Derivatives
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- Created by: lilly557
- Created on: 24-01-17 09:40
What is a Derivative?
A financial instrument whose price is based on the price of another asset.
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How can the trading of derivatives take place?
Directly between counter parties or on an organised exchange
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What is Exchange Traded?
Where a derivative takkes place on an exchnage such as LIFFE
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How are derivatives used in hedging?
Used by portfolio managers to reduce the impact of adverse price movements on a portfolio's value.
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How are derivatives used in anticipating future cash flows?
Futures can be used to fix price at which it iwll be brought and offset the risk that prices will have risen by the time cash flow recieved
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How are derivatives used in asset allocation changes?
Changes to the asset allocation to the fund can be made more swiftly and less expensively by buying and selling securites within the underlying portfolio
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How are derivatives used in Arbitrage?
By simutaneously buying and sellling the same azssets in two different markets when a price difference between the two exists.
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What is a future?
An agreement between a buyer and a seller.
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What does the buyer agree to pay a prespecifed amoutn for?
Delivery of particular specified quantitu of an asset at a prespecified future date.
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What does the seller agree to with a future?
deliver the asset at a future date in exchange for the prespecified amount of money
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What are the two distinct featues of a future?
Exchange traded, dealt on standardised terms, only the price is open to negotiation
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What is the term long used for in futures?
Used for position taken by the buyer of the future. The person who is long of the contract has commited to buying the asset
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What is the term short used for in futures?
Position taken by the seller of the future. Seller is committed to delivering the underlying asset in exchange for the pre-agreed price.
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What is the term Open mean in futures?
The initial trade, a market opens its trade when it first enters into a futrue.
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What is the term Closed mean in futures?
the physical assets underlying most futuresthat are opend do not end up being a delivered.
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What is the term covered men in futures?
When the seller of the future has the underlying asset that will be needed if physical delivery takes place
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What is the term naked mean in a future?
Seller of the future does not have the asset that will be needed if physical delivery of the underlying commodity is required
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What is an option?
Gives the buyer the right but not the obligation to buy or sell a specified quanitity of an yunderlying asset at a pre-agreed exercise price before a prespecified future date.
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What is a call option?
When a buyer has the right to buy the asset at the exercise price if they choose to. The seller is obliged to deliver if the buyer exercises the option
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What is a put option?
The buyer has the right to sell the underlying asset at the exercise price. The seller of the put option is obliged to take delivery and pay the exercise price.
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What are buyers of an option called?
Holders
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What are sellers of an option referred to?
Writers
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What is a SWAP?
An agreement to exchange one set of cash flows for another.
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When is a SWAP most commonly used?
To switch financing from one currency to another or replace floating interest with fixed interest
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What type of form are the Swaps?
Over the counter
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What is an interest rate swap?
Involve an exchange of interest payments and are usually constructed whereby one leg of swap us a payment of a fixed rate of interest and the other leg of payment of a floating rate of interest.
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What are credit derivatives?
Instruments whose value depends on agreed credit events relating to a third-party company.
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What is a credit event?
Defined as including a material default, bankruptcy, a significant fall in an asset's value or debt restructuring.
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What is the purpose of credit dirvatives?
Enable organisation to protect itself against unwanted credit exposure by passing it to someone else.
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How are OTC derivatives used?
They are negotiatedand traded privately btween parties without the use of an exchange
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Name two trades that used OTC?
Interest rate swaps, forward rate agreements
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Why can exchnage-traded derivatives be traded on an exchange?
They have standardised features,
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Name the physical markets?
Agricultural , base and precious metals, energy, power, plastics, emisions and freight and shipping markets
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What is the ICE Futures Europe?
Main exchange for trading financial derivative products in the UK
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ICE futures Europeinclude futres and options on....?
Interest rates and bonds, equity indicies , individual equities
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What is the Eurex?
Worlds leading international derivatives exchnage.
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What is the Eurex principal productsd?
German bond futures and options and index products for a range of european markets
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What is the Intercontinental Exchange?
ICE operates the electronical global futures and OTV marketplace for trading energy commodity contracts
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What is the London Metal Exchange?
Non-ferrous metals market. Futures and options are traded on a range of metals
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What metals are traded on the LME?
Aliminium, copper, nickel, tin , zinc and lead. Also launched worlds first future contracts for plastics.
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How does the trading on the LME take place?
Open outcry trading , inter-office telephone market and LME select. The exchange electronic trading platform.
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Other cards in this set
Card 2
Front
How can the trading of derivatives take place?
Back
Directly between counter parties or on an organised exchange
Card 3
Front
What is Exchange Traded?
Back
Card 4
Front
How are derivatives used in hedging?
Back
Card 5
Front
How are derivatives used in anticipating future cash flows?
Back
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