FRM AIM: Describe the mechanism of delivery process and contrast with cash settlement
Refers to closing out f contract where the trader who has short position in the contracts sells the agreed upon asset and the trader who has the long position in the contract buys the asset
For cash settlement delivery is not an option and position marked to market based on price on the last settlement price
Delivery can take on the floor of the exchange and also away from the clearinghouse where the two parties contact privately and close out the deal. After the trade is closed out the parties have to inform the clearinghouse about the transaction
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Relate Significant market events of the past several decades to the growth of risk management industry I :
Several significant events have occurred in the past that has affected the common man, financial institutions and business that has led to huge financial loses.
Some of the significant events in the past are as follows:
Black Monday of 1987 that saw a sharp decline in U.S stock price for a single day
Asian equity markets decimation of 1997
Russian default of 1998
2001 September world trade attack
Sub mortgage crisis that started on 2007 and whose impact is felt even today
These events remind us that it is even more important to use financial risk management policies and practices to insulate ourselves from future financial losses.
Calculate an arbitrage payoff and describe how arbitrage opportunities are ephemeral (i.e., short lived):
FRM AIM: Calculate an arbitrage payoff and describe how arbitrage opportunities are ephemeral (i.e., short lived)
- Take positions in the market to profit from the positions
- There might be large gain/loss when speculators use futures as a hedge against the underlying securitys
- The maximum loss when speculators use options as hedging strategy is limited to the cost of the option itself
- Use derivatives to earn risk free profit in excess of risk free rate by manipulation of mispriced securities
- Riskless profit is earned by entering into equivalent and offsetting positions in markets
- Opportunities do not last long since supply and demand will quickly eliminate the arbitrage situation
Risk from Derivatives
FRM AIM: Describe some of the risks that can arise from the (mis) use of derivatives
- Traders use to speculative instead of hedging the derivatives (Operational Risk)
- Loses suffered using hedging, speculation, arbitrage is high
- Control mechanism needed to monitor risk that arises out of hedging, speculation, arbitrage opportunities
FRM AIM Define:
- Market Maker
- Spot, Forward, Future contract
- Call, Put option
- American, European option
- Long, Short position
- Exercise (strike) price
- Expiration(Maturity) date
- Bid, Offer price
- Bid-Offer spread
- Hedgers, Speculators, Arbitrageurs
- Derives its value from underlying security value
- Ex: Options, Forward, futures contract
- Individual who acts as a middleman between exchange and end user
- Buys and sells security
- Charges fees based on the services offered
- Agreement to buy/sell asset today
- No legal binding agreement in the contract
- Contract to buy/sell asset at a predetermined prices and at predetermined date in the future
- No legally binding agreement in the contract
- Legally binding agreement to buy/sell asset at a predetermined price at a predetermined date in the future
- Ex: Buy/Sell of commodities in the future like jet fuel
- Buy a specified number of shares of an underlying security on/or before the expiration date at a given strike price
- Used for hedging, speculative, arbitrage purposes
- Sell a specified number of shares of an underlying security on/or before the expiration date at a given strike price
- Used for hedging, speculative, arbitrage purposes
American Styled Option
- Similar to call/put option except that the option can be exercised anytime between issue date and expiration date
- Valuable at times when right to exercise early will bring in profit
European Styled Option
- Similar to call/put option except that the option can be exercised only at expiration date
- Valuable when right to exercise early doesn’t bring in any profit
- Individual who has long positions owns/buys the security in the near future
- Investor who owns long position anticipates increase in the value of the security in the near future
- Individual who has short positions sells the security in the near future
- Investor who owns short position anticipates decrease in the value of the security in the near future
- Price at which the underlying security may be bought/sold
- Date at which the option may be exercised (bought/sold)
- Price at which the buyer is willing to pay for the security
- Price at which the seller is willing to sell the security
Bid-Ask Spread = Asking Price – Bid Price
- Use forward, futures, option to reduce their risk of the financial security that they have
- Usage of forward contracts, the hedgers neutralizes risk by paying the price of the underlying security
- Usage of options is used as an insurance policy
Take offsetting positions in financial markets to lock in a risk less profit
FRM AIM: Define and Describe key features of futures contract
- Highly standardized contract specified by exchange
- The person who buys/sells futures contract is obligated to buy/sell the assets at agreed upon time and at agreed upon price
- Futures contract is used by speculators who take advantage of price fluctuations of the underlying asset to get a profit
- Futures contract is used by hedgers to reduce the risk of the underlying asset
Characteristics of Futures Contract
- Price quotation
- Contract Size
- Quality of asset
- Delivery Time
- Delivery Location
- Position Limits
- Daily Price Limits
FRM AIM: Describe the over the counter market and how it differs from trading on an exchange, including advantages and disadvantages :
FRM AIM: Describe the over the counter market and how it differs from trading on an exchange, including advantages and disadvantages
|Properties||Over the Counter Market||Traditional Exchange|
|Definition||Uses telephone and computers to make trade||Uses shouting and hand signals to make trade|
|Size||Bigger than traditional exchange||Smaller than OTC market|
|Terms of contract||Not specified by exchange||Specified by exchange|
|Can participant negotiate contract||Yes||No|
|Any type of risk involved||Credit Risk||No Credit Risk|
|How issues are resolved||Calls are recorded during transactions which serves as a reference in any disputes||
Issues are resolved based on contractual terms agreed during trading
FRM AIM: Describe, contrast and calculate the payoffs from hedging strategies involving forward contracts and options :
FRM AIM: Describe, contrast and calculate the payoffs from hedging strategies involving forward contracts and options
|Purpose||Eliminate or reduce financial exposure||Eliminate or reduce financial exposure|
|Investor with Long exposure to asset||Hedge the exposure by entering into short futures contract||Hedge the exposure by buying a put option|
|Investor with Short exposure to asset||Hedge the exposure by entering into long futures contract||Hedge the exposure by buying a call option|
|Advantages||No initial investment in executing these contracts||Initial premium to purchase options|
|Disadvantages||Hedgers give up price movements that has a positive effect in event the position is left un hedged||The price movement that has a positive effect on the options is used by the hedgers to earn a profit|
FRM the Financial Risk Manager exam offered by GARP, is the premiere risk management professional certification availed by risk management aspirants across the globe. GARP has opened up May 2017 FRM exam early bird registration. FRM exam offers a leverage to finding a career in risk management, positional advantage if you are currently into risk management and there are ton lots of advantages. Lets see why it is important to avail early bird registration offer from GARP when there is an option to avail regular registration, late registration options
FRM exam registration on new candidate FRM exam PArt I as well as returning candidate part I and Part II happens in three registration pricing categories named as early bird, standard, late fee pricing.In all these three cases enrollment fee remains the same. Exam fees are dicsounted at about 46% in FRM early bird registration slot. Big deal and lots of saving. So, plan early and enroll faster
1) FRM is not an easy exam and the pass rate is relatively low compared to other financial certifications. Though people have rated this as toughest when compared to CFA, CAIA etc to name a it is not always easy. To pass any exam a good deal of preparation time is needed and for such exams it becomes inevitable to start preparing early
2) Early registration gives you best commitment – Be it self-sponsored (or) employer sponsored FRM is always tough and money makes you more disciplined and committed. To have best commitment, take a screenshot of your exam receipt and save this as wallpaper in your phone and desktop/laptop. This keeps reminding you of upcoming exam and early the better
3) Cost efficiency – You ideally save $300 off the standard pricing that is above $1000 in case of new FRM candidate and about $650 in case of returnign candidate
4) Network with FRM aspirants -This can happen via FRM forum section and get best moral support from fellow exam aspirants. So start early
5) Master exam material with best amount of study time
New candidate FRM Exam Part I
Early Bird Pricing
December 1st 2016-January 31st 2017 – $750 This includes enrollment fees of $400 and exam fees of $350
Standard Exam fee pricing
February 1st 2017- February 28th 2017 – $875 This includes enrollment fees of $400 and exam fees of $475
Late Exam fee Pricing
March 1st 2017- April 15th 2017 – $1050 This includes enrollment fees of $400 and exam fees of $650
Returning candidate FRM Part I/Part II
Early Bird Pricing
December 1st 2016-January 31st 2017 – $350 This includes enrollment fees of $0 and exam fees of $350
Standard Exam fee pricing
February 1st 2017- February 28th 2017 – $475 This includes enrollment fees of $0 and exam fees of $475
Late Exam fee Pricing
March 1st 2017- April 15th 2017 – $650 This includes enrollment fees of
$0 and exam fees of $650
FRM Fee payment and registration is open
What does Booking The Basis mean?
Booking the basis is an arrangement made between a buyer and seller giving either party the ability, at some future date, to determine the cash price of the forward sales agreement. Once the basis of a futures contract is booked, it is applied to the current futures price and is maintained for the duration of the contract. Also known as “deferred pricing.”
A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor’s 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market.
Leverage is the action of using borrowed money to make money
ABC Paper – Asset-Backed Commercial Paper :
ABC Paper – Asset-Backed Commercial Paper is a security whose value and income payments are derived from and collateralized/backed by a specified pool of underlying assets.
Capital Gains Tax:
Capital Gains Tax is a type of tax levied on capital gains incurred by individuals and corporations. Capital gains are the profits that an investor realizes when he or she sells the capital asset for a price that is higher than the purchase price.
Capital gains taxes are only triggered when an asset is realized, not while it is held by an investor. An investor can own shares that appreciate every year, but the investor does not incur a capital gains tax on the shares until they are sold
Arbitrage is a popular hedging strategy.The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.
Ask Price/Offer Price – Trading Term
Ask Price/Offer Price – Trading Term is popular among the investment banking community, stock traders.
Ask price is also known as offer price. It is the price that a seller is willing to accept for selling a stock/security.
In general amount of security willing to be sold at that price will be listed in ask.
It is sometimes called as ask.
Yield is the relationship between coupon rate and price. It is used as a major concept while computing financial risk.Yield can be calculated using two major methods:
1) Current yield
2) Yield to maturity
Current yield=Interest payment/Market value
When a bond is trading at discount, yield is higher than the coupon rate.
When the bond is trading at a premium, the yield is lower than the coupon rate.
Coupon rate is the stated interest rate of the bond.
Active investing is an investment strategy involving ongoing buying and selling actions by the investor. Active investors purchase investments and continuously monitor their activity in order to exploit profitable conditions.
It is also known as active management.It refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index.
Portfolio manager is the person or persons responsible for investing a mutual, exchange-traded or closed-end fund’s assets, implementing its investment strategy and managing the day-to-day portfolio trading.
Mutual Fund Subadvisor:
Mutual fund subadvisor is a money manager who works outside of the fund, and is hired by a fund manager to help with an investment portfolio. These subadvisors are allowed to manage all or some of a fund’s assets, and usually are given a set of investment objectives to adhere to when selecting securities
Layered Fees :
Layered fees are the two sets of management fees that are paid by an investor for the same group of assets. This practice is found in many types of investment vehicles such as wrap funds, variable annuities, registered investment advisor client accounts and even mutual funds
AFA – Afghanistan Afghani – Forex/Currency Trading:
The currency abbreviation or currency symbol for the Afghanistan afghani (AFA). The Afghanistan afghani is made up of 100 pul. The new afghani replaced the prior currency in early 2003, due to the low relative value of the nation’s currency
Financial Information Exchange (FIX) Protocol:
Financial Information Exchange (FIX) Protocol started with version 2.7 and gradually emerged to the level of 4.2.This is a set of rules to be used by firms involved in investment banking business.
FIX determines the rules to be followed from order entry to closure.
To put it in simple terms FIX provides information on STP (Straight Through Processing).
It has been formulated for various products starting from equities and extending to derivatives, FX(currency exchange also called as Forex)
OMS – Order Management system can be evaluated and proposal can be given on implementing FIX protocol at infrastructure level and at code level
Municipal Notes- Municipal Notes are short-term instruments. The duration is six months or less and they are discounted instruments.Notes are issued for interim funding in anticipation of collecting taxes called Tax Anticipation Notes (TANS).
RANS – Revenue Anticipation Notes issued in anticipation of revenues from bridges,tolls etc.
BANS – Bond Anticipation Notes. They are offered before new bond offering to the market.
PNS – Project Notes. Issued for major projects
Atlas Options – Atlas options is a type of equity-based exotic option from the family of mountain range options. Atlas options have a payout that is based on the performance of the underlying securities, which comprise stocks. At maturity, some of the best- and worst-performing stocks are removed from this group of underlying securities, at which point the payout is calculated on the remainder of the securities
Street Side Transaction – Street Side Transaction is the movement of security from seller to buyer and movement of payment from buyer to seller
Automated Clearing House – ACH is an electronic funds-transfer system run by the National Automated Clearing House Association. This payment system deals with payroll, direct deposit, tax refunds, consumer bills, tax payment, and many more payment services
What is a futures contract?
Exchange traded obligations to buy or sell a certain amount of underlying good at specified price and date
Assets can be agricultural goods to stock indexes
Mostly delivery is not taken in futures contract
The futures position is closed or reversed prior to settlement date
At any time Long Position = Short position
Buyer and seller have no ideas of each others existence
American Depositary Share – ADS:
A U.S. dollar-denominated equity share of a foreign-based company available for purchase on an American stock exchange. American Depositary Shares (ADSs) are issued by depository banks in the U.S. under agreement with the issuing foreign company; the entire issuance is called an American Depositary Receipt (ADR) and the individual shares are referred to as ADSs.
Depending on the level of compliance with U.S. securities regulations the foreign company wishes to follow, the company may either list its shares over-the-counter (OTC) with low reporting requirements or on a major exchange like the NYSE or Nasdaq. Listings on the latter exchanges generally require the same level of reporting as domestic companies, and also require adherence to GAAP accounting rules.
Quotron are devices that help stock brokers obtain quotes, hign and low prices, last sales by keuing security symbol.
Alternative Trading System(ATS):
Alternative Trading System (ATS) is a trading system that is not regulated as an exchange, but is a venue for matching the buy and sell orders of its subscribers. Alternative trading systems are gaining popularity around the world and account for much of the liquidity found in publicly traded issues.
Regulation ATS was introduced by the SEC in 1998 and is designed to protect investors and resolve any concerns arising from this type of trading system. Regulation ATS requires stricter record keeping and demands more intensive reporting on issues such as transparency once the system reaches more than 5% of the trading volume for any given security.
It constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange within the meaning of Rule 3b-16.
Why companies/firms issue stock?
Stocks are instruments issued/sold by the companies to raise funding for their business operations. It is a means used by the companies to perform their operations with the money raised by initial public offering(IPO) without having to pull out money from their own pocket.
Corporate Bonds And Notes:
Corporations borrow long term capital through debt instruments known as bonds.
Corporations borrow intermediate term financing through notes.
Corporations borrow short term financing through commercial loans.
Corporations borrow using short term instruments like commercial papers.
A broker dealer in investment banking is a person or firm in the business of buying and selling securities operating as both a broker and a dealer depending on the transaction.
FOREX/FX Trading Cross Currencies:
Currency pairs that don’t involve USD at all are called cross currencies.
One foreign currency is traded for another without having to first exchange the currencies into American dollars.