Exotic Options Flashcards by Shiyi Zhou

For a call barrier option, _____ is the call price. The call price is ______ the strike price.

For a put barrier option, _____ is the call price. The call price is ______ the stike price.

Barrier level, higher

Barrier level, lower

How well did you know this?

Not at all

Perfectly

For Up & In calls and Down & In puts, these barrier options are like ______ until ____.

For Up and Out calls and Down & Out puts, these barrier options are like ______ until ____.

OTM European-style options until the barrier level is reached.

ITM European-style options until the barrier level is reached

How well did you know this?

Not at all

Perfectly

Callabale Bull/Bear Contracts (CBBCs) are traded on the _______ with settlement on ____ days, just as that for a _____

Cash market of the exchange

T+3

Stock

How well did you know this?

Not at all

Perfectly

______ issue CBBC.

CBBCs are independent of ______

Investment Banks

Underlying asset and the exchange on which they are listed

How well did you know this?

Not at all

Perfectly

Changes in price of a CBBC is _______ with the changes in the ______ as ______

The magnitued of relative movement depends on the ____, which is _____.

very much in accordance with the changes in the underlying asset as the delta of the CBBC is approximately equal to 1.

Conversion ratio which is the number of underlying assets that each unit of CBBC is required to buy or sell.

How well did you know this?

Not at all

Perfectly

What does 5:1 mean (conversion ratio of CBBC)?

5 units of a CBBC control 1 unit of the underlying asset

How well did you know this?

Not at all

Perfectly

For a Bear CBBC Contract, the MCE (mandatory call event) occurs if ______

For a Bull CBBC Contract, the MCE (mandatory call event) occurs if ______

Spot price touches or moves above the Call Price

Spot price reaches or declines below the Call Price.

How well did you know this?

Not at all

Perfectly

The Effective Gearing of CBBC is the same as ______ because _____

Simple gearing because delta is equal to 1.

How well did you know this?

Not at all

Perfectly

Gearing Ratio of CBBC =

Underlying Asset Price / (Price of CBBC x Conversion Ratio)

How well did you know this?

Not at all

Perfectly

If the effective gearing of CBBC is 5 times, it means _____

1% change in underlying price will result in increase/decrease of the CBBC price by 5%

How well did you know this?

Not at all

Perfectly

Gearing ratio is higher if _________

the strike price is closer to the spot price of a CBBC’s underlying asset, leading to more flucutuations in the price and higher risk of the CBBC being called

How well did you know this?

Not at all

Perfectly

What’s N-CBBC

Call price = Strike PRICE

Residual value on termination is zero

How well did you know this?

Not at all

Perfectly

What’s R-CBBC?

Call price is different from strike price, and a small amount of cash is paid as residual value on termination

How well did you know this?

Not at all

Perfectly

What are the characteristics of CBBCs?

Bull Contract: Market View, Call Price & Strike Price, Mandatory Call Event Occurs (knock-out)

Bear Contract: Market View, Call Price & Strike Price, Mandatory Call Event Occurs (knock-out)

How well did you know this?

Not at all

Perfectly

What are theoretical factors affecting CBBC pricing? (3)

Price movement of underlying asset

Strike Price

Financial cost

How well did you know this?

Not at all

Perfectly

Financial Costs include ______. (3 types) These costs are ____ for CBBCs with _____, and passed on to the _____.

Issuer’s cost of borrowing, adjustments for dividends, and the issuer’s profit margin.

higher for CBBCs with longer maturity

investor by the issuer

How well did you know this?

Not at all

Perfectly

What’s theoretical price of a bull/bear contract?

Bull Contract = [(Underlying Asset Price - Strike Price) + Financial Cost] / Conversion Ratio

Bear Contract = [(Strike Price - Underlying Asset Price) + Financial Cost] / Conversion Ratio

How well did you know this?

Not at all

Perfectly

What are market factors affecting CBBC pricing? (3)

Liquidity of the underlying asset

Demand and supply of the CBBC

Issuer related factors

How well did you know this?

Not at all

Perfectly

What’s the delta for Bull/Bear CBBC Contracts?

Bull: +1

Bear: -1

How well did you know this?

Not at all

Perfectly

if MCE occurs

Residual Value for a Bull CBBC Contract =

Residual Value for a Bear CBBC Contract =

(Settlement Price - Strike Price) / Conversion Ratio

(Strike Price - Settlement Price) / Conversion Ratio

How well did you know this?

Not at all

Perfectly

if there’s no MCE, the investors can hold the CBBC until maturity. At maturity,

Matuiry value for a Bull CBBC Contract =

Matuiry value for a Bear CBBC Contract =

(Settlement Price - Strike Price) / Conversion Ratio

(Strike Price - Settlement Price) / Conversion Ratio

How well did you know this?

Not at all

Perfectly

The MCE Settlement Price in a Bull Contract is _____

The MCE Settlement Price in a Bear Contract is _____

not lower than the minimum trading price of underlying asset between the period of MCE up to the next trading session

not lower than the maximum trading price of underlying asset between the period from the MCE up to the next trading session.

How well did you know this?

Not at all

Perfectly

For CBBC expires at maturity, the MCE Settlement Price =

Closing price of the udnerlying asset on settlement day

How well did you know this?

Not at all

Perfectly

Similarities and Difference between Knock-Out products and Structured warrants or other products

Underlying Asset

Trading method

Bullish View

Bearish View

Strike Price

Call Price

Mandaotry call mechanism

Implied Volatility

Maturity

Holding Cost

Margin Requirement

Duration

Maximum Loss

How well did you know this?

Not at all

Perfectly

What's the impact of implied volaitility on CBBCs vs. Structured Warrants?

CBBCs: Insignificant to pricing Structured Warrants: Impacts pricing

Wht's holding cost of CBBCs vs. Structured Warrants?

CBBCs: Financial costs are deducted daily Structured Warrants: Time dcay

When early termination (mandatory call mechanism) occurs for CBBCs?

Bull: Underlying asset price < Call Price Bear: Underlying asset price > Call Price

Brokerage commissions and finance charges are _____ for CFDs. In Singapore, no _____ be paid on CFD contracts.

Low and competitive Stamp duty

CFDs has ____ Expiry Date.

CFDs are settlted _____

always in cash only

What are three main business models used by CFD providers?

Market-maker model Direct market access model Exchanged-traded CFD model

What's the mostly used CFD business model in Singapore?

DMA

Exchange-Traded CFDs is _____ model that is available in _____

Uncommon Australia

All CFD orders are considered to be ______

GTC

What are three types of orders for equity CFDs in Singapore?

Limit orders Market-to-limit orders Market orders

Stop Entry orders of CFDs can be used to _____

Exist a short CFD position.

For a short CFD investor, a stop order or a BUY Stop can set a ____ on the position at a price ____. On the other hand, a long CFD investor can place a Buy Stop order to _____

stop-loss target above the existing price enter the market at a price above the existing price, i.e. on a breakout.

Those who are long CFDs ____ a financing cost, while those who are short on CFD contracts _____ financing.

incur get a financing charge benefit

For short CFD positions, the investors receive interest for _____

Deferring of the sale proceeds

Difference betwen CFDs and Futures 1. Trading Plarform 2. Maturity & Expiry date 3. Financing Cost 4. Dividends

What's CFDs pair trading strategy? It involves _____ This's a _____ strategy that aims to _____

One long and One short position in CFDs Market-neutral strategy that aims to exploit a percevied deviation in the underlying share prices from historical trends and expectation of a reversion of the price to the normal trend in the short-term.

The two positions of CFDs pair trading ____ the risks, and the investor gains if _____

offset the risk profit on one position is more than the loss on the other

ES (Extended Settlement) Contract Specifies _____

Quantity Security Price for final settlement Future date for contract maturity or expiry

If an ES contract is held to maturity without an offsetting position, the settlement is by _______

physical delivery

Hedgers can use ES contracts for ______ by _______ to ______ Arbitrageurs can ______

Managing their cash market exposure by a long position in the underlying stock and a short position in the ES contracts to lock in prices. Take advantage of market inefficiencies by taking simultaneous trades that offset each other to capture risk-free profits.

The buy-in of ES starts on the day ______ It starts at _____ (price)

after the due date, i.e. last trading day or LTD+4 day by Central Depository Pte Ltd two min. bids above the previous day's closing price, the current last done price or the current bid, whichever is the highest.

SGX set ____ margins in fxied tiers based on ____. Members may set _____

Outright and spread margins Volatility of the stock higher margin requirements

_____ are important criteria for SGX selecting stocks for ES.

Trading volume and market cap

ES contracts commence trading on ____ (day). Each ES series has a tenor of _____ days. This ensures _____ to enable customers to ____.

25th of the month preceeding the spot month 35 overlap period to enable customers to roll over their positions

For margins imposed by Member to customer on ES contracts, _____ are exlcuded from margining. Despite this, the margin calculation by ____ includes _____ because _____

Contra contracts CDP includes the contra contracts because settlement between CDPand Member for the contracts occurs only on LTD+3

Apart from the brokerage fees, ES contracts are also subject to the following charges_____ (2 types)

A clearing fee of 0.04% of the contract value, limited SGD600 GST on brokerage and clearing fees

ES contracts provide opportunities for arbitraging between _____

the ES market and the ready market

Investors of ES are able to trade spreads between ____ more easily than in the _____

stocks ready market

Initial Margins for the new trade of ES may be deposited _____ (when)

in advance or within 2 market days from the trade date if the trading member or representative beleives that the margin will be deposited within such time.

The initial margin of ES is calculated as ______

By multiplying the maintenance margin by the IM:MM ratio stipulated by SGX or the Member

Maintenance Margin is calculated by ______ based on ____ (price)

multiplying the margin rate with the value of the ES contract based on the last traded price of the underlying in the ready market

Variation Margins are not required for _____

contra trades or if the Member allows the customer to book a gain or loss after executing an offsetting trade in an existing position

____ is a must for ES contract

Outright margin

Spread Margining is referred to _____

If an investor holds both a long and a short position in ES contracts of different contract months of the same underlying security, he's only required to deposit one side of the maintenance margin and not two separate maintenance margin amounts

Acceptable forms of ES margin collateral (5 types)

Cash Government Securities Bank Certificate of Deposit Gold Bars or approved Gold Certificate Selected common shares

Valuaiton of the collateral for ES is based on ____ prescribed by _____

hiar-cut rates SGX

Differences among ES Contracts with Contra and Margin Financing 1. Leverage 2. Financing Cost 3. Short Selling 4. Borrowing Cost

Knock-in barrier options are ideal for ____ Knock-out barrier options are ideal for _____

Speculating Large market moves Speculating small moves in a sideways market

Barrier Reverse Convertibles appeal to investors _____.

Looking for income.

The Barrier Reverse Convertibles contain ____, and the investor is taking ___ risk.

Investors are effectively long a bond/money market instrument and short a knock-out put option. Selling the put option, the investor is is taking downside risk

Investors of Barrier Reverse Convertibles are paid _____ at maturity if _____

principal plus coupon the barrier is never breached

The coupon in a Barrier Reverse Convertible is paid _____

regardless of market direction of the underlying

Investors of a Barrier Reverse Convertible have a ____ view on direction of the underlying. They expect ____ and do not expect _____

Neutral falling volatility underlying to breach the barrier during product lifetime.

Investors in bonus certificates are generlaly _____ on underlying but are looking for ____ if markets are flat or slightly down.

bullish yield enhancement

Bonus of Bonus certificates is available as long as _____

the underlying is above the barrier

If underlying of a bonus certificate is below the barrier, investors have ____ exposure to the downside.

1:1

The exposure in a bonus certificate is similar to _____ with the benefit of a bonus if ____

Direct investment in the underlying, with the benefit of a bonus if underlying performance is flat or slightly negative.

In a bonus certificate, Barrier is usually observed ____ throughout the term of the product.

Continuously

In the bonus certificate, if underlying is below the barrier, investors have ____ exposure to the downside.

1:1

Generally, the ____ the strike price is to the spot price of a CBBC's underlying asset, the ____ will be the gearing ratio of the CBBC.

closer higher

For category N-CBBC, the call price is equal to its ___. The CBBC holder will not ______

strike price. The CBBC holder will not receive any cash payment once the underlying asset price reaches or exceeds the call price (when MCE occurs and the CBBC is called).

Price of a Callable Bull/Bear Contract is NOT adjusted for ____ because ____

regular share dividends they're taken into account by the issuer as part of the funding cost

At the end of each day, all open positions in ES contracts will be revalued or marked to their respective ____ prices by ____

Valuation CDP

In arriving at the Valuation Price of an Extended Settlement (ES) contract BEFORE the LTD, the SGX will take into account _____ After the LTD, when the ES contract has stopped trading, _____ will be used for marking-to-market.

the last traded price, the bid-offer spread at the close of the market and price data derived from pricing models, as selected or established by SGX from time to time the closing price for the underlying

Excess Margin in case of a customer for an Extended Settlement Contract is the Customer Asset Value in excess of ____

The sum of Initial margin and Variation margin (Additional Margins)

Memebers may allow their customers to withdraw Excess Margins provided such withdrawal will not _____

cause the deposited collateral or Customer Asset Value to be less than zero

A 6-month (125 business days) accumulator with a strike price of S$1.60, with daily observation and 1,000 shares to be acquired per day may help an Investor to get ____ shares for _____

125*1,000=125,000 shares for $1.6*125,000=$200,000.

A Range Accrual Note (RAN) based on interest rate is a ____ If the closing interest rate on a parrituclar day is ____ of the range, ___ interest may accrue.

Structured fixed income product If the closing interest rate on a particular day is below the lower end of the range, a lower or zero interest may accrue

RAN basd on the HSI: The range is the range between ____ barrier and ____ barrier The range is based on ____ ___ volaility in HSI may lead to ____

Knock-out barrier and accrual barrier Spot price Higher volatility may lead to higher expected yield

The contract size for Eurodollar Futures is ____.

USD 1,000,000

The upside of RAN is _____

Limited to the maximum coupon rate

Credit Linked Notes (CLNs) are constructed based on ____

The credit default swaps linked to one or more reference entities (a company or companies).

CLNs are ____ (type) products. The principal sum is ____. They can be settled by ____

OTC Not guaranteed cash or physical delivery

Auto-callable structured products normally offer ___ yields to investors to ____.

Auto-callable structured products normally offer HIGHER yields to investors to compensate for the risk of the product being called before maturity.

Auto-callable structured products can be constructed using _____ options (type)

American / Bermudan

What's the common requirement for both Equity CFDs and Equity Futures contracts?

Margin and Leverage requirements

Investors and directors of listed companies must also note that ES transactions can amount to a change _____, and should comply with ____.

Interest in the underlying security Companies Act (especially sections 164-166) SFA (Division 2 and 3 of Part VII) Listing Rule 704 of the SGX-ST Listing Manual.

The trading schedule of ES contracts is _____.

Fixed

ES contracts are ____ products (type)

Leveraged

The First Trading Day of ES Contract is _____

25th of the month that is immediately preceeding the contract month

Exotic Options Flashcards

(95 cards)