Futures Markets Flashcards Preview

The Financial Environment > Futures Markets > Flashcards

Flashcards in Futures Markets Deck (26)
Loading flashcards...
1
Q

What are futures markets?

A

Where futures contracts are traded.
Futures contracts= agreement between buyer and seller that an asset will be bought/sold for an agreed price on a set day in the future

2
Q

What are the functions of the futures exchange?

A
  • central place for large amounts of buyers and sellers
  • enforce trading rules and standards
  • settle disputes
3
Q

Who are the participants in futures markets?

A

Traders- buy and sell contracts for themselves

Brokers- take customer orders

4
Q

Who are hedgers?

A

Derivative users who seek to reduce risks. They lock in favourable contract prices as an insurance policy for their business.

5
Q

Who are speculators?

A

Derivative users who seek to profit from price changes. Their activity helps provide liquidity to the market. Their only purpose is to make profits from the market

6
Q

Who are arbitrageurs?

A

Derivative users who seek to exploit price differences on the same instrument or similar assets.

7
Q

What are derivatives?

A

A large number of financial instruments whose value is based on the prices of securities, commodities, money or other external variables. They are contracts which give the right to buy or sell a quantity of the underlying.

8
Q

What is an options derivative?

A

Contracts that allow the buyer the right, not the obligation, to buy/sell the asset at an agreed price on a certain date

9
Q

What is a forwards derivative?

A

Buy or sell assets at a specified price on a future date. They are non-standardised so allow for hedging. They are customised so can be any commodity, amount and timer period. Over the counter.

10
Q

What is a futures derivative?

A

A deal between 2 investors to buy or sell a standardised quantity and quality of a commodity at a predetermined place and time in the future. Exchange trade based instruments on a regulated exchange. A clearing house is the formal counter party.

11
Q

What are over the counter derivatives?

A

Contracts that are traded directly between 2 parties without going through an exchange.

12
Q

What are the advantages and disadvantages of over the counter derivatives?

A

Advantages
-Contracts are tailor made
-can arrange deals without a specific margin or deposit
Disadvantages
-risk that the counterparty wont honour the transaction
-may take a long time
-difficult to reverse

13
Q

What are exchange traded derivatives?

A

Contracts that are standardised like futures and options contracts that are transacted on an organised exchange

14
Q

What are the advantages and disadvantages of exchange traded derivatives?

A
Advantages
-counterparty risk is reduced
-high regulation
-positions can be reversed
Disadvantages 
-standardisation can be restrictive
15
Q

What is a margin in the trading futures?

A

For a new trade traders must deposit money called a margin which acts as a deposit.
If the equity in the traders account falls below the maintenance margin level (minimum amount required at all times) then there is a margin call and the trader must deposit enough to reach the initial margin again.

16
Q

What is meant by a long position?

A

Long position is the term to buy. To be long means you’re trying to protect the purchase price of the commodity that you plan to obtain from raising prices

17
Q

What is meant by a short position?

A

Short position is the term to sell. To be short means you’re trying to protect the commodity in your possession from falling prices.

18
Q

What is contago?

A

A situation where the futures price of a commodity is above the expected spot price . The nearby price is lower than the distant contract price so prices increase into the future

19
Q

What is backwardation?

A

When the futures price of a commodity is below the expected spot price. The nearby price is higher than the distant contract prices so prices decrease into the future

20
Q

What terms are agreed in futures contracts?

A
  • Quality (for contracts of commodity products)
  • Delivery date (when the contract must be completed)
  • Price limits (smallest allowable price movement)
  • Position limits (limit on the number of contracts a speculator may hold for a particular delivery month)
  • Settlement (when settlement must occur)
21
Q

What are call options?

A

Give the buyer the right to buy an underlying security at the strike price. An option writer who sells a call option believes the underlying stock price won’t exceed the option’s strike price

22
Q

What are put options?

A

Give the buyer the right to sell at the strike price. They want the stock price to go down. The put option writer believes the underlying stock’s price wont go below the strike price.

23
Q

What is meant by ‘the underlying’?

A

The underlying can be almost anything that is actively traded in a market where the current price is continuously available and indisputable. For example:

  • equity options
  • index options
  • bond options
  • commodity options
  • currency options
24
Q

What are the benefits of trading options?

A
  • Risk management
  • Hedging= option contract can be used to reduce or eliminate the risk of an asset losing value
  • Leveraged speculation= a given amount of money can be used to make a greater bet on the price of the underlying
  • Arbitrage= seek profit from discrepancies in prices in different markets
  • Income= large investors write options for income
25
Q

What is a swap?

A

A derivative contract through which 2 parties exchange financial instruments.

  • interest rate swaps
  • commodity swaps
  • currency swaps
  • debt-equity swaps
  • credit default swaps
26
Q

What is a warrant?

A

Derivative that gives the right but not the obligation to buy or sell a share at a certain price before expiration