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21 Cards in this Set
- Front
- Back
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1. Describewhat a futures contract is, and how it is different from an option contract.
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futures is a deferred sales agreement. set price, terms today, but we wait. futures are obligations. options are rights. futures have no premiums, daily mark to market |
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1. What is each of these traders trying toaccomplish with a futures contract?a. hedgerspeculator
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hedger: trying to get rid of risk Speculator: taking on that risk |
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a. Initial marginb. Maintenance marginc. Settlement price
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initial margin: amount to deposit w broker maintenance margin: minimum acceptable level to have in account settlement price: last price of the day |
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a. Volumeb. Open interest
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volume: # of contracts sell on one day open interest: # of contracts still outstanding, still obligated |
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1. Describe how gains and losses onfutures contracts are taxed.
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60% gain on long term 40% as short term |
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1. You believe the spot price of gold willfall to $1,500 by year end. According tothe expectations hypothesis of futures pricing, the futures price today will be_____. Explain how you know.
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a. Equal to $1,500
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1. You believe the spot price of gold willfall to $1,500 by year end. According tothe normal backwardation model of futures pricing, the futures price today willbe _____. Explain how you know.
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a. Less than $1,500
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1. The modern portfolio model of futurespricing holds that The textbook claims this model impliesF0 < E0(ST). Why is this so?
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If beta > 0 ; positive systematic risk then K > Rf <1 |
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1. Explainwhy the basis must converge to zero at delivery for a futures contract on gold.
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arbitrage opportunity |
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a. Crosshedge risk
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asset trying to hedge is not available, use a substitute |
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quantity risk |
dont know spot quantity, not equal to the quantity,have to round |
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Dailymarking to market
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margin call on futures, how to generate cash to meet margin call |
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a. HEDGE FUND
Transparencyb. Investorsc. Investment strategiesd. Liquiditye. Compensation structure |
no transparency, investors have to have substantial net worth, limit to 100 investors, they can have any investment strategies, hedge funds have limits when you can sell and buy, they have 2.0% and above compensation structure |
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Mutual Fund a. Transparencyb. Investorsc. Investment strategiesd. Liquiditye. Compensation structure |
mutual funds are required to report holdings aka transparency, they have no limit to investors, they cant drift from their strategies, they have daily liquidity and trading, compensation structure .05-1% |
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Describewhat a directional strategy is
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invest in bonds, try to profit with direction |
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1. Describe what a non-directionalstrategy is.
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independent of market movements, should not move with mkt. closer together or farther apart |
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1. Describe the pairs trading strategy.
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such as home depot and lowes. do it by industry, firm size, relative price over time. HD is cheap buy, lowes is expensive sell. when prices properly unwind then sell HD and buy back lowes stock to owner |
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1. What is “alpha” and how is itdifference from “beta”?
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alpha is the total return due to superior security selection. the return you earn above beta |
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1. Explain how illiquidity of hedge fundsmakes beta seem lower and alpha seem higher than they might really be.
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you dont know, you cant observe the co variance in H.F. we underestimate it, underestimate beta, underestimate expected return. we overestimate alpha |
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1. Explain what survivor bias is and howit affects reported hedge fund performance.
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report to companies, that aggregate data, report to public. they kickout hfs that are no longer in existence, winning funds only remain in the database. avg of winners |
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1. Explain what backfill bias is and howit affects reported hedge fund performance.
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hf waits 5 years to report historical data #s to database. back filling database with successful funds, not the losers. |
