Fin 470 exam 1 Study Guide Solutions

Fin 470 exam 1 Study Guide Solutions derivative - Ans:-an instrument whose value depends on the values of other more basic underlying variables hedge risks - Ans:-change nature of a liability speculate - Ans:-make bet on future direction of market arbitrage - Ans:-lock in arbitrage profits trading derivatives - Ans:-large volume accompanied by increasing volatility in underlying commodities swap execution facilities - Ans:-venue to host many trades, similar to exchange central counter-party - Ans:-for many trades, similar to exchange central repository - Ans:-for reporting of trades future contract - Ans:-an agreement to buy or sell an asset at a certain time in the future for a certain price ©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH OCTOBER 2024 Page 2/8 option - Ans:-contract giving holder the right, but not obligation, to buy(sell) an asset at a fixed price(strike or exercise price) on or before a given date(expiration) call option - Ans:-gives holder right to buy put option - Ans:-gives holder right to sell writing option - Ans:-sellers of options are said to "write" the contract European exercise - Ans:-at expirations American exercise - Ans:-any time prior stock options - Ans:-individual stocks stock index option - Ans:-sp500, sp100, nasdaq-100 interest rate options - Ans:-t-bills, t-notes, t-bonds futures options - Ans:-options on future contracts hedges - Ans:-seek to reduce risk, futures obligates trade-immunize risk, options gives right to exercise- provides insurance speculators - Ans:-assume risk for expected return, ©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH OCTOBER 2024 Page 3/8 -scalpers -day traders -position traders -spreader scalpers - Ans:-positions for minutes day traders - Ans:-positions for less than day position traders - Ans:-position for days or weeks spreader - Ans:-use spreads to exploit transitory price differentials arbitrageurs - Ans:-trade equivalent positions based on parity open interest - Ans:-a transaction , may cause open interest to increase, stay constant, or decline price patterns- futures price path versus spot price path(over time) - Ans:--prices will tend to converge as contract nears maturity -intuition- the day before delivery, futures and spot market almost identical commodity futures trading comm(CFTC) - Ans:--authorizes exchanges ©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH OCTOBER 2024 Page 4/8 -regulates markets to protect public interest and ensure fair practices -reviews contracts and supervises markets registers agents handling customers -position limits for speculators commodity exchange(CME) - Ans:-rules over trade clearance -trade records, position limits, price limits -disciplinary actions, floor trading practices and standards of conduct perfect hedge - Ans:-a trade that completely eliminates type of risk long(futures) hedge - Ans:-if you need to purchase asset in future short(futures) hedge - Ans:-if you need to sell asset in future what might firms hedge - Ans:-interest rates exchange rates commodity prices interest rates-hedge - Ans:-hedging can reduce