Unit 3 - Checkpoint Flashcards

Question

Cross trades

Answer 1

Broker may act on behalf of two clients, buy from one client to sell to another.

Answer 2

General clearing members (GCM) - May clear trades for themselves, clients and non-clearing members Individual clearing members (ICM) - May clear trades for themselves and their clients Non-clearing members (NCM) - Cannot clear trades, must enter into agreement with a GCM in order to facilitate clearing

Answer 3

fair value = cash price of underlying + cost of carry

Answer 4

cash and carry = own underlying, sell future | reverse = sell underlying, own future

Answer 5

Closer the future gets to delivery, the less the cost of carry, future price tends toward the cash price.

Answer 6

No. of ticks futures contract has moved x No. of contracts in the position x Tick value = profit or loss on position

Answer 7

Number of contracts required = Nominal value of CTD / Nominal value of contract * CTD price factor

Answer 8

Valued at 100 minus the implied interest rate. Therefore, they move inversely to interest rates.

Answer 9

intrinsic value | + time value

Answer 10

at the money (due to uncertainty being higher, if option will or will not end in the money

Answer 11

positive for all long options (calls and puts) negative for all short options (calls and puts)

Answer 12

C-P = S - K/(1+r)^t

Answer 13

Forward rate agreement FRAs are OTC interest rate futures ratio of '1v4' would refer to a 3m contract that starts in 1 month (effective date) and ends in 4 months (termination date)

Answer 14

F = S (1+r (variable)/(1+r (base))

Answer 15

``` Payer = pays fixed, receives floating Receiver = Receives fixed, pays floating ```

Answer 16

``` cap = OTC call option on an interest rate floor = OTC put option on an interest rate collar = cap and a floor combined ```

Answer 17

``` Receiver = Receives equity return and pays LIBOR Payer = Pays equity return and receives LIBOR ```

Answer 18

Allows an institution to protect itself from the default of a debtor by creating a note representing the debt and selling it on. Risk of default has been passed on to owner of the credit linked note.

Answer 19

Credit spread = difference between the yield on an asset and that on a benchmark put option - makes money if the spread weakens (widens/increases) call option - makes money if the spread strengthens (narrows/decreases)

Answer 20

ISDA master agreement Brings together all OTC trades performed between counterparties into one agreement. Each trade going forward only requires a confirmation which can be very short. Confirmations supersede the master. Can have a master give up.

Answer 21

Deal ticket is created after the trade has been agreed. Deal tickets are effectively a trade report. A term sheet is a template on which these deal tickets can be produced.

Answer 22

Principal to principal = clearing house guarantee its members obligations in relation to the trades it clears for them by taking the role of central counterparty. (remember, only members of clearing house have this) Independent guarantee = backed by the resources of the clearing house. Mutual guarantee = backed by clearing house and clearing members by default fund.

Answer 23

When the clearing house becomes the central counterparty to both sides of the trade. Both obligations are now to the clearing house.

Answer 24

Payable on a contingent liability transaction. Returnable good faith deposit, if collected by a UK clearing house.

Answer 25

The initial calculation is based on the worst case scenario for one days' losses. This is known as scanning risk. Scanning risk is adjusted for: - Inter-month spreads - Spot month charges - Inter-commodity credits

Answer 26

If market suddenly becomes highly volatile, additional margin may be demanded at short notice.

Answer 27

One feature of options spreads is their limited downside risk.

Answer 28

Variation margin accounts for the previous day's gains and losses made on open derivative positions. All members have accounts with the clearing house. Day losers account will be debited and winners will be credited. Paid today for movements yesterday (marked to market)

Answer 29

Holders of up front options do not need to pay variation margin. The writer of the option does pay initial margin. Based on the probable daily loss attributed to the option, so seller only receives the net of the premium minus the initial margin. Options on futures, premiums for options on futures are not generally paid up front in full, but at the sooner of the exercise or expiry. Both sellers and buyers of options on futures are subject to variation margin.

Answer 30

Theoretical Intermarket Margining system - used by the options clearing corporation (OCC) - risk margin - similar to initial margin - premium margin - similar to variation margin

Answer 31

The system works by variation margin payments being made out of initial margin. In the event of the balance in the initial margin falling to a pre-determined level the clearing house will make a 'margin call' requiring the clearing member to replenish their account up to the original initial margin level.

Answer 32

Variation margin normally paid in cash Initial margin normally paid by lodging collateral UK clearing house - accept most collateral - cash, bonds, certificates of deposits

Answer 33

exchange delivery settlement price (EDSP) EDSP is the price at which the underlying asset will change hands on the delivery date. It is not the agreed price of the futures contract. This is due to variation margin, which changes through the life of the contract. Total paid = EDSP + total variation margin paid For CFD, the final payment (EDSP) is the same as the final day variation payment.

Answer 34

Exchange of futures for physical Amount long must pay is the invoice amount = EDSP x number of contracts x contract size seller has choice of when to deliver in the delivery month seller also has say over quality and location of delivery

Answer 35

inter = different assets but correlated intra = same underlying but different expiry

Answer 36

strangle think bart strangle has flat bottom straddle think stick man, v shape long means buying the options v short means selling the options, ^

Answer 37

SEC = regulates securities markets FINRA - regulates firms CFTC = regulates derivatives markets NFA - regulates firms

Answer 38

Commodity Futures Trading Commission Part 30 of the commodity exchange act For a firm to deal on behalf of a US investor on a US derivatives exchange, the firm must always be fully registered with the CFTC and the NFA. A part 30 exemption allows direct dealing with US investors when carrying out deals on non-US exchanges.

Answer 39

Wall street reform and consumer protection US firms must always segregate its clients money. UK only retail clients must be segregated, professional clients can opt out.