Chapter 13 Flashcards
(16 cards)
What is hedging?
To hedge is to engage in a financial transaction
that reduces or eliminates risk
– When a financial institution has bought an asset, it is
said to have taken a long position
– When a financial institution has sold an asset, or has
agreed to deliver an asset to another party at a future
date, it is said to have taken a short position
- To “hedge risk” means to offset a long position by
taking an additional short position, or to offset a
short position by taking an additional long position
What are the two types of options?
- American options that can be exercised any time up
to the expiration date - European options that can be exercised only on the
expiration date
What is a call option?
A call option is an option that gives the owner the right (but not the obligation) to buy an asset at a pre specified exercise (or striking) price within a specified period of time.
How are the buyer and seller referred to in a call?
The buyer of a call is said to be long in a call
and the writer is said to be short in a call.
Define a call premium.
The buyer of a call will have to pay a premium (called call premium) in order to get the writer to sign the contract and assume the risk.
What is a put option?
It gives the owner the right (but not the obligation) to sell an asset to the option writer at a pre specified exercise price.
How are the owner and the writer of the put referred to?
As with calls, the owner of a put is said to be long in a put
and the writer of a put is said to be short in a put.
What factors affect options premiums?
- Higher strike price
– Lower premium on call options
– Higher premium on put options - Greater term to expiration
– Higher premiums for both call and put options - Greater price volatility of underlying instrument
– Higher premiums for both call and put options
Slide 16 Spot, forward and future contracts
Slides 20-23 Hedging Interest Rate Risk
with Forward Contracts
What is micro and macro hedging?
Micro hedge—hedging the value of a specific asset.
Macro hedges involve hedging, for example, the
entire value of a portfolio, or general prices for
production inputs.
What are the three classifications of financial futures and where are they traded in Canada
Financial futures are classified as:
1. Interest-rate futures
2. Currency futures
3. Stock index futures
In Canada, financial futures are traded in the Montreal Exchange (ME)
What are swaps?
Swaps are financial contracts obligating each
party to exchange (swap) a set of payments it
owns for another set of payments owned by
another party
What are the two kinds of swaps?
Two kinds of swaps:
– Currency swaps
– Interest-rate swaps
Slides 32-35 Using Currency Swaps to Manage Exchange Rate Risk
Slides 36-37 Interest rate swaps
