specific to a particular trade - we anre not tested on the difference between long-form and short-form confirmations.
As identified by the ISDA credit support documentation, what is the main difference between UK and US law?
AUK may use cash or collateral as margin whereas the US can use cash only BUK may use cash only as margin whereas the US may use cash and collateral CAny collateral deposited in the UK remains the legal property of the depositor whereas in the US title transfers to the holder DAny collateral deposited in the US remains the legal property of the depositor whereas in the UK title transfers to the holder
Any collateral deposited in the US remains the legal property of the depositor whereas in the UK title transfers to the holder,
US law dictates that a security interest of any collateral deposited as margin can be created instead of legal transfer of title. In the UK title transfers immediately.
A credit derivative contract is based on a:
AReference obligation BReference asset CReference entity DNominated asset
Reference asset ,
Credit default swaps offer protection for credit event involving a reference asset. Although a reference obligation (such as debt) could be a reference asset, B is the best answer here.
What type of option gives the holder the right to buy (or sell) an asset at the lowest (or highest) price over a period of time?
ABarrier option BPath dependent option CAmerican option DRatchet option
Path dependent option ,
A path dependent or lookback option gives the holder this right.
Who acts as central counterparty to all transactions on SwapClear?
AEuroclear BLCH Group CClearstream DDepository Trust and Clearing Corporation
LCH Group
Bclear is used for?
AClearing Brazilian government bonds BClearing Bloomberg trades CClearing OTC equity derivatives DClearing UK government bonds
Clearing OTC equity derivatives,
Bclear service combines much of the flexibility of the over-the-counter (OTC) market with many of the benefits of an exchange and clearing house environment. Launched initially for OTC equity derivatives, Bclear now also offers commodity contracts.
Which of the below is TRUE of forward contracts traded away from an exchange?
AContracts must be novated by a central counterparty BAll components of the contracts are negotiated fully by the counterparties CAll components of the contract are negotiated except the asset and the quantity which is set by the exchange DAll participants are free from counterparty/credit risk
All components of the contracts are negotiated fully by the counterparties ,
Forwards are OTC contracts and therefore there is no exchange involved and terms will be fully negotiated bilaterally between the parties involved. Whilst OTC contracts can be novated by a clearing house it is not a must and so there will be exposure to counterparty risk where clearing houses are not used.
