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Futures Basics
Hedging with Futures
Interest Rates
Interest Rate Futures
Swaps
100
Forwards are negotiated and futures are exchange-traded. Forwards require no up-front exchange of cash and futures have margin requirements. All gains and losses on forward contracts are realized at expiration and futures contracts are marked-to-market.
What is one difference between a forward contract and a futures contract?
100
Another phrase for a 'set it and forget it' hedge.
What is a static hedge?
100
A method of calculating present values or future values when the number of interest periods in one year is infinite.
What is continuous compounding?
100
One is typically tangible and held for consumption while the other is typically intangible and held for investment.
What is the difference between consumption assets and investment assets?
100
To transform an asset or transform a liability.
Why would a firm enter into a swap?
200
One refers to buying and the other refers to selling.
What is the difference between a long position and short position?
200
The opposite of a static hedge.
What is a dynamic hedge?
200
A method used to calculate bond yield using a set of zero rates.
What is bootstrapping?
200
Financing costs minus income plus storage.
What is the cost of carry?
200
The theory that certain firms are superior in certain areas due to their access to land, labor and capital.
What is comparative advantage?
300
Hedgers, speculators and arbitragers.
Who are the three types of derivative traders?
300
The difference between spot prices and futures prices.
What is basis?
300
The interest rate available today on a bond that pays no interest over its life.
What is a zero rate?
300
The quoted bond price plus accrued interest.
What is the cash or 'dirty' price of a bond?
300
The difference between a floating rate bond and a fixed rate bond and a portfolio of forward rate agreements.
What are the two ways that interest rate swaps can be valued?
400
It must be costless, riskless and profitable.
What are the three requirements for true arbitrage?
400
Futures prices and spot prices move farther away from each other.
What is a strengthening of basis?
400
A future interest rate implied by current zero rates.
What is a forward rate?
400
The bond that minimizes the sellers cost less proceeds.
What is the cheapest-to-deliver bond?
400
Because the cash flows in a swap are discrete exchanges.
Why are discrete interest rates used when calculating payments related to a swap?
500
The fact that the difference between futures prices and spot prices gets smaller as the futures contract gets closer to expiration.
What is future-spot convergence?
500
Shorting contracts on a stock index whose components (or risk) mimics an investor's equity portfolio.
What is index futures hedging?
500
A contract between two parties where they agree to exchange a future payment based on a pre-determined notional principal and a pre-determined interest rate.
What is a forward rate agreement?
500
A multiplier used to standardize deliverable bonds underlying Treasury bond futures contracts.
What is the conversion factor?
500
Advanced set, settled in arrears.
How are realized interest rates used to determine exchanges in swap agreements?