CH2 IMD
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Questions and Answers

What is a characteristic of the futures market?

  • It only exists for certain types of underlying assets. (correct)
  • It operates without any contract rigidity.
  • It completely replaces spot markets.
  • It features standardized forward contracts. (correct)
  • Which function does the Clearing House NOT perform?

  • Centralization of exchanges.
  • Daily margin calls to manage potential losses.
  • Settlement of all contract negotiations. (correct)
  • Daily valuation for counterparty risk management.
  • How is counterparty risk typically managed in OTC markets?

  • By eliminating the need for margin calls.
  • Through regulatory oversight only.
  • By utilizing a single standardized contract.
  • Via bilateral netting and collateralization. (correct)
  • In futures contracts, what element is NOT typically standardized?

    <p>Market price fluctuations.</p> Signup and view all the answers

    What is the primary role of a Clearing House in futures trading?

    <p>To manage the liquidity and counterparty risk.</p> Signup and view all the answers

    What is the primary function of a clearing house in the context of futures contracts?

    <p>To act as an intermediary between buyers and sellers</p> Signup and view all the answers

    Which of the following is NOT one of the three objectives of the G20 after the great crisis?

    <p>Promoting economic growth</p> Signup and view all the answers

    What are the methods of settlement for a futures contract?

    <p>Physical delivery, compensation, and cash settlement</p> Signup and view all the answers

    What does the term 'basis' refer to in the futures market?

    <p>The difference between the futures price and the spot price</p> Signup and view all the answers

    Which of the following represents a potential difficulty associated with clearing houses?

    <p>They can promote greater risk-taking behavior</p> Signup and view all the answers

    What is the consequence of a futures price being higher than the spot price just before the expiry of the contract?

    <p>Arbitrage opportunities may arise</p> Signup and view all the answers

    Which regulatory body in the US is responsible for overseeing commodity futures trading?

    <p>Commodity Futures Trading Commission (CFTC)</p> Signup and view all the answers

    What happens at the expiry of a futures contract?

    <p>Futures and spot prices must be equal</p> Signup and view all the answers

    Which of the following statements accurately describes the standardization of futures and forward contracts?

    <p>Futures contracts are highly standardized, while forward contracts are not standardized at all.</p> Signup and view all the answers

    What is a key feature of the liquidity in futures markets compared to forward markets?

    <p>Futures markets typically offer ample liquidity, whereas forward markets have almost zero liquidity.</p> Signup and view all the answers

    How does the initial outlay differ between futures and forward contracts?

    <p>Futures involve deposits or margin calls, whereas forwards typically require no payment.</p> Signup and view all the answers

    What aspect of hedging differentiates futures from forward contracts?

    <p>Hedging in futures is reversible and inexpensive, unlike forward hedging.</p> Signup and view all the answers

    Which of the following best captures the role of clearing houses in futures markets?

    <p>Clearing houses provide a central clearing mechanism to mitigate counterparty risk.</p> Signup and view all the answers

    What is the primary method of settlement for futures contracts compared to forwards?

    <p>Futures contracts may use cash settlement or physical delivery, whereas forwards usually settle through physical delivery.</p> Signup and view all the answers

    Which of the following transactions is not a characteristic of futures markets?

    <p>Futures transactions guarantee a set delivery date with no room for adjustment.</p> Signup and view all the answers

    Which of the following is a typical historical evolution of futures markets?

    <p>Futures markets for financial assets emerged significantly after the 1970s.</p> Signup and view all the answers

    Study Notes

    G20 Objectives After The Great Crisis

    • Increase transparency
    • Mitigate systemic risk
    • Fight market abuse

    Regulatory Reforms Post Great Crisis

    • Global reforms coordinated by the Financial Stability Board (FSB)
    • US: Dodd-Frank and Commodity Futures and Trading Commission (CFTC)
    • Europe: European Market Infrastructure Regulation (EMIR) and European Securities and Markets Authority (ESMA)
    • "Too big to fail" clearing houses present a moral hazard risk
    • Clearing houses may encourage greater risk-taking
    • Costs associated with clearing houses:
      • Learning costs
      • Treasury costs
    • Unbalanced markets for collateral assets

    Futures Contract Conclusion

    • Physical delivery
    • Compensation (countertrade)
    • Cash settlement

    Basis Convergence

    • Basis is the difference between future prices (F) and spot prices (S)
    • The basis converges at the expiry of the contract (T): F(T,T) = S(T)
    • Arbitrage opportunities arise when F(T,T) ≠ S(T)
    • Example:
      • Physical price: 140
      • Futures price: 145
      • Profit: 5 (Sell futures and buy physical)
    • Consequence of arbitrage: Equality between physical and futures prices is restored through price adjustments

    Role of The Futures Market

    • Standardized forward contracts traded on the futures market
    • Key details of contracts: Quality, volume, location, and date of delivery
    • Rigidity of contracts

    Clearing House Roles

    • Liquidity function: Centralization of exchanges
    • Counterparty risk management:
      • Daily settlement prices
      • Margin calls
      • Payment of profits and losses
      • Deposit payment required for transactions

    Counterparty Risk Management in OTC Markets

    • Bilateral netting
    • Collateralization / Initial Margin
    • Revaluation of collateral and margin call
    • Cleared OTC products through clearing houses

    Differences Between Forwards and Futures

    Futures Forwards
    Standardized transactions Non-standardized transactions
    Exceptional expiration with effective delivery Normal expiration with effective delivery
    Ample liquidity Almost zero liquidity
    Initial outlay includes deposit and margin calls No initial payment required
    Imperfect hedging, inexpensive, and reversible Perfect hedging, costly, and irreversible

    Brief History of Futures Markets

    • Cereals
    • Non-ferrous metals
    • Tropical products
    • Oilseed
    • Animals
    • Currencies
    • Financial fixed income
    • Petroleum products
    • Equity Indices

    Key Dates for Derivative Markets

    • 1850 – 1930: Forward market on agricultural products
    • 1930 – 1970: Futures markets on raw materials
    • 1970-1985: Futures markets on financial assets
    • 1985-2000: The era of OTC markets
    • 2000-…..: Towards a new organization of derivatives markets

    Spot, Forward, and Futures Prices

    • Physical Market:
      • Immediate delivery: Spot transaction, Spot price
      • Delayed delivery: Forward transaction, Forward price
    • Contract Market: Futures transaction, Futures price
      • Standardized
      • Multiple futures prices for various delivery dates

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    Description

    Explore the objectives and regulatory reforms initiated by the G20 after the Great Crisis. This quiz covers key topics such as transparency, systemic risk mitigation, and the challenges faced by clearing houses. Test your understanding of futures contracts and basis convergence as well.

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