Fin 322: Chapter 17, Part 5 -- Futures Markets And Risk Management

Front 1

Forward contract

Back 1

An arrangement calling for future delivery of an asset at an agreed-upon price.

Front 2

Futures price

Back 2

The agreed-upon price to be paid on a futures contract at maturity.

Front 3

Long postion

Back 3

The futures trader who commits to purchasing the asset.

Front 4

Short position

Back 4

The futures trader who commits to delivering the asset.

Front 5

Single stock futures

Back 5

A futures contract on the shares of an individual company.

Front 6

Clearinghouse

Back 6

Established by exchanges to facilitate trading. The clearinghouse may interpose itself as an intermediary between two traders.

Front 7

Marking to market

Back 7

The daily settlement of obligations on futures positions.

Front 8

Maintenance margin

Back 8

An established value below which a trader's margin may not fall. Reaching the maintenance margin triggers a margin fall.

Front 9

Convergence property

Back 9

The convergence of futures prices and spot prices at the maturity of the futures contract.

Front 10

Cash settlement

Back 10

The cash value of the underlying asset (rather than the asset itself) is delivered to satisfy the contract.

Front 11

Basis

Back 11

The difference between the futures price and the spot price.

Front 12

Basis risk

Back 12

Risk attributable to uncertain movements in the spread between a futures price and a spot price.

Front 13

Spread (futures)

Back 13

Takinga long position in a futures contract of one maturity and a short position in a contract of a different maturity, both on the same commodity.

Front 14

Spot-futures parity theorem, or cost-of-carry relationship

Back 14

Describes the theoretically correct relationship between spot and futures prices. Violation of the parity relationship gives rise to arbitrage opportunities.

Front 15

Index arbitrage

Back 15

Strategy that exploits divergences between actual futures prices and their theoretically correct parity values to make a riskless profit.

Front 16

Program trading

Back 16

Coordinated buy orders and sell orders of entire portfolios, usually with the aid of computers, often to achieve index arbitrage objectives.

Front 17

Price value of a basis point

Back 17

The change in the value of an asset due to a 1 basis point change in its yield to maturity

Front 18

Cross-hedging

Back 18

Hedging a position in one asset by establishing an offsetting position in a related, but different, asset.

Front 19

Notional principal

Back 19

Principal amount used to calculate swap payments.