CH10 IMC

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The Long of a future
The future buyer of the underlying asset.
Long position makes money in a rising market.
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The short of a future
The future seller of an underlying asset.
Short position makes money in a rising market.
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Futures positions max gain/loss
Long: Max Gain=UL, Max Loss=Price
Short: Max Gain=Price, Max Loss=UL

Mirror image, if long position gains, then the short position loses the exact same amount.
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Cost of carry
extra costs from an asset.
Interest rates, storage, insurance
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Fair value of a future
Cash price of the underlying asset + cost of carry
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Basis
Basis= cash price - Futures
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If basis is negative?
usually negative (contango).
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If basis is positive?
positive (backwardation)
Can occur if temporary shortage of the underlying or if there is a benefit of carry
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Contingent Liability
Describes a position where a investor faces a potential liability which is uncertain at present time.
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Contracts for Difference
Cash settled derivative.
No physical delivery takes place.
Contract is settled for the agreed difference between the agreed price and settlement price.
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Basic hedging and beta hedging
Basic Hedging= Total Val/pts*tick size(£10)

Beta hedging = Basic hedging * Beta
(equals how many contracts to buy)
Always round cant be decimal
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Differences between options and futures
Only seller of option has the obligation, the buyer has a choice. With futures, both are obligated.
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4 option positions:
Long a call
Short a call
Long a put
Short a put
Right to buy
Obligation to sell
Right to sell
Obligation to buy
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Moneyness of a call option
Strike Price < Asset Price : ITM
Strike Price = Asset Price : ATM
Strike Price > Asset Price : OTM
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Moneyness of a put option
Strike Price > Asset Price : ITM
Strike Price = Asset Price : ATM
Strike Price < Asset Price : OTM
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Premium
Premium = Intrinsic value + Time value
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Intrinsic value
Obvious value of option, the built in profit -
Can never be less than 0
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Time value
The amount over and above the intrinsic value the investor will pay to buy an option
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Delta
Change in price of the option premium / change in price of the underlying

Measure of the sensitivity of the option premium
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Influencing factors for time value
interest rates, volatility of price, remaining life
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Vega
Theta
Delta
Rho
Increase in volatility
Increase in time
Increase in underlying
Increase in interest rates
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Covered call
made up of a short call option and a long position in underlying asset. Used to generate income in static market. Can be used to cushion fall and or benefit from premium.
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Protective Put
Made up of a long position in underlying asset and a long put option. Used to hedge against a falling market.
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Long Straddle
Call and put option with same strike price are bought. Make profit if underlying share price lies outside the downside and upside breakeven values. Trading on volatility of share price. Gain from both P/L. ML is both premiums.
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Short Straddle
Call and put option with same strike price are sold. Zero sum game with the long straddle (mirrored). Max profit of ** is Max loss of LS
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Long strangle
Call and put option with different strike prices are bought. ML total of both premiums. Adv of strangles is the total cost is cheaper.
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Short strangle
Long and out option with different strike prices are sold. Zero sum game with long strangle.
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Interest Rate futures
Futures on the value of a rate of interest. STIR. Used to speculate on interest rate changes or to hedge against interest rate exposure. I.e. if you thought interest rates would rise you would short a STIR.
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Swap market
OTC
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Interest rate swaps
Agreement to swap cash flows. Can borrow at fixed or variable, and can change borrowing styles part way through the loan. Would borrow at fixed if thought that interest rates would go up.
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Payments and principal of IRS
Principal amount is notional (predetermined but never actually changes hands). Payments are netted
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Real Rate Swap
Stripout effect of inflation by combining a nominal interest rate swap with a less inflation swap.
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Cross currency swap
Allows a company to raise funds in one currency and convert into another currency. The notional principal does change hands and payments are made without netting.
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Equity Swap
Can gain exposure in equity market without incurring the additional costs. OTC. An 'equity leg' and 'interest leg' (usually LIBOR)
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Credit default swap
Used to reduce credit exposure. Buyer pays a premium to the swap bank and in return receives cash payment if default occurs.
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Constant maturity default swap
Different from regular CDS as premium is reassessed at regular intervals rather than fixed for the swaps entirety. When the risk of failure increases, the premium on the swap will increase.
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Synthetic CDOs
No physical transfer of bonds or loans take place. Gain exposure to credit risk by selling a credit default swap to the credit institution. Keep loan but pass on risk.
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Credit linked notes
Note is linked to a specific debtor or pool of debtors and sold to investors. Price is determined by the risk of the debtors. Note will pay coupons linked to interest paid by debtors.
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Unfunded credit derivative
Bilateral contract between 2 counterparties where each is responsible for making payments
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Funded credit derivative
Involves protection seller making an initial payment that is used to settle any potential credit events
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Commodities
Softs (coffee, sugar, cocoa), agriculturals (wheat, barley), metals, energy, exotics (weather traded on CME, emissions)

good hedge against inflation
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Commodity derivative indices
1) S&P GSCI (based on liquidity, weighted on global production levels, 24 commodities)
2) BCOM (Liquidity of individual commodities and production over 5 years)
3) RICI (38 commodities, 4 countries)
4) TR/JCRB Thomas reuters
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Stock borrowing and lending Intermediary SBLI
Used to provide liquidity in the secondary market and can assist firms with short positions in a security for a fee.
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Other cards in this set

Card 2

Front

The future seller of an underlying asset.
Short position makes money in a rising market.

Back

The short of a future

Card 3

Front

Long: Max Gain=UL, Max Loss=Price
Short: Max Gain=Price, Max Loss=UL

Mirror image, if long position gains, then the short position loses the exact same amount.

Back

Preview of the back of card 3

Card 4

Front

extra costs from an asset.
Interest rates, storage, insurance

Back

Preview of the back of card 4

Card 5

Front

Cash price of the underlying asset + cost of carry

Back

Preview of the back of card 5
View more cards

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