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CFA-Derivative Market and instruments
Terms in this set (16)
Forward commitments include...
forwards, futures, swaps
is a series of forward contracts
is a claim to payoff. Options are contingent claims
Benefits of derivatives markets
1) provide price information, 2) allow risk to be managed, 3) reduce transaction costs
Will exist if a return greater than the risk-free rate can be earned by holding a portfolio of assets that produces a certain (riskless) return, then an
T-Bill prices are often quoted as a ...
..percentage discount from face value
The percentage discount for T-Bills is annualized so that 90-day T-bill quoted at a 4% discount will be priced at...
... a (90/360) x 4%=1% discount from face value. This is equivalent to a price quote of (1-0.01) x $1000=$990 per $1000 of face value
Example: BOND FORWARDS. A forward contract covering a $10 million face value of T-bills that will have 100 days to maturity at contract settlement is priced at 1.96 on a discount yield basis. Compute the dollar amount the long must pay at settlement for the T-Bills.
The 1.96% annualized discount must be "unannualized" based on the 100 days to maturity:1) 0.0196 x (100/360)=0.005444 is the actual discount. 2) The dollar actual settlement price is (1-0,005444) x $10 million = $9,945,560
A long who is obligated to purchase the bonds, will have losses on the forward contract when
interest rates rise
A long who is obligated to purchase the bonds, will have gains on the forward contract when
when interest rates fall
When market interest rates increase, what happens to discounts and to T-bill's prices?
When market interest rates increase, discounts increase, and T-bill prices fall
a government bond that is repaid within three months to a year
Term for deposits in large banks outside the United States denominated in U.S. dollars.
The lending rate on dollar-denominated loans between banks is called the London Interbank Offered Rate. It is quoted as an annualized rate based on a 360-day year. LIBOR is used as a reference rate for floating rate U.S. dollar-denominated loans worldwide. LIBOR is published daily by the British Banker's Association.
Example: LIBOR-based loans. Compute the amount that must be repaid on a $1 million loan for 30 days if 30-day LIBOR is quoted at 6%
The ad-on interest is calculated as $1 million x 0.06 x (30/360)=$5000. The borrower would repay $1,000,000 + $5,000=$1,005,000 at the end of 30 days.