Module 14 Study Note Flashcard
Question:
Name the primary types of derivatives.
Answer:
Futures, options, swaps, and forwards.
Question:
What is a derivative in financial markets?
Answer:
A financial instrument whose value is derived from the value of an underlying asset.
Question:
How do financing and investment decisions interact in corporate restructuring?
Answer:
Investment decisions can necessitate financing changes, while financing decisions can support or limit strategic investment opportunities.
Question:
Define a futures contract.
Answer:
A standardized contract to buy or sell an asset at a predetermined price at a specified time in the future.
Question:
Define speculative trading in derivatives.
Answer:
Taking a position in the market purely to profit from expected changes in the prices of derivatives.
Question:
What is arbitrage in financial markets?
Answer:
The simultaneous purchase and sale of an asset to profit from a difference in the price in different markets.
Question:
Explain hedging in derivatives markets.
Answer:
A strategy used to offset or reduce the risk of price movements in an asset by taking an opposite position in a related derivative.
Question:
What is an option in derivatives trading?
Answer:
A contract that gives the holder the right, but not the obligation, to buy or sell an asset at a specified price before a certain date.
Question:
Define 'delta' in options trading.
Answer:
The rate of change of the price of an option with respect to changes in the price of the underlying asset.
Question:
What are the 'Greeks' in options trading?
Answer:
Financial measures of the sensitivity of the price of options to changes in underlying parameters like delta, gamma, vega, theta, and rho.
Question:
Describe the Black-Scholes model.
Answer:
A mathematical model used to calculate the theoretical price of European call and put options.
Question:
What is a pay-off diagram?
Answer:
A graphical representation of the potential profit or loss of a derivatives position at different prices of the underlying asset.
Question:
Define 'rho' in options trading.
Answer:
The rate of change of the price of an option with respect to changes in the risk-free interest rate.
Question:
What is 'theta' in the context of options?
Answer:
The rate of change of the price of an option with respect to the passage of time.
Question:
Explain 'vega' in options trading.
Answer:
A measure of the sensitivity of an option’s price to changes in the volatility of the underlying asset.
Question:
What does 'gamma' measure in options trading?
Answer:
The rate of change of delta with respect to changes in the price of the underlying asset.
Question:
Explain 'mark-to-market' in futures trading.
Answer:
The daily process of adjusting the margin account to reflect the current market value of the futures contract.
Question:
What is a swap contract?
Answer:
A derivative in which two parties exchange cash flows or other financial instruments for a set period of time.
Question:
What is meant by over-the-counter (OTC) derivatives?
Answer:
Derivatives contracts that are traded directly between parties, outside of formal exchanges.
Question:
What is the significance of margin in futures trading?
Answer:
It acts as a performance bond ensuring parties can cover potential losses.
Question:
What is technical analysis in financial markets?
Answer:
Analyzing statistical trends from trading activity, such as price movement and volume.
Question:
Describe fundamental analysis in the context of derivatives trading.
Answer:
Analyzing the intrinsic value of an asset based on economic, financial, and other qualitative and quantitative factors.
Question:
What is 'backwardation' in futures markets?
Answer:
A situation where the futures price is lower than the expected future spot price.
Question:
Define 'contango' in the context of futures markets.
Answer:
A situation where the futures price of a commodity is higher than the expected future spot price.
Question:
What is a 'protective put' strategy?
Answer:
Buying a put option to hedge against potential losses in a long position in the underlying asset.
Question:
Explain the concept of 'delta-neutral' hedging.
Answer:
Creating a position where the overall delta is zero, effectively hedging against small price movements in the underlying asset.
Question:
What is a 'straddle' strategy in options trading?
Answer:
Buying a call and a put option on the same asset with the same strike price and expiration date to profit from large price movements in either direction.
Question:
Define the term 'implied volatility'.
Answer:
The market's forecast of a likely movement in an asset’s price, reflected in the price of options.
Question:
What is 'intrinsic value' in options trading?
Answer:
The difference between the current price of the underlying asset and the strike price of the option, if the option is in-the-money.
Question:
Define 'time decay' in options trading.
Answer:
The reduction in the value of an option as it approaches its expiration date.
