Test 2 Flashcards
Types of Derivatives
Fowards, Futures, Options, and Swaps
Derivatives
Fin’l securities that derive their economic value from an underlying asset (such as a stock or bond)
Hedge
To reduce risks
Speculate
Place financial bets on movements in asset prices
Forward Contract
Agreement to buy/sell an asset at an agreed price in the future
Spot
Agreement to buy/sell an asset at an agreed price today
Settlement Date
The delivery date of an asset in a forward contract
Counter-party Risk
Risk that the other party will default
Future Contract
Contract to buy/sell a specified amount of an asset at a SPECIFIC future date
Put option (Short Position)
(in a futures contract) The right/obligation of the seller to sell/deliver the asset at a specified future date
Call option (Long Position)
(in a futures contract) Right/obligation of buyer to receive/buy asset on a specified future date
Maintenance Margins
minimum account value required to maintain holding one or more futures contracts
Initial Margins
Amount of money deposited by buyers/sellers of futures contracts to ensure terms of the contract
European Options
Can only be exercised at the expiration date
American Options
Can be exercised at any time until the expiration date passes
Nominal Exchange Rate
Price of 1 country’s currency in terms of another (what we see)
Real Exchange Rate
Price of 1 country’s products in terms of another
cost of living
Spot Exchange Rate
exchange rate for delivery today
Forward Exchange Rate
exchange rate for delivery in the future
Solvency
The possession of assets in excess of Liabilities (ability to pay off one’s debts)
Liquidity
Availability of liquid assets
Leverage
High Leverage ratio may indicate danger of insolvency
GAP
measures income risk
In scenario that Int. rates RISE…
if GAP is Positive, profits RISE
If GAP is Negative, profits FALL
Duration GAP
measures wealth risk
In scenario that Int. rates RISE…
if DG is Positive, net worth FALLS
if DG is Negative, net worth RISES
Loan Commitment
bank agrees to lend a certain amount to at a given rate for a period of time
Balance Sheet Assets
Cash Bonds Loans Loan Loss Reserves Real Estate
Balance Sheet Liabilities
Checkable Deposits Savings Accounts CDs Fed funds purchased & RRPs Equity (Capital)
Currency Swaps
allows the company to hedge the risk that the currency that it receives depreciates over time
Credit Default Swaps
one party pays a fixed amount per period while the other party agrees to pay a certain amount if something bad occurs
