Module 67.1: Fowards and Futures Flashcards
(15 cards)
What are linear derivatives?
Futures, Forwards and Swaps
What are similarities of Forwards, Futures and Swaps
- Specified Contract Size
- Always an underlying
- Exchange of Cash Flows at a future date (forward/futures) / dates(swaps)
- Always have a pre specified price as the basis for the future exchange of cash flows.
What is a forward contract?
Forward contracts are OTC contracts, in which two counterparties get together a where one party commits to buy and the other commits to sell a physical / financial asset at a specific price (forward price) at a specified date (settlement date).
What does it mean to be long on the future?
Being long on the future is the buyer, who profits if the market price on the underlying exceeds the forward price
What does it mean to be short on the future
The seller: Who will profit if the market price of the underlying is less than the forward price
How do Futures differ from Forward?
- They are forwards that are standardised and exchange-tranded.
- They are more liquid in secondary markets
- They minimise counterparty credit risk (as its backed by a clearing house)
What is mark to market (MTM)
At the end of each trading day, the margin balance in a futures account is adjusted for any gains and losses in the value of the futures position based on the new settlement price
What is Initial Margin?
Both Long and Short parties to the future post money to the central clearing house to protect against counterparty credit risk
It is usually one days maximum expected price flutuation on the total value of the underlying.
What is maintainence margin? How does it differ from maintaince margin in an equity account?
It is the minium balance that must be held in the margin account
If maintainince margin isn’t sustained then the holder must post additional funds to bring the margin back up to the inital margin amount, not the maintainance margin amount
What is variation Margin
The amount of margin you need to redeposit after your margin amount falls under your maintainance margin
What happens if you don’t mean to margin call?
You must close out your contract and your posisition or the exchange will do it for you.
What happens if the loser cannot compensate?
The clearing house has to pay out of their own pocket.
What measures can clearing house take in order the amount of risk they take
Higher Margin Requirements
Intraday Margin calls
Limits on daily price fluctuation
What is a circuit breaker?
This is a stop on trading for a brief period of time when futures prices reaches a limit price.
