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The Trade Lifecycle > Chapter 1 > Flashcards

Chapter 1 Flashcards

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1
Q

spot trades

A

Immediate buy and sell

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2
Q

options

A

right to buy and sell in the future

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3
Q

Broker

A

mean by which trades are exchanged

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4
Q

Exchanges

A

Organised, safe and reliable place to exchange

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5
Q

OTC (over the counter trading)

A

Trading without restrictions , counterparties can agree to any trade at any time but the absence of an exchange
carries greater risks

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6
Q

WHEN IS A TRADE LIVE?

A

A trade is live between the time of execution and the time of maturity

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7
Q

spot trade

A

trade is completed very soon after execution with a single exchange of cash or assets

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8
Q

First trading policy

A

holding a trade to its maturity

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9
Q

Second trading policy

A

resale before maturity

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10
Q

Investment banks

A

financial entity

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11
Q

Investment banks are active in trading activities in order to:

A

Service their clients: bank can either act as the middleman or broker to execute trades on behalf of
the client who has no access to counterparties

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12
Q

Investment banks are active in trading activities in order to:

A

Proprietary trading: Most investment banks have proprietary (or “prop”) desks with
the aim of using the bank’s resources to make profit.

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13
Q

Investment banks are active in trading activities in order to:

A

Offset risks: have substantial
holdings in various assets.

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14
Q

Investment banks are active in trading activities in order to:

A
  1. Broaden their client base:Just as a shop selling sports equipment might decide to appeal
    to more customers or better service its existing customers by expanding
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15
Q

Hedge funds

A

Hedge funds are established to make profits for their investors. In return, the fund managers
usually get paid an annual fee plus a percentage of any profits made.

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16
Q

Pension funds and other asset managers

A

Asset management is a generic group of financial companies of which pension funds are the
most well-known. They trade for very similar reasons to hedge funds. They want to maximise
the return on the assets they hold for their clients or employees.

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17
Q

Brokers

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A

Brokers facilitate trades by bringing together buyers and sellers. They do not take upon
themselves positions or trade risks.

18
Q

risk

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A

market risk of holding
trading positions

19
Q

METHODS OF DEALING WITH RISK

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A

1-Ignore
2-Minimise
3-Avoid
4-Remove

20
Q

As long as the potential risks are understood and estimated

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A

it can be said
that risk is being managed

21
Q

Deposit

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A

A deposit (or loan) is a simple instrument. One counterparty gives an amount of currency to
another counterparty, expecting its return on a future date. At agreed regular intervals, interest
will be paid by the receiver to the depositor.

22
Q

Future

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A

A future is a longer term deposit. They are standard products traded on exchanges, as opposed
to forwards which can be any over-the-counter (OTC) agreement between counterparties

23
Q

Swap

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A

a swap is an agreement to exchange one asset for another, however when used
without a qualifier it means interest rate swaps

24
Q

FOREIGN EXCHANGE (FX)

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A

Closely linked to interest products are those in foreign exchange. As the name implies foreign
exchange is the transfer of one currency for another.

25
Spot
A spot foreign exchange trade is an immediate transfer of currencies. (Immediate meaning within a few days of execution as dictated by the conventional settlement date for standard trades or by mutual agreement for OTCs.)
26
Futures and forwards
As for interest rate trades, a future is an exchange-traded standard contract and a forward is any OTC agreement between two counterparties. In essence, for foreign exchange they are delayed spot trades. The exchange rate is agreed upon execution and the future exchange of currencies is mandatory upon the agreed date
27
Swaps
As for the interest rate asset class, foreign exchange swaps are a common way of trading fixed and floating cashflows,
28
EQUITY
Equities are synonymous with shares and stock. They entitle the owner to a part of the company which has sold them. By giving up capital to finance the company, the purchaser of equity hopes to receive a share in the profits. This is a payment known as a dividend. Dividends vary in size and date of payment
29
Bonds
Apart from raising capital by selling shares in the company, there is an alternative by which the company borrows money. This could be a simple bank loan and would be dealt through a retail bank. However, for large capital amounts it is highly unlikely that a single bank would have the funds and the desire to lend by itself. To overcome this problem, companies issue bonds. Purchasers of bonds pay capital to the company, which is repaid to them at the end of the period (term) of the bond.
30
Types of bond
Fixed: The bond pays the same coupon at regular intervals with the last coupon usually coinciding with the redemption payment.
31
Floating Rate Note (FRN)
When the coupon is paid at variable rates, the bond is known as a floating rate note or floater. The exact payment is determined only just before the coupon date and is derived from a benchmark index, such as LIBOR
32
Zero coupon bonds
These bonds pay no coupons. The bonds are offered at the issue date for a discounted price (e.g. 63 %) and are redeemed at maturity for par (100 %).
33
Amortising bonds
Sometimes the capital borrowed is repaid to investors in instalments, rather than all at the end. Then the notional of the coupon is reduced over time
34
What are commodities
A commodity is something that is common between different suppliers. It can be defined by its size and quality. The buyer can be certain that he is getting the same object no matter where he purchases it.
35
DERIVATIVE
Any trade that derives from an underlying asset, but does not involve the direct purchase or sale of that asset, is known as a derivative
36
LINEAR
The simpler set of derivatives are linear products. This means that the payoff is related linearly to the spot price of the underlying asset
37
NONLINEAR
When the payoff versus spot price is nonlinear for some or all spot prices then we say the trade is a nonlinear derivative. The most common nonlinear product is an option.
38
call option
right but not the obligation to buy an instrument or commodity at a specific price at or before a particular time in the future.
39
put option
s the same as a call option except that it refers to the sale rather than purchase of the underlying
40
Exercise
Exercise is the taking up of the option to buy or sell the underlying in the option contract. The traders, middle office and back office have to be prepared for the possibility of exercise

The Trade Lifecycle (1 decks)

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