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FIN 430 > Final Exam > Flashcards

Final Exam Flashcards

1
Q

Most recent Derivative Security

A

Credit Derivatives, innovated in the 1990s

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2
Q

Two Fully Electronic Derivative Markets in US

A
  1. Eurex

2. CMEs Globex

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3
Q

European Options

A

Only can be exercised at maturity

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4
Q

American Style Options

A

May be exercise at any time until maturity

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5
Q

Define Forward Contract

A

A contract for future payment and delivery.

  • Terms determined at initiation
  • Negiotiated
  • Non Standard
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6
Q

Define Credit Forward

A

A fwd agreement that hedges against an increase in default risk

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7
Q

Define Forward Rate Agreement

A

Contract where buyer agrees to pay a specified rate on a loan that will be settled in the future

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8
Q

To enter into a Future Contract

A

Buyer and seller must pay on inital margin requirment

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9
Q

Margin Call is issued when..

A

Funds in a margin account fall below the requirement in a Future Contract

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10
Q

Clearing House

A

Backs buyers and sellers position in a Future Contract

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11
Q

Marked to Market

A

Means gains or losses on a future contract are realized daily

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12
Q

Day Traders

A

Liquidate positions by the end of the day

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13
Q

Define Scalpers

A

Future or Option Exchange Members who take positions for only a few minutes

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14
Q

Buyer of a Call Option Benefits if..

A
  • If stock prices rises

- if volatility of stock price increases

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15
Q

Gain and Loss for Writer of a Put Option

A
  • Limited Gain

- Unlimited Loss

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16
Q

In Bear Markets, What option makes money

A

Buying a Put

Writing a Call

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17
Q

Commidity Futures Trading Commission (CFTC)

A

Must approve new Future Contracts

18
Q

Define Swap Contract

A

An agreement between two parties to exchnage a series of specified periodic cash flows in the future

19
Q

What Increases the Price of a Call Option (3)

A
  1. Increase stock price
  2. Increase stock volatility
  3. Increased interest rates
20
Q

What makes Put Option more Valuable

A
  1. Increase in volatility

2. Increase Exercise Price

21
Q

Credit Default Swap

A
  1. Reduces Credit Exposure
  2. Insures against Default
  3. Linked to Subprime Mortgage Crisis
22
Q

Interest Rate Swap

A

Buyer pays fixed and recieves floating rate

23
Q

Largest Derivative Market in the World

A

Swap Market measured by amount outstanding

24
Q

Swap Market Primary Regulator

A

No direct goverenment regulator

25
Q

Cap

A

Is a Call Option for rising interest rate

26
Q

Floor

A

Is a Put Option for falling interest rates

27
Q

Interest Rate Collar

A

Is buying a cap and writing a floor

28
Q

Operational Risk

A

Is the risk that existing technology or support system may malfunction or breakdown

29
Q

Technology Risk

A

Is the risk incurred by an FI when its technological investments do no produce anticipated cost savings

30
Q

Insolvency Risk

A

Is the risk that an FI may not have enough capital to offset a sudden decline in the value of it assets relative to liabilities

31
Q

Firm Specific Credit Risk

A

Is the risk of default for the borrowing firm associated with the specific types of project risk taken by that firm

32
Q

Systematic Risk

A

Will remain even in a well diversified portfolio

33
Q

Liquidity Risk

A

Is the risk that a sudden and unexpected increase in liability withdrawals may require FI to liquidate assets in a very short period of time at low prices
Ex) not able to get new repo finacning

34
Q

Having longer maturity asset than liabilities cause bank what risk?

A
  1. Interest rate risk

2. Liquidity risk

35
Q

Market Risk

A

Risk arising from unhedged positions in secruities or derivatives

36
Q

Sovereign Risk

A

Is the risk that repayments from foreign borrowers may be interrupted becasue of interference from foreign governments
Ex) Argentina

37
Q

Who cannot be Asset Transformers

A

Many intermediaries, such as banks cant match maturities of their assets and liabilities

38
Q

Who is at risk from falling interest rates?

A

A bank that has made floating rate loans funded by longer maturity deposits

39
Q

Rising Interest Rates… DO NOT

A

decrease the value of fixed income assets and increase the value of Fixed Income liabilities

40
Q

Assets in a banks trading book…

A

tend to be held for a SHORTER time than asset held in the banking book.

41
Q

Net Charge Off Rates (list high to low) 3

A
  1. Credit Card Loans
  2. C & I Loans
  3. Real Estate Loans
42
Q

Present Value uncertainty is risk that

A

the market value of equity will decline if interest rate change

FIN 430 (4 decks)

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