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Finance 436 – Futures and Options
Review Notes for Midterm Exam
Chapter 1
1.
Derivative securities: concepts
2.
Futures and forward contracts: definitions and comparison
Exchange trading; contract size, delivery; default risk; marking to market
3.
Options: concepts
4.
Players in options and futures markets
Hedgers: reduce price risk (uncertainty)
Speculators: bet on price movement
Arbitrageurs: look for riskfree profit
5.
Applications
6.
Examples discussed in class and assignments
Chapter 2
1.
Specification of futures contracts
Opening vs. closing a futures position
Long vs. short a futures position
Underlying asset
Contract size (will be given if needed)
Delivery month; Daily price limit; Position limit
Settlement price: concepts
Open interest: concepts and calculations
2.
Convergence of futures price to spot price: concepts and proof
3.
Margins: concepts and calculations
Initial margin; Maintenance margin; Margin call; Variation margin
4.
Marking to market process: concepts and calculations
5.
Orders and applications
Market order; Limit order; Stop (stoploss) order
Stoplimit order; Day order; Open order
6.
Cash settlement: concepts
7.
Forward contracts: profit/loss diagrams
8.
Examples discussed in class and assignments
Chapter 3
1.
Hedging: concepts
Long hedging vs. short hedging
2.
Basis risk: definitions and applications
3.
Cross hedging
Hedge ratio: definition, estimation, and implication
Minimum variance hedge ratio: minimize the variance
Optional number of contracts
4.
Hedging with stock index futures: concepts and calculations
5.
Examples discussed in class and assignments
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Chapter 4
1.
Types of interest rates
2.
Measuring interest rates: concepts and calculations
3.
Zero rates: concepts
4.
Forward rates: concepts and calculations
5.
Term structure theories
6.
Examples discussed in class and assignments
Chapter 5
1.
Investment assets vs. consumption assets
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 Spring '12
 Scott
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