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13 Cards in this Set
- Front
- Back
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Exchange-traded derivatives |
Traded in centralized locations (exchanges) and are standardized, regulated and are free of default |
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Custom Contracts / OTC Derivatives |
Created by dealers of financial institutions Limited trading in secondary markets and default/counterparty risk must be considered |
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Examples of exchange-traded derivatives and OTC derivatives |
Exchange-traded: futures, options OTC: forwards, swaps |
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Contingent Claim |
Asset that has a future payoff only if some future event takes place (options, credit derivatives) |
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Difference between forward and futures contracts |
Futures are exchange-traded (w/ a clearinghouse), liquid and require daily settlement of any gains or losses |
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Settlement price of futures contract |
Average of prices of trades during the last period of trading |
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Open interest of futures contract |
# of futures contracts of a specific kind outstanding at any given time |
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Futures Market Margin |
Money that must be deposited by both the long and short as a performance guarantee prior to entering into a futures contract |
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Initial vs. Maintenance Margin |
Initial- amount that must be deposited in a futures account before a trade may be made Maintenance- minimum amount of margin that must be maintained in a futures account |
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Important Distinction Between Futures Margins and Equity Account Margins |
In a futures margin, if margin balance falls below maintenance margin, additional funds must be deposited to bring margin balance up to INITIAL MARGIN ACCOUNT (not maintenance margin) |
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Price limits |
exchange-imposed limits of how each days' settlement price can change from previous day's settlement price |
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American vs. European Options |
American: can be exercised at any time up to and including the contract's expiration date European: can be exercised only on the contract's expiration date |
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Law of one price |
two securities or portfolios that have identical cash flows in the future should have the same price |
