Chapter 11 part 2 forwards Flashcards Preview

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Flashcards in Chapter 11 part 2 forwards Deck (34)
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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


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


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


what is initial margin

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


what is maintenance or variation margin

a minimum amount that must be maintained in a margin account


what is margin call

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


what is daily resettlement

marking to market and adjusting inveotrs' equity position


what is settlement price

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


what is notional amount

the dollar amount upon which a contact is valued


what is offsetting

cancelling a futures position by making an equivalent but opposite transaction


futures contracts are like what

like are forwards (buy from banks only)


forwards involve what

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


futures are what

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


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


what is the clearinghouse in canada

Canadian derivatives clearing corporation (CDCC) of the Montreal exchange


what two types of margins does CDCC enforce

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


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


new or smaller clients have a higher margin?



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



what are the most commonly delivered months

March, June, Sept, December


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


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


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



What is open interest

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


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


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

when they have 250 or more contracts


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


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


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

fall , causing a loss in their value


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