Treasury Products

Question 1

Spot

Answer 1

A transaction where two parties agree to exchange one asset for another, at the spot rate, for settlement t+2 or earlier

Question 2

Forward

Answer 2

An agreement between two parties to transact, where settlement of the trade falls after t+2
Normally used for hedging against an adverse movement of prices
An importer buys forward while an exporter sells forward
Can be deliverable or non deliverable

Question 3

Swap

Answer 3

A derivative with two transactions that are agreed upon simultaneously
1) to transact one currency against another on a near date
2) to do the opposite transaction at a future date
The dates and rates are set at the inception of the swap.

Question 4

Bond

Answer 4

A debt instrument that provides the holder a fixed stream of cash flow over its life, and the par value of the bond at maturity

Question 5

Derivative

Answer 5

A financial instrument whose value is derived from an underlying thing, usually an asset.
Smaller cash upfront compared to transacting the underlying
Settled at an agreed future date

Question 6

Cross currency swap

Answer 6

An agreement between two parties to exchange a stream of cash flows denominated in two different currencies
Can have an exchange of notional
Normally fixed cash flows that are known on the outset
Used for hedging

Question 7

Interest rate swap

Answer 7

An agreement to exchange a stream of cash flows in the same currency at agreed rates
Normally one is a fixed rate known at the beginning and constant
While the other is a floating rate that is not yet known, but dependent on a benchmark such as libor or phiref
Floating for floating is a basis swap

Question 8

Option

Answer 8

A right to buy or sell an underlying asset at an agreed rate and date. 
Factors to consider include 
Spot 
Strike vs forward price
Volatility
Time to expiry

Options have a premium that varies depending on the factors above

Question 9

Call option

Answer 9

The right to buy an underlying asset at an agreed rate and date
Its value increases as spot moves higher

Question 10

Put option

Answer 10

A right to sell an underlying asset at an agreed rate and date
Value goes duo when asset value goes down

Question 11

Non deliverable forward

Answer 11

A forward transaction where the ending amount is settled against the fixing rate. Usually it is settled in dollars.
For USDPHP, NDFs normally settle against the 11:30am wtd average of the day before
The onshore market can deal in the offshore ndf market by buying NDFs.
The offshore market participates in USDPHP thru the NDF market, which is not regulated by the BSP.