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CISI Capital Markets Programme: Derivatives > Chapter 3: Market Structure > Flashcards

Chapter 3: Market Structure Flashcards

1
Q

Which Platforms are Used on the London Metals Exchange?

There are 4.

A
  • Select
  • Sword
  • Ring-Trading
  • LME Clear
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2
Q

Which Platforms are Used on the ICE Futures Europe?

How many versions are there of this.

A

ICE Clear and ICE Connect (6 versions)

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3
Q

Which Platforms are Used on the CME Group?

There are 3 for CME…….

A
  • CME Globex
  • CME Direct
  • CME Clearing
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4
Q

Which Platforms are Used on the Euronext?

A
  • Optiq
  • LCH and EuroCCP
  • Euronext Clearing
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5
Q

Which Platforms are Used on the Singapore Exchange?

DC heros on a quest?

A
  • SGX Quest
  • SGX-DC
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6
Q

Which Platforms are Used on the China Financial Futures Exchange?

A
  • CFFEX Order Book
  • CFFEX CCP
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7
Q

What are the Contract Specifications of a Derivatives?

Q S Q T T D E

A
  • Quality
  • Size
  • Quotation
  • Tick Size
  • Tick Value
  • Delivery Month
  • Exchange Delivery Settlement Price (EDSP)
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8
Q

What are Components of the Delivery Month for a Derivative?

What can this comprise of?

A
  • Notice Days
  • Delivery Days
  • Last Trading Days
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9
Q

What is the Tick Size?

A

The minimum price movement of a contract i.e. 1 pence, 1 basis point etc.

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10
Q

What is the Tick Value?

A

The profit or loss for one tick movement.

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11
Q

What are the Components of a Long Gilt Future?

What does this mean for the tick size and tick value?

A
  • Contract size: GBP 100,000NV 4% Gilt
  • Quotation = GBP100NV
  • Valuation = GBP10 (Tick Value) per GBP 0.01 (Tick Size) per GBP100NV (Contract)
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11
Q

What are the Components of a Universal Stock Future?

ie. What is the Tick size? Valuation method? etc.

A
  • A single stock future
  • Global Product
  • Contract specs
    (Physically delivered or cash settled)
    (Contract size: typically 100 shares or 1000 in UK or Italy)
  • Valuation: Price per share
  • Tick Size: 1 penny
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11
Q

What is Convergence, When Pricing Derivatives?

A

When the fair value of the future converges with the cash price, as it approaches delivery.

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12
Q

What is Meant by the Cheapest to Deliver Bond?

Where do these come from?

A

Many long bond contracts are based on a basket of deliverable bonds. At any point in time one will be cheaper than the other, known as the Cheapest to Deliver

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13
Q

What is the Cheapest to Deliver Price Factor?

A

Where the prices are brought in line as often, the price of the deliverable bond and the contract bond might not be the same.

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14
Q

How does one Hedge with Bond Futures, What Formula is Used?

A

No. Contracts Required = Nominal Value of CDT Holding / Nominal Value of Contract X CTD Price Factor

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15
Q

Do You Round the Number of Contracts When Hedging?

A

Absolutley Not!!

Always use the whole number

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16
Q

What are the Factors of a Short-Term Interest Rate Future (STIR)?

What is the Quotation and Value e.g X GBP per basis point etc.

A
  • Contract for Difference
  • 500,000GBP at 3 month short term interest rate e.g. SONIA
  • Quotation: 100 - Implied Interest Rate
  • Valuation: 12.50 GBP per basis point (tick size)
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17
Q

What Would A Speculator Do With STIR Futures if he Thinks Rates Will Rise?

Why?

A

Short them, as when rates go up, prices go down.

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18
Q

What is the Equation for Hedging with STIRs?

Long or short and why?

A

Contracts = Value of Exposure / Value of Contracts

Whether long or short depends on ones concern.

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19
Q

What is the CISI Equation for Hedging with STIRs?

What must you consider for this?

A

No. Contracts = Price Change in the Portfolio given a 1 basis point change in Yields / Price Change in the Contract given a 1 basis point change in yield (Tick Value)

Futures are 3 months and 1 basis point in 0.01%

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20
Q

What is a Dual Capacity Market Participant AKA?

A

Broker Dealers?

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21
Q

What is a Cross Trade?

How does this work?

A

Taking opposite pricipal trades from 2 clients, and reporting them on their own book to the exchange.

22
Q

What are the 3 types of Clearing Members?

GIM

A
  • GCMs (General Clearing Members)
  • ICMs (Individual Clearing Members)
  • NCMs (Non Clearing Members)
23
What Privileges do GCMs Have? ## Footnote Who can they arrange clearing of trades on behalf of.
They can arrange clearing of trades on behalf of themselves, clients, and other clearing house members.
24
What Privileges do ICMs Have? ## Footnote Who can they arrange clearing of trades on behalf of.
They can arrange trades to be cleared on behalf of themselves and other clients.
25
What Privileges do NCMs Have? ## Footnote Who can they arrange clearing of trades on behalf of, if not who?
They cannot arrange for trades to be cleared therefore they must "give up" trades to GCMs for clearing. (they can only have a miximum of 2 agreements)
26
What is a "Give Up"? ## Footnote Regarding clearing.
When the executing broker and clearing broker are different.
27
What are Characteristics of Quote-Driven Markets for Derivatives? ## Footnote What are these best at selling?
For Illiquid contracts. * Price Makers * Bid / Offer Spreads * Screen and Phone calling based * Open Outcry
28
What are Characteristics of Order-Driven Markets for Derivatives? ## Footnote What are these best at selling?
More Liquid contracts. * Negotiated prices * Electronic trading
29
What is STP? ## Footnote What does this mean?
Straight through processing. Where the order is filled and booked electornically and then sent straight to the clearing house.
30
What are the Steps to Open Outcry Trading? ## Footnote Before it is submitted to the clearing house?
Client > Broker (order slip) > Booth Clerk (dealing slip) > Pit Trader (dealing slip) > Booth Clerk > Broker > Clearing House.
31
Who are Pit Officials in Open Outcry Trading?
Take dealing slips and are responsible for official prices, that are then submitted to price vendors.
32
What is an Out Trade in Open Outcry Trading?
When the dealing slips do not match, this could casue the trade to fail, or could mean the details need to be reconfirmed.
33
Does the LME Operate on an Order Book or Open Outcry?
Both.
34
What is the LME Order Book Called? ## Footnote What times do these trade between?
LME Select 01:00 AM - 19:00 AM
35
What is the LME Quote Driven Market Called?
24 Hour inter-office market.
36
How Does the LME Open Outcry Trading Day Operate? ## Footnote The structure.
* 4 ring sessions per day (each metal trades for 5 minutes) * 2 Kerb sessions (all metals are trading together)
37
What is Significant About Session 2 of the LME Open Outcry Day? ## Footnote What does this also provide?
This provides the official LME prices for the day. It also provides the prices for EDSP.
38
What are Example of Order Driven Trading Systems?
ICE Connect, CME Globex, LME Select
39
What is Quoted in the Touch Strip?
The highest priced buy and sell orders.
40
What is Level 2 in the Market Order Book AKA? ## Footnote What is this?
Market in Depth. All other order below the touch strip.
41
What is the Price Limit on the Limit Order AKA? ## Footnote e.g. Sell 600 at 210
No worse than price. i.e they will not take a price less that 210.
42
What is an Immediate or Cancel Order? ## Footnote Fill-or-Kill
A limit order that cannot be partially filled, it is either executed or cancelled.
43
What is a Market-if-Touch Order?
A market order with an activation price. This holds off the market order until the touch strip shows the price.
44
What is a Stop-Loss Order?
Where a market order is automatically placed when the price falls below a certain level, in order to close out a position quickly.
45
What is a Stop-Limit Order? ## Footnote Why is this different to a stop loss order and why can this be bad?
Where a limit order is automatically placed when the price falls below a certain level, **in order to close out a position quickly and guarantee a price**. Some positions may stay open causing further loss.
46
What is a Good Till Cancelled Order?
Where the order is not cancelled at the end of the day, it instead stays open until filled or otherwise specified.
47
What is a Day Order?
An order that is placed but then also cancelled at the end of the trading day if it is not filled.
48
What is a Limit or Market-on-Close Order?
A limit order that is automatically transformed into a market order at the end of the day, if it is not filled at the specified price.
49
What are the Characteristics of a Block Trading Facility? | Wholesale Trading Facilities ## Footnote What does this mean?
* Large order arranged bilaterally off order book but on-exchange * Gives certainty or pricing and execution (not always book price) * Trade details are reported to exchange (5 minutes ICE futures) * Published trade details destinguished from order book execution (to show block trade).
50
What is a Basis Trading Facility? | Wholesale trading activities.
* Transactions involving the simultaneous trading of the financial asset and offsetting number of futures. * Agreed off order book but on exchange. * Trade details reported to the exchange (15 mins ICE futures)
51
What do COMEX, NYMEX, CBOT and PHLX Trade? ## Footnote COMEX sub is made from? PHLX is a Flex
* COMEX - Metals * NYMEX - Oil Derivatives * PHLX - Financial Contracts * CBOT - Agricultural and financial contracts.
52
What is Exchange Futures for Physical? ## Footnote What are the conditions of this?
An exchange of an OTC position for a futures position. - Non financial (commodities) - Has to be similar in value or quantity
53
What are the Cons of EFPs? ## Footnote m2m
Operational risk due to daily mark to market accounting and margins.
53
What are the Pros of EFPs?
- Reduced credit risk for OTC position - Reduced margin requirements - 24 hour trading
54

CISI Capital Markets Programme: Derivatives (11 decks)

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