First-Week Flashcards
(20 cards)
Difference between Discrete and Continuous Compounding?
Continuous is compounding every ‘milisecond’ and the FV is ALWAYS higher than Discrete
What is the Formula for Discrete FV?
FV = PV* (1+r)^t
PV = FV/(1+r)^t
Formula for Continuous FV?
FV = PV * e^rt
PV = FV * e^-rt
What is Long Selling?
Traditional ‘buy low sell high’ where you will BUY the goods first and then SELL the goods at a higher price later for a profit
What is Short Selling?
Selling goods for HIGHER PRICE first and then speculating price will drop, so you later repurchase the goods when the prices fall, therefore making a profit too.
What is Arbitrage
2 of the same things in EVERY ASPECT but have diff prices –> iPhone 15pro at JB vs iPhone 15pro at HN for $1400 and $1500 respectively.
What is an ‘Arbitrage Opportunity’
When u can make profit without having ANY risk // having a riskless rate of interest
What is a derivative?
Financial product that derive its price based on sth else
What are the 4 types of derivatives?
Forward Contracts
Future Contracts
Options
Swap
What is a Forward Contract?
Contract to buy or sell a good at a specified price on a specified date
What is a Future Contract?
Contract to buy or sell an asset or instrument at a specified price on a specified date?
What is the Long and Short Parties to a contract?
Short Party = counterparty selling
Long Party = counterparty buying
Who benefits if price increases and decreases in a forward contract?
If price decreases –> short party will be favoured
If price increases –> long party will be favoured
Where do Forward Contracts occur?
OTC
Characteristics of a Forward Contract
More informal –> more risk burdened upon counterparties
Characteristics of Future Contracts
- More formal as trade done ‘Organised Exchange’
- B/c its formal, there is NO RISK on parties defaulting
Advantages of Future Contracts
- NO need to find counterparty
- NO default risk
What are the 2 Settlement Procedures for Future Contracts?
- Holding position right to expiry
- Close-out prior to expiry
What does it mean to ‘Hold position right to expiry’
- Physical Delivery at expiry = RARE, but delivery upon delivery date –> usually this process is a write-off
- Cash Settlement at expiry = cannot distribute the right proportion in a given portfolio –> cash settlement
What does it mean to ‘Close out prior to expiry’
Stay in contract at same magnitude but opposite direction
