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CISI Unit 3 > Unit 3 - Checkpoint > Flashcards

Unit 3 - Checkpoint Flashcards

1
Q

Contingent Liability

A

Position where investor may lose more money than they originally invested.

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2
Q

Contracts for difference

A

A cash settled derivative

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3
Q

Forward or Future

A

Future traded on exchange

Forward is traded OTC

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4
Q

Asian style option

A

Exercised at an average of the underlying

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5
Q

Flex contracts

A

Options that provide users the ability to negotiate the maturity, exercise price and exercise style of a contract

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6
Q

Binary/digital option

A

pays a fixed amount or nothing

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7
Q

Ratchets/Cliquets

A

Series of options built into one package

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8
Q

Chooser option

A

Holder decides if put or call on expiration

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9
Q

Compound option

A

Option giving the right to buy or sell another option

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10
Q

Options on futures

A

Common for options to settle into futures positions. With such contracts, exercise of the option results in a long or short futures position.

Exercising a long call results in the holder being long the future (and the writer being short)

Exercising a long put results in the holder being short the future (and the writer being long)

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11
Q

Certificates of deposits (CDs)

A
  • CDs represent a deposit and not a loan
  • CDs pay interest, whereas bills of exchange, T-bills and CPs do not
  • CDs may be issued with a life of up to five years
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12
Q

Government bonds

A

France

  • Oats
  • Annual coupon
  • T+2

Germany

  • Bunds
  • Annual coupon
  • T+2

UK

  • Gilts
  • Semi annual coupon
  • T+1

USA

  • Treasuries
  • Semi annual coupon
  • T+1

Japan

  • JGB
  • Semi annual
  • T+1

France and Germany are bearer
rest are registered

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13
Q

Loan stock

A

Unsecured corporate debt, lenders have no legal charge over any of the company’s assets

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14
Q

LME

A

London Metals Exchange

Trading

  • Inter-office (telephone)
  • Select (order book)
  • The ring (open outcry)

Clearing
LME Clear

Products
- Most metals

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15
Q

ICE Futures Europe

A

Trading
- Electronic on ICE connect

Clearing
- ICE Clear Europe

Products
- Energy, major futures and options on crude oil, coal, electricity, soft commodities

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16
Q

LSE Derivatives

A

Trading
- Electronically

Clearing
- LCH.Clearnet

Products
- Futures and options on FTSE, Norwegian and Russian equities

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17
Q

Euronext Derivatives

A

Trading
- Electronic access (Universal Trading Platform)

Clearing
- LCH.Clearnet SA

Products
- Futures/options on currencies and equities

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18
Q

Eurex

A

Trading
- Electronic

Clearing
- Eurex clearing

Products
- Europe’s largest derivatives exchange

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19
Q

CME

A

Chicago Mercantile Exchange

Trading

  • Open outcry
  • CME globex (electronic)

Clearing
- CME clearing

Products
- Financials range (FX, IR, equity)

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20
Q

NYMEX

A

New York Mercantile Exchange

Trading
- Open outcry and electronically

Clearing
- CME clearing (part of CME group)

Products
- wide range of metals, energy products

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21
Q

CBOT

A

Chicago board of trade

Trading
- Open outcry and electronic

Clearing
- CME clearing

products
- Wide ranging, Agri, Fin, precious

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22
Q

SGX

A

Singapore Exchange

Trading
- electronic

Clearing
- SGX-DC (derivatives clearing)

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23
Q

Exchanges

A

Market place where traders can meet to agree prices, ensure transparent market where all trades are reported and published.

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24
Q

Dealing or broking

A

Dealing (principal)
- taking a position yourself

Broking (agent)
- place trade for client for commission

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25
Q

Cross trades

A

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

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26
Q

Clearing members

A

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

27
Q

Fair value of future

A

fair value = cash price of underlying + cost of carry

28
Q

Cash and carry

Reverse cash and carry

A

cash and carry = own underlying, sell future

reverse = sell underlying, own future

29
Q

Convergence and basis

A

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

30
Q

Fair value (PnL) of position on equity index future

A

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

31
Q

Hedging with bond futures

A

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

32
Q

STIR futures

A

Valued at 100 minus the implied interest rate.

Therefore, they move inversely to interest rates.

33
Q

option premium

A

intrinsic value

+ time value

34
Q

time value of money is greatest

A

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

35
Q

Gamma is

A

positive for all long options (calls and puts)

negative for all short options (calls and puts)

36
Q

Put call parity

A

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

37
Q

FRA

A

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)

38
Q

Interest rate parity

A

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

39
Q

Swaps
Payer
Receiver

A 
Payer = pays fixed, receives floating
Receiver = Receives fixed, pays floating
40
Q

Caps, floors and collars

A 
cap = OTC call option on an interest rate
floor  = OTC put option on an interest rate
collar = cap and a floor combined
41
Q

Equity swap

A 
Receiver = Receives equity return and pays LIBOR
Payer = Pays equity return and receives LIBOR
42
Q

Credit linked note

A

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.

43
Q

Credit spread options

A

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)

44
Q

ISDA Documentation

A

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.

45
Q

Deal tickets and term sheets

A

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.

46
Q

Clearing house guarantees

A

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.

47
Q

Novation

A

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

48
Q

Initial margin

A

Payable on a contingent liability transaction.

Returnable good faith deposit, if collected by a UK clearing house.

49
Q

SPAN

A

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
50
Q

Intraday margin

A

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

51
Q

Spread margining

A

One feature of options spreads is their limited downside risk.

52
Q

Variation margin

A

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)

53
Q

Variation margin on options

Margin on options for futures

A

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.

54
Q

TIMS

A

Theoretical Intermarket Margining system

  • used by the options clearing corporation (OCC)
  • risk margin - similar to initial margin
  • premium margin - similar to variation margin
55
Q

Maintenance margin

A

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.

56
Q

Collateral

A

Variation margin normally paid in cash
Initial margin normally paid by lodging collateral

UK clearing house

  • accept most collateral
  • cash, bonds, certificates of deposits
57
Q

EDSP

A

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.

58
Q

EFP

A

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

59
Q

inter-market spreads
intra-market spreads
on futures

A

inter = different assets but correlated

intra = same underlying but different expiry

60
Q

straddle or strangle

A

strangle think bart
strangle has flat bottom

straddle think stick man, v shape

long means buying the options v
short means selling the options, ^

61
Q

US regulation

A

SEC = regulates securities markets
FINRA - regulates firms

CFTC = regulates derivatives markets
NFA - regulates firms

62
Q

CFTC

A

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.

63
Q

Dodd-Frank Act

A

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.

CISI Unit 3 (4 decks)

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