Chapter 11 part 2 forwards Flashcards Preview

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Flashcards in Chapter 11 part 2 forwards Deck (34):
1

what are future contracts

a standardized exchange-traded contract in which the seller agrees to deliver a commodity to the buyer at some point in time

2

What is a clearing corporation

a company that is responsible for reducing the credit risk of futures contracts and option contracts and for making sure that delivery takes place

3

what is margin

a good faith deposit with a clearing house that is made by both the buyer and the seller to ensure they complete the transaction

4

what is initial margin

a relatively small deposit made with the clearinghouse, usually between 2 and 10% of the value of the contract

5

what is maintenance or variation margin

a minimum amount that must be maintained in a margin account

6

what is margin call

a requirement to add money and increase an equity postion to a minimum level

7

what is daily resettlement

marking to market and adjusting inveotrs' equity position

8

what is settlement price

the price used to settle futures contracts
- usually the daily closing price

9

what is notional amount

the dollar amount upon which a contact is valued

10

what is offsetting

cancelling a futures position by making an equivalent but opposite transaction

11

futures contracts are like what

like are forwards (buy from banks only)

12

forwards involve what

credit risk which is why investors need a line of credit with their bank before they can purchase

13

futures are what

standardized Forwards , something needs to be standardized in order to be tradable so that people know exactly what they are getting

14

the dramatic growth in the development of futures markets occurred because of what problems

1. credit risk (borrower won't pay) if he suffers a loss
problem solved: all futures are made with futures exchange, not with an individual

15

what is the clearinghouse in canada

Canadian derivatives clearing corporation (CDCC) of the Montreal exchange

16

what two types of margins does CDCC enforce

1. initial margins and
2. a maintenance or variation margin

17

how is the margin set and by who

it is set by CDCC and it is based on the risk involved in the underlying asset: the riskier the asset the higher the margin

18

new or smaller clients have a higher margin?

yes

19

does the underlying asset and the contract need to both be standardized

yes

20

what are the most commonly delivered months

March, June, Sept, December

21

in practice does physical delivery take place?

no , most positions are closed o9ut with an offsetting transaction before the final day of trading which is generally a couple of days before delivery

22

what is the general term for most futures and what does this mean for investors

a rolling 18 month term
investors can normally buy and sell futures on the same commodity with 6 different maturity dates

23

is there a lot of trading that takes place on Canadian exchanges

no

24

What is open interest

the number of contracts that are outstanding
- the true amount of futures market activity

25

what is basis risk

the risk associated with a hedged position that is attributable to the fact that the asset to be hedged is not identical to the asset used as the hedge

26

when do individuals have to report to the MX (montreal exchange)

when they have 250 or more contracts

27

why is there a maximum of contracts someone can have

the maximum is 37,575
this is to make sure that no single institution dominates trading

28

with more futures contracts, the underlying asset is clearly specified, and the party responsible for delivering the asset has no choice. however, bond futures generally provide what

a choice

29

if interst rates increase then the market value of the bond will

fall , causing a loss in their value

30

whther the gain on futures contact exactly equals the loss on the long Canada bond portfolio depends on what

how sensitive both are to interst rate changes

31

if the bond portfolio's value changes exactly minimc those of the asset underlying the CGB contract, the portfolio will be what

completely hedged

32

when a portfolio is not completely hedged the investor is

exposed to basis risk

33

what is an advantage of forward contracts

is that they can be structured to minimize (or even eliminate) basis risk
this is because, unlike futures, forwards are not standardized and can therefore be tailored made with respect to underlying assets and maturity dates

34

for bonds, how can basis risk be reduced

by adjusting the number of bond futures sold to create a weighted average hedge