Capital Markets Chapters 6,7,8

1. 1. Forward commitments are contracts entered in which the outcome is dependent on the outcome of an underlying asset

3. 2. Contingent claims are contracts entered into at one point in time that require both parties to engage in a transaction at a later point in time on agreed upon at the start

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1. 1. The underlying in a forward rate agreement is interest rate

3. 2. 3x6 FRA means entering in a three-month waiting period and a six-month contract period

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1. 1. The payoffs of a long position in a forward contract value are computed as: Vt(T) = [St - F0(T)]

3. 2. The payoffs of a short position in a forward contract value are computed as: Vt(T) = —[St - F0(T)]

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1. 1. FRA buyer receives the settlement amount when settlement rate is greater than the contract rate

3. 2. FRA seller receives the settlement amount when contact rate is less than the settlement rate

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1. 1. It is possible to have a gain in a margin account after a 10-day period even if the investor receives a margin call 9 times during that span

3. 2. The likelihood that the margin account balance of a long futures position will receive a margin call increases as the futures price of the underlying assets decreases

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1. 1. The future price goes up, the long position will realize a gain and the margin account will decrease

3. 2. If the futures price goes down, the short position will realize a gain and the margin account will increase

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1. 1. The investor receives a margin call if the balance falls above the maintenance margin

3. 2. Maintenance margin is always significantly lower than the required initial margin

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1. 1. The exchange acts as a clearing house which facilitates the trading process by recording all transactions and guaranteeing timely payments

3. 2. The futures exchange facilitates the trading process but does not itself take buy or sell positions on futures contracts

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1. 1. In a contango market, the futures prices are lower than the spot prices

3. 2. In a backwardation market, the underlying asset typically has no storage cost

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1. 1. Cost of carry is the net of the costs and benefits

3. 2. Cost of carry is holding an asset that incur a net cost that is essentially what it takes to carry an asset

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