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28 Cards in this Set
- Front
- Back
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What are commodity markets? |
Where are it primary products are exchanged or traded on regulated exchanges |
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Why do financial firms and spectators trade? |
To make profit on predicted market movement |
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What are the 4 forms of derivatives? |
Forwards Future Options Swaps |
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What is a derivative? |
A financial instrument whose price based on price of another asset ‘underlying’ |
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What is hedging? |
Reduced impact on price movement on portfolio value |
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What is linked to hedging if portfolio managers expect to receive large inflows? |
Anticipating future cash flows |
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Why would asset allocation changes be implemented? |
To take advantage of short term market movements or implementing change in strategy. Is made swiftly and more cheaper than futures for buying & selling sexurities |
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What is arbitrage? |
Processing a risk free profit from buying and selling same asset in 2 different markets |
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How can portfolio managers profit from pricing anomaly? |
If derivative and underlying assets mismatch |
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What are futures? |
Enables standardised qualities and quantities of grain to be traded for fixed further date |
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2 examples of futures being exchange traded? |
LIFFE ICE (intercontinental exchange) |
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Define difference between naked and covered on futures |
Naked- seller does not have assets to be traded Covered- seller does have assets to be traded |
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Define options? |
Gives buyer the right but not obligation to by or sell asset on pre arranged date at price or between 2 dates. |
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What is call option? |
Buyer had right to buy assets at price if chose to. Seller obligated to sell. |
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Put option to buy or sell? |
Sell |
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What are exchange traded contracts? |
Settles with clearing house rather than each other. Neither buyer or seller. |
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What is swap? |
Agreement to exchange one set of cash flows for another. Can replace floating Interest with fixed |
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Define interest rate swaps? |
One leg of payment is fixed rate and other is floating rate. |
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Notional amount calculated what? |
Amount of interest due but never exchanged |
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What are credit default swaps? |
Value depends on credit events E.g bankruptcy would cause significant fall in asset value |
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Purpose of Credit defaults swaps are? |
To protect organisation from unwanted credit exposure on someone else. But can also increase credit exposure for return on income |
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Do credit default swaps exchange in cash flow? |
No |
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Trading on derivatives are dominated by? |
Major international trading houses and govs
Producers and consumers |
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What is Eurex? |
World leading derivative win Frankfurt Created by deutsch borse AG and Swiss exchange Enables US and EUrope to access Eure |
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What is ICE? |
Operates electronic global futures and OTC marketplace for track generously commodity contracts Europe’s leading energy futures and options
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What is LME? |
Worlds premier on-ferrous metals market and global market with 95% of membership coming from overseas |
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Advantages of derivatives ? |
Buyer & seller both agree price
Investment firms can hedge risk on portfolio and individual stock
Can assess range of assets and make bets on price movements |
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Disadvantages on derivatives? |
Investor could lose more than they initially outlayed Thrive on price volatility so experience and skills needed OTC needed great attention to detail to assess counterparts risk and documentation |
