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investments > Chapter 17 - futures markets and risk management > Flashcards

Chapter 17 - futures markets and risk management Flashcards

(50 cards)

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1
Q

forward contract

A

An arrangement calling for future delivery of an asset at an agreed-upon price

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2
Q

futures makets

A

Establish contract size, acceptable grade of commodity, contract delivery dates, etc.

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3
Q

Key differences between futures and forwards:

A
  • futures contracts are standardized, traded on organized exchanges, and settled on a daily basis
  • forward contracts are customized, traded over the counter, and settled at the expiration of the contract
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4
Q

basics of futures contracts

A
  • Calls for delivery of a commodity at a specified delivery date, for an agreed-upon price
  • Place and means of delivery are specified
  • Parties to the contract much more commonly close out their positions before contract maturity
  • Taking gains/losses in cash
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5
Q

futures price

A

The agreed-upon price to be paid on a futures contract at maturity

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6
Q

long position of futures

A
  • The futures trader who commits to purchasing the asset
  • Profit = spot price and maturity - original futures price
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7
Q

short position in futures

A
  • The futures trader who commits to delivering the asset
  • Profit: original futures price - spot price and maturity
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8
Q

“zero-sum game” of futures

A

losses/gains to all positions netting out to 0

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9
Q

futures categories

A

agricultural, metals/minerals (includes energy), foreign currencies, and financial (fixed-income and equities)

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10
Q

single stock futures

A

A futures contract on the shares of an individual company

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11
Q

clearing house

A
  • Established by exchanges to facilitate trading, an intermediary between two traders
  • The only party that can be hurt by the failure of any trader to honor the obligations of the contract
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12
Q

open interest

A
  • the number of contracts outstanding
  • long/short position are not counted separately
  • Can be defined as the number of long or short contracts outstanding
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13
Q

marking to market

A
  • The daily settlement of obligations on futures positions
  • E.x. Clearinghouse credits/debits the accounts of the long/short position of the futures price rises
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14
Q

margin

A

a security account consisting of cash/equivalents (such as T-bills) that ensures the trader will be able to satisfy the obligations of the futures contract

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15
Q

maintenance margin

A
  • An established value below which a trader’s margin may not fall
  • Reaching the maintenance margin triggers a margin call
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16
Q

margin call

A

requires the margin account be replenished or the position be reduced to a size commensurate with remaining funds

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17
Q

convergence property

A

The convergence of futures prices and spot prices at the maturity of the futures contract

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18
Q

cash settlement

A

The cash value of the underlying asset (rather than the asset itself) is delivered to satisfy the contract

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19
Q

federal commodity futures trading commission (CFTC)

A
  • regulates futures markets
  • Sets capital requirements for member firms, authorizes trading in new contracts, and oversees the maintenance of daily trading records
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20
Q

general rule of capital gains

A

60% of futures gains/losses are treated as long-term cap gains and 40% as short term

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21
Q

speculator

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A

uses a contract to profit from movements in futures prices

22
Q

hedger

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A

uses a contract to protect against price movements

23
Q

short hedge

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A

taking a short futures position to offset risk in the sales price of an asset

24
Q

why futures?

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A
  • Transaction costs are far small in futures markets
  • Leverage because of margin
25
cross-hedging
hedging a position using futures on another asset
26
basis
The difference between the futures price and the spot price
27
basis risk
Risk attributable to uncertain movements in the spread between a futures price and a spot price
28
futures spread
taking a long position in a futures contract of one maturity and a short position in a contract with a different maturity
29
Spot-futures parity (cost-of-carry relationship)
- Describes the theoretically correct relationship between spot and futures prices - Violation of the parity relationship gives rise to arbitrage opportunities - F0 = S0(1+rf)^T - S0 = F0/(1+rf)^T
30
spot-futures parity (cost-of-carry relationship) if there is a dividend
- F0 = S0(1 + rf - d)^T - If d < rf, the futures price will exceed the spot price and by greater amounts for longer times to contract maturity - If d > rf, the income yield on the stock actually exceeds the forgone (risk-free) interest that could be earned on the money invested - The futures price will be less than the spot price and by greater amounts for a longer time to contract maturity
31
contract size
the multiplier used to calculate contract settlements
32
synthetic stock positions
Index futures let investors participate in broad market movements without actually buying/selling a large number of stocks
33
timers
- Attempt to shift from bills intro the market before market upturns and shift back into bills to avoid market downturns - Using futures contracts makes trading costs much lower
34
index arbitrage
- Strategy that exploits divergences between actual futures prices and their theoretically correct parity values to make a riskless profit - If the futures price is too high, short the futures contract and buy the stocks in the index - If too low, buy futures and short the stocks
35
program trading
Coordinated buy orders and sell orders of entire portfolios, often to achieve index arbitrage objectives
36
hedging foreign exchange risk and Ex
- can be hedged through currency futures or forward markets - E.x. if you know you will receive £100,000 in 60 days, you can sell those pounds forward today in the forward market and lock in an exchange rate equal to today’s forward price
37
direct quotes
the number of US dollars required to purchase some unit of foreign currency
38
direct quotes
the number of US dollars required to purchase some unit of foreign currency
39
indirect quotes
the amount of foreign currency needed to purchase $1
40
Major US interest rate contracts
- Eurodollars, Tbills, Tnotes, and Tbonds
41
interest rate futures
Allow traders to hedge against interest raet risk in a wide spectrum of maturities
42
treasury contracts
- call for delivery of a T-bond, bill, or note - If interest rates rise, the MV of the security at delivery will be less than the original futures price, and the deliverer will profit - The short position in the interest rate futures contract gains when interest rates rise and bond prices fall
43
Price value of a basis point (PVBP)
- The change in the value of a fixed-income security resulting from a one-basis-point change in its yield to maturity - PVBP = change in portfolio value / predicted change in yield
44
hedge ratio (H) =
= PVBP of portfolio / PVBP of hedge vehicle
45
cross-hedging
Hedging a position in one asset by establishing an offsetting position in a related, but different asset
46
swaps
Multiperiod extensions of forward contracts
47
foreign exchange swaps
- An agreement to exchange a sequence of payments denominated in one currency for payments in another currency at an exchange rate agreed to today - Exchange of currencies on several dates
48
interest rate swap
Contracts between two parties to trade cash flows corresponding to different interest rates
49
notional principal
Principal amount used to calculate swap payments
50
swap dealer
- Typically a financial intermediary such as a bank - Finds people looking to take opposite sides of a swap so its preposition is effectively neutral - Charges a bid-ask spread on the transaction

investments (14 decks)

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