missed qus mock exam

two terms for basis

simple basis

crude basis

how can basis be described

non-linear, since the relationship between futures and cash prices is not constant

what does a client absolutely need to trad

a credit line - if they have used it up they can’t trade

how to top up a credit line

client supplies more collateral to the broker

what strategy will a fund manger looking to contribute to the cost of acquiring a stock use

covered call, since the premium can partially fund the purchase of the long underlying

between future, option, swap and guarantee, which has no contractual obligations

option - it’s a right not obligation

future delta

long —> 1

short —> -1

what is a bear call spread

buy a call with a higher strike, sell with a lower strike

and vice versa

what is spot month margin

additional margin to:

• fund delivery

• suppress volatility as a contract approaches expiry

when does ICE Clear Europe become CCP to a trade

when they are registered

what is novation

the legal passing across of contractual obligations to a third party

when may novation occur, other than following an initial trade

when a NCM gives up a trade to a GCM

which two exchanges both have oil contracts traded on them

ICE Futures

NYMEX

why are spread margin rates lower than initial margin rates

spreads are less risky

is the premium a standard contract specification in an option contract

no, that is the ‘market price’ of the option, determined by demand and supply

is contract size a standard contract specification for options

yes

what are the two main processes for determining the value of credit derivatives

probability mordel

no arbitrage model

when might a broker pay margin to a client

as a result of MTM

if you expect an intramarket spread to narrow, what should you do

sell the spread

what is selling the spread

buy far, sell near

if you expect an intramarket spread to widen, what should you do

buy the spread

what is buying the spread

buy near sell far

how is best to think about buying/selling the spread

look to see if the market is contango or backwardated, so then u know what the basis is on the spread, then u can tell if it’s weakening or strengthening then you know whether to buy basis (buy the spread) or sell

when will the writer of an option on a future receive premium

the earlier of exercise or expiry

what is the key concept underlying the credit derivative market

isolation

what is the purpose of MTM

to establish the daily settlement price

what would happen to the value of an OTM put option if the underlying rises in value

the option would decrease in value as it basically moves even further OTM

if an investor expects the yield curve to rotate and flatten at the long end, what does this mean

short term interest rates are expected to rise in relation to long term interest rates

if short term rates rise, what happens to the price of STIR futures

they fall, since the formula for STIR prices is 100 - implied rate

who is responsible for currency options on CME

the CFTC (not sec)

what is a cross trade

where a broker acts as an agent for two clients

what is Markit Wire

an automatic OTC derivatives trade processing system

what needs to be reported for a firm executing a basis trade off exchange

price

volume

contract terms

(but not counterparty)

can the EDSP and contract currency be different for a universal stock future

no never

how to offset risk on a synthetic long call

short call

can you assume delta if they’ve not told you it

no, they should say if its ITM ATM or OTM and to what extent

apart from futures obvs

what is TIMs

calculates margin for open portfolios

who uses TIMs

OCC —> options clearing corporation

how can brent crude be settled

cash or physically

the buyer of a receiver swaption has the right to….

…receive a fixed rate of interest and pay a variable rate

why might you buy a receiver swaption

hedge against or profit from a fall in interest rates

so what does the buyer of a payer swaption do

pay a fixed rate and receive a floating rate

so they would probs think IR will rise

what is a floor

a series of put options that allows a saver to receive a fixed rate (protects them against falling interest rates)

opposite of floor

cap

what is a cap

a series of call options that protects borrowers from rising interest rates

what is a collar

buy a cap, sell a floor

who uses a collar

want protection from rising rates but dont wanna pay a huge upfront premium:

the price of selling the floor usually covers the price of buying the cap so its like zero cost

what is a reverse collar

buy a floor, sell a cap

same thing but for falling rates

is a ratchet a type of OTC option

yes - aka cliquet option

it consists of a series of forward starting options, where the strike price periodically resets to represent gains

what is the credit support annex used for

detail the framework for collateral provision in an OTC relationship

what is the adjustment to SPAN scanning risk to incorporate offsetting futures positions

inter-commodity spread margin

what is wide basis

when it increases

what can cause wide basis

high demand in the cash market

why does high demand in the cash market cause wide basis

high demand = higher cash market prices = higher cost of carry (bc it’s done as a percentage of cash prices) = wider basis

who is margined with an equity option

the writer only

(not holders)

what happens to margin required on an equity option as delta increases

margin required increases - bc the option has moved more in the money so it’s more likely that the option will be assigned against the writer

what are 2 possible consequences of failing to monitor open derivatives positions properly

unexpected cash calls to meet initial or variation margin payments

unexpected holdings of the cash asset

can a third party close out your position

no

what is the closing range

the highest and lowest prices recorded during the closing period on an exchange

which type of margin requires a deposit of more than initial margin

maintenance margin

why do exchanges require transaction reports

to facilitate the matching of trades for clearing + margin

what is a horizontal call spread

buying and selling calls with same underlying and strikes but different expiries

what is a long horizontal call spread

buy shorter dated, sell longer dated

why do a long horizontal call spread

anticipating more volatility (bc u sell the one that’s more volatile - the longer dated one - so you profit if volatility rises)

who initiates the trade process in open outcry

client

breakevens on a strangle

add together both premiums, then add/subtract that number from the upper/lower strike

who provides info to quote vendors in open outcry

pit observers

when might you use a basis swap

profit from a change in interest rates in different currencies (since its a floating for floating)

can an NCM execute trades for clients

yes, it just can’t clear anything

what is the main difference between FLEX options and OTC options, in terms of risk

FLEX options have lower credit risk

why is the spread on forward FX quotes wider than on spot quotes

the impact of time

to close a short position at a price lower than the current market price, what kind of order should you place

buy limit (or buy MIT)

what is the risk associated with buying a futures contract

limited to the futures price, since the price can’t go below zero

(think of the option alien and how long future losses eventually hit that wall)

what is conversion

buying a put + selling a call to create a synthetic short future, then doing a long future to close out

what is a basket CDS

based on the default of a basket of securities

what is a basic CDS

based on a specific asset

what is an index CDS

based on the movements of an index

when a futures contract is physically delivered, what is the amount calculated by the clearing house to be paid called

the invoice amount

how is the invoice amount different to EDSP

EDSP is the price at delivery, but it’s combined with the number of contracts traded and a scale factor to make the invoice amount

when is time value highest

at the money, far from expiry

when might an investor exercise a receiver option

if interest rates have fallen, and the option is in the money

if interest rates rise, what is the likely effect on equity option premiums

call premiums rise

put premiums fall

why do equity call premiums rise if interest rates rise

cash is retained (relative to just buying the cash asset) so u can benefit from higher interest rates

why to equity put premiums fall if interest rates rise

you’d rather physically sell the underlying so u can have cash, rather than wait to sell it

then this cash will benefit from higher interest rates

who trade reports on the ICE trading platform

automatic reporting means no one needs to trade report

bc it’s order driven

what are the two components of total margin calculated by TIMS

premium margin

risk margin

if a non clearing member defaults on a trade after giving up their trade to be cleared, who is responsible for any loses initially

the GCM that the trade was given up to

what does the EU transparency directive do

establish minimum requirements on periodic financial reporting

when does a covered call make money

when market conditions are bullish neutral (prices rise = make money, but the upside is capped)

what is the order of actions from execution to clearing

execute

match

register

give up

clear

when is variation margin due

9am the next business day

list the three types of volatility trade

straddle

strangle

horizontal spread

what is a non deliverable forward

an outright, cash settled forward contract on a thinly traded foreign currency

how is payment calculated on an NDF (non deliverable forward)

the fixing rate for the contract is compared with the spot rate at the end of the contract

what type of collateral can a firm accept from a client

anything they both agree

(this is different from collateral that can be given to a clearing house btw)

what is spread margin

a reduced form of margin reflecting offsetting trades, since spread positions often have lower combined risk than two independent positions

which type of options have positive gamma

long

who issues an assignment notice

the clearing house

whose resources are used when a clearing member defaults and there is an independent guarantee

the clearing house only

when a deal has been struck on an exchange, who becomes the counterparty to the buyer

the clearing house