requires cash deposit margin bond or performance bond from participants

Requires cash deposit margin bond or performance bond

This preview shows page 6 - 27 out of 76 pages.

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How do dealers hedge their risk? Key Characteristics : Flexibility & Customization Privacy Lower Liquidity Higher Credit Risk
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4 Types of Derivatives Forward commitments Obligation a. Forward contracts b. Futures c. Swaps Contingent claims Contingent on an event a. Options b. Credit derivatives c. Asset-backed securities Hybrids a. E.g. callable bonds, convertible bonds etc.
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Forward Commitments a. Forward contracts Key Terminologies / Concepts : Spot Price Forward Price Pay-off / Value of Contract
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Settlement of Forward Contracts :
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Pay-off from Forward Contracts:
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Marking to Market
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The account is referred to as Margin Account : Initial margin? Maintenance margin? Margin call?
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Provisions Limiting Price Changes : Definition of Open Interest :
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Futures Price Eventually Converges to Spot Price :
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Plain Vanilla Swap :
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Converting a floating-rate loan to a fixed-rate loan:
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Swaps vs. Actual Loans : Other Differences : Lower credit risk than loan because notional principal is not exchanged There are also interest rate swaps in which one party pays based on one reference rate while the other party uses another reference rate
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Value of Swap at Initiation = 0
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Contingent claims
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a. Options
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Call option vs. Put option:
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Exercise Price ? Option Premium ?
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