Self Study Questions Topic 7

Question 1

S0 (in terms of futures and forwards)

Answer 1

s naught
spot price at which can immediately buy or sell the underlying the asset
changes over time

Question 2

F0

Answer 2

f naught
delivery price which would be written into a new forward or futures contract

Question 3

value of a futures or forwards contract

Answer 3

contract already been written
change over time

Question 4

long position
regarding futures and forwards

Answer 4

party that is contracted to buy the underlying i.e receive delivery

Question 5

short position
regarding futures and forwards

Answer 5

sell the underlying

Question 6

forward price with no income or costs

Answer 6

Question 7

forward price with predictable income stream from underlying

Answer 7

Question 8

value of a long forward contract

Answer 8

T = time in years

Question 9

value of a short forward contract

Answer 9

Question 10

forwards and futures on currencies
(also a proof)

Answer 10

Question 11

forwards and futures on currencies

Answer 11

where rx = foreign

Question 12

storage costs - investment commodities

Answer 12

• first formula = storage costs upfront and known in advance
• second = storage treated like an ongoing cost

Question 13

storage costs - consumption commodities

Answer 13

Question 14

convenience yield - consumption commodities

Answer 14

Question 15

Cost of a carry

Answer 15

c
summary measure of the relationship between forward price and spot price

Question 16

different cases for cost of a carry

Answer 16

Question 17

investment asset vs consumption asset

Answer 17

• investment = generate future financial returns not direct use or consumption
  (no storage cost)
• consumption = use or production not financial return
  (used up and has storage costs may have convenience yield)

Question 18

convenience yield

Answer 18

benefit of holding the physical asset

Question 19

expected future spot prices

Answer 19

Question 20

typical uses of an interest rate swap

Answer 20

converting a liabiltiy from:
fixed -> floating or floating -> fixed

converting an investment from:
fixed-> floating or floating -> fixed

Question 21

credit risk mitigation

Answer 21

1. netting
2. collateralization
3. downgrade triggers

Question 22

credit default swaps

Answer 22

buyer of CDS acquires protection from seller against a default by the reference entity

Question 23

premium

Answer 23

credit default spread

pays a premium of xxx for protection against company xxxx

Question 24

recovery rate

Answer 24

ratio of the value of the bond issued by reference entity immediately after default to the face value of the bond

Question 25

attractions of the CDS market

Answer 25

1. credit risks traded in same way as market risks 2. used to transfer credit risks to a third party 3. used to diversify credit risks