Derivatives Tutorial 4 Flashcards
What is technical analysis?
Technical analysis is a method used in financial markets to evaluate and forecast future price movements of assets, such as stocks, currencies, or commodities, by analyzing historical market data, primarily focusing on price and volume patterns.
What are the key principles of technical analysis?
Technical analysis relies on principles like trend analysis, chart patterns, support and resistance levels, and various technical indicators (e.g., moving averages, RSI, MACD) to make predictions about future price movements.
How does technical analysis differ from fundamental analysis?
While fundamental analysis assesses the intrinsic value of assets based on economic, financial, and qualitative factors, technical analysis primarily focuses on past price and volume data to predict future price movements without considering the intrinsic value of the asset.
What are some common tools used in technical analysis?
Technical analysts use various tools like charts (candlestick, line, bar), trendlines, moving averages, oscillators, and other indicators to identify patterns and trends in price data.
How is technical analysis utilized in trading or investing?
Traders and investors use technical analysis to identify entry and exit points for trades, determine trends or reversals, set stop-loss orders, and make informed decisions based on historical price patterns and indicators.
What is Fundamental Analysis in investing?
Fundamental Analysis is an approach used by investors to evaluate the intrinsic value of a stock by examining various qualitative and quantitative factors related to a company’s financial health, management, industry, and economic conditions.
What are the key components of Fundamental Analysis?
Fundamental Analysis considers:
Financial Statements: Balance sheet, income statement, and cash flow statement.
Company Management: Leadership quality, strategy, and corporate governance.
Industry & Market Conditions: Trends, competition, and regulatory factors.
Economic Indicators: Interest rates, inflation, and GDP growth.
How does Fundamental Analysis differ from Technical Analysis in investing?
Fundamental Analysis focuses on a company’s financial health and market factors, while Technical Analysis uses past price movements and patterns to forecast future price movements.
What financial ratios are commonly used in Fundamental Analysis?
Ratios include:
Price-to-Earnings (P/E) ratio: Compares a company’s stock price to its earnings per share.
Debt-to-Equity (D/E) ratio: Measures a company’s leverage.
Return on Equity (ROE): Measures a company’s profitability relative to shareholders’ equity.
What is the goal of Fundamental Analysis for investors?
The goal is to determine the intrinsic value of a stock compared to its market price to make informed investment decisions, including buying, selling, or holding stocks.
What are some limitations of Fundamental Analysis?
Limitations include:
Subjectivity in qualitative analysis.
Inability to predict short-term price movements.
Overlooking market sentiment and investor behavior.
What are the types of Credit Risk?
Types include:
Default Risk: Risk of non-payment or default by the borrower.
Counterparty Risk: Risk of default by the other party in a financial transaction or contract.
How is Credit Risk managed in financial institutions?
Credit Risk is managed through various methods, including diversification of credit portfolios, credit scoring, collateral requirements, and risk mitigation strategies like hedging.
How are Derivative Products used to manage Credit Risk?
Derivatives can be used for Credit Risk management by allowing investors to hedge against potential credit losses or default by using credit derivatives, such as credit default swaps (CDS).
What are some common credit derivatives used to manage Credit Risk?
Credit derivatives include:
Credit Default Swaps (CDS): Insurance-like contracts against credit defaults.
Credit Spread Options: Options based on the difference in interest rates between two bonds.
What role do derivatives play in mitigating Credit Risk in financial markets?
Derivatives provide tools for investors to transfer or offset Credit Risk, offering mechanisms to protect against potential losses due to credit events or defaults.
What are Commodity Swaps in finance?
Commodity Swaps are financial derivatives where two parties agree to exchange cash flows based on the price fluctuations of commodities, such as oil, natural gas, agricultural products, or metals.
How do Commodity Swaps work?
In a Commodity Swap, one party typically agrees to pay a fixed price or a floating rate linked to a benchmark (like LIBOR) for the commodity, while the other party pays the actual market price for the commodity.
What is the purpose of Commodity Swaps?
Commodity Swaps are used by participants in the commodities market to manage or hedge exposure to price fluctuations in commodities, reducing the risk of adverse price movements.
How are Commodity Swaps different from other types of swaps?
Commodity Swaps differ from interest rate or currency swaps as they involve the exchange of cash flows based on the price movements of physical commodities rather than interest rates or currencies.
What are the types of participants involved in Commodity Swaps?
Participants include producers, consumers, traders, and investors in the commodities market seeking to manage their exposure to price volatility.
What risks are associated with Commodity Swaps?
Risks include:
Price Risk: Exposure to adverse movements in commodity prices.
Counterparty Risk: Risk of default by the other party in the swap agreement.
Market Risk: Exposure to overall market volatility.
What are some examples of Commodity Swaps?
Examples include:
An oil producer agreeing to receive a fixed price and paying a floating rate based on market prices to hedge against oil price fluctuations.
A food processing company entering a swap to manage risks associated with changing agricultural commodity prices.
Types of Commodity Swaps
Fixed-floating swaps
commodity-for-interest swaps
What is a fixed-floating swap?
A fixed-floating swap is a financial derivative where two parties exchange fixed-rate and floating-rate cash flows based on an agreed-upon notional amount.
How does a fixed-floating swap work?
In this swap, one party pays a fixed interest rate on the notional amount while the other party pays a floating interest rate linked to a reference rate, such as LIBOR or a government bond yield.
What is the purpose of a fixed-floating swap?
The swap allows parties to manage interest rate risk. One party might prefer the certainty of a fixed rate, while the other seeks protection against potential fluctuations by paying a floating rate.
