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33 Cards in this Set

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  • Back
What is the basic economic function of futures markets?
to hedge against the risk of adverse price movements
What are commodity futures?
1. traditional agricultural commodities (grain and livestock)
2. imported foodstuffs (coffee, cocoa, sugar)
3. industrial commodities
What are financial futures?
1. stock index futures
2. interest rate futures
3. currency futures
What are futures contracts commonly called?
derivative instruments; derives value from the value of the underlying instrument
What is a futures contract?
a legal agreement between a buyer and a seller in which:
1. buyer agrees to take delivery of something at a specified price at the end of a designated period of time
2. seller agrees to make delivery of something at a specified price at the end of a designated period of time
What is the futures price?
price at which the parties agree to transact in the future
What is the settlement or delivery date?
the designated date at which the parties must transact
What is the underlying?
the "something" that the parties agree to exchange
What is long position or long futures?
when an investor takes a position in the market by buying a futures contract; wants futures price to increase to realize a profit
What is short position or short futures?
when an investor's opening position is the sale of a futures contact; wants the futures price to fall to realize a profit
What is a nearby futures contract?
contract with the closest settlement date (settlement dates are usually in March, June, September or December)
What is the most distant (or deferred) futures contract?
the contract farthest away in time from settlement
What two choices does a party to a futures contract have regarding liquidation of the position?
1. liquidate prior to the settlement date; party must take an offsetting position in the same contract; if a buyer, must sell identical number of contracts, vice versa
2. wait until the settlement date; or cash settlment
What are cash settlement contracts?
futures contract in which settlement is made in cash only
What is a contract's open interest?
statistic that measures the liquidity of contract; it's the number of contracts that have been entered into but not yet liquidated
What is the clearinghouse?
1. guarantees the two parties to the transaction will perform; clearinghouse takes the opposite position and agrees to satisfy the terms set forth in the contract
2. allows parties to a future contact to unwind their position prior to the settlement date
What is initial margin?
when a position is first taken in a futures contract, the investor must deposit a minimum dollar amount per contract, specified by the exchange; may be a Treasury bill
What is investor's equity?
sum of all the margins posted and all daily gains less all daily losses to the account
What is the settlement price?
not the closing price, value that the exchange considers to be representative of trading at the end of the day
What is maintenance margin?
minimum level to which an investor's equity position may fall as a result of an unfavorable price movement before the investor is required to deposit additional margin
What is variation margin?
amount necessary to bring the equity in the account back to its initial margin level; must be in cash rather than interest-bearing instruments; must be posted within 24 hrs
What are the two types of floor traders?
1. locals- buy and sell futures contracts for their own account, risk their own capital; professional risk takers; bring liquidity to the market; play same role as market maker- there is no actual market maker
2. floor brokers (or pit brokers)- buy and sell for their own account; execute customer orders as well; mostly trade for customers
What is a futures commissions merchant?
an authorized futures broker; go through to floor brokers to be executed
What is a daily price limit?
sets the minimum and maximum price at which the futures contract may trade at that day; provides stability
What is a forward contract?
like a futures contract, it is an agreement for the future delivery of something at a specified price at the end of a designated period of time; however futures contracts are standardized- as to delivery date and quality, forward contracts is nonstandardized, terms are negotiated individually between buyer and seller; no clearinghouse and secondary markets are either thin or nonexistent; futures are exchange traded and forwards are over-the-counter instruments; less than 2% of outstanding futures contracts are settled by delivery; forward contracts are intended for delivery; forward contracts are exposed to credit risk, either party may default;
How is the dollar value of a stock index future calculated?
dollar value of a stock index futures contract = futures price X multiple
What are the types of financial futures markets in the US?
1. stock index futures - cash settlement contracts
2. interest rate futures markets- T-bill futures (13 week remaining to maturity, $1 million face value); Eurodollar CD Futures; Treasury note futures; Agency Futures Contract; Bond Buyer's Municipal Bond Index Futures
What are conversion factors?
the factor that must be multiplied by the price of the futures contract to arrive at the invoice price for a particular deliverable Treasury bond or note
What is the cheapest-to-deliver issue?
the Treasury issue that is the cheapest to deliver to satisfy the delivery requirements of a Treasury bond or Treasury note futures contract
What is the quality or swap option?
the option granted to the short of a Treasury bond futures contract to select the Treasury issue to deliver
What is the timing option?
the short position is permitted to decide when in the delivery month actually to make the delivery
What is the wild card option?
the right of the short position to give notice of intent to deliver after the closing of the exchange, on the date when the futures settlement price has been fixed
What is a forward rate agreement (FRA)?
over-the-counter equivalent of the exchange traded futures contracts on short-term rates; buyer of an FRA benefits if the reference rate (interest rate) increases, unlike futures contract in which buyer benefits when rate declines; this is because in FRA the underlying is a rate and in futures contract the underlying is a fixed-income instrument; in FRA, one party pays a fixed rate and the other pays a floating rate; so person paying the fixed rate (the buyer) hopes the reference rate increases