Derivatives
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Accounting and Financial Management for Bankers — JAIIB.
One-liners from this chapter
Free sample — 8 of 138 rapid-fire Q&A cards.
Define a derivative and name three types of underlying markets.
Financial contract deriving value from: financial markets (rates, currencies, equities), commodity markets (gold, crude), or indices (Nifty, MIBOR).
What are the two main objectives of using derivatives?
Hedging (protect positions from adverse movements) and speculation (profit from anticipated price movements).
Name three key characteristics of derivatives.
Value changes with underlying asset, high leverage and complex pricing, settled at future date with little initial investment.
List four main functions of derivatives in financial markets.
Risk transfer, improve liquidity, better fund-raising avenues, increase market depth.
What is the key difference between OTC and exchange-traded derivatives?
OTC: custom, bilateral, counter-party risk. Exchange-traded: standardised, mark-to-market, transparent, traded through exchange members.
What are the four basic building blocks of derivatives?
Forwards (OTC fixed-price contracts), Futures (exchange-traded forwards), Swaps (bilateral cash-flow exchange), Options (right, not obligation).
Define a forward contract and state its main disadvantage.
OTC contract to deliver currency at fixed exchange rate on future date; disadvantage is opportunity cost if market rate is better.
What is the cost-of-carry model for futures pricing?
Futures price = spot price + financing/storage/insurance costs − income earned (dividends, coupons).
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