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Flashcards in Financial Risk Deck (18)
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1
Q

Forward contract

A

tailor-made binding agreement to exchange a set amount of goods at a set future date at a price agreed today

2
Q

Future contract

A

standardised contract to buy ot sell a specific amount at a particular price on a set future date

3
Q

Call option

A

~ entitled to buy

~ investors starts by buying

4
Q

Pull option

A

~ the right to sell

~ borrower always sells 1st

5
Q

Over-the-counter

A

traded on an exchange or betwn two parties

6
Q

Traded options

A

standadised and bought and sold on secondary markets e.g. Euronext

7
Q

Intrinsic value

A

computed as if expiry date is today

8
Q

Premium =

A

intrinsic value + time value

9
Q

Forward contract: Pros + Cons

A

+ tailored contract
~ set commodity price in advance (no downside or upside risk)
- binding contract: can’t get out if customer cancels

10
Q

Future contract: Pros + Cons

A

~ set commodity price in advance (no downside or upside risk)

  • binding contract: can’t get out if customer cancels
  • standardised contract
11
Q

Options: Pros + Cons

A
  • have to pay a premium
    + reduces downside risk
    + enables upside potential
12
Q

Methods used to reduce interest rate risk

A

~ FRA
~ Futures
~ Options
~ Swaps

13
Q

Forward Rate Agreements (FRA): Disadvantages

A

~ only for loans of at least £500k
~ difficult to obtain for >1yr
~ remove upside potential

14
Q

Forward Rate Agreements (FRA): Advantages

A

~ no downside risk

~ can be tailored (amount +duration)

15
Q

Swaps: Advantages

A

~ able to switch from floating to fixed rate
~ arrangement costs < terminal costs
~ available for longer periods
~ tailored

16
Q

Swaps: Disadvantages

A

~ unfavourable market movements

~ counterparty may default before agreement completion - reduced by using a reputable intermediary

17
Q

Receiving foreign currency =

A

selling

18
Q

Paying in foreign currency =

A

buying