NCFM Derivatives Market (Dealers) flashcards
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- Derivative contract
- A financial contract whose value is derived from an underlying asset, rate, or index. The underlying itself need not be bought or sold at inception.
- Forward contract
- A private, customizable agreement to buy or sell an asset at a fixed future date and price. Both parties are exposed to counterparty default risk.
- Futures contract
- A standardized, exchange-traded agreement to transact at a future date, marked to market daily and guaranteed by a clearing corporation.
- Option premium
- The price paid by the option buyer to the seller for the right, but not the obligation, to exercise the contract at the strike price.
- Put-call parity
- For European options on a non-dividend stock, C − P = S − K·e^(−rT). A deviation from this relationship creates a riskless arbitrage opportunity.
- Open interest
- The total number of derivative contracts outstanding and not yet closed by offset or delivery. It differs from trading volume, which counts trades in a period.
- Basis
- The difference between the futures price and the spot price of the underlying. It converges toward zero as the contract approaches expiry.
- Limit order
- An order to buy or sell only at a specified price or better. It guarantees price if filled but not execution.
- Stop order
- An order that becomes a market order once the trigger price is reached. It offers no price protection once triggered.
- Delta
- The change in an option's price for a one-unit change in the underlying. Call deltas are positive and put deltas negative, between −1 and +1.
- Gamma
- The rate of change of delta with respect to the underlying's price. High gamma means the hedge ratio changes quickly and requires frequent rebalancing.
- Vega
- The sensitivity of an option's price to a one-percentage-point change in implied volatility. Longer-dated options generally have higher vega.
- Implied volatility
- The volatility input that makes a model price equal to the observed market price. It reflects market expectations and supply-demand for options.
- Theta
- The change in an option's price per day as time to expiry decreases, holding other factors constant. Long options typically have negative theta.
- Market maker
- A participant that continuously quotes bid and ask prices, earning the spread while managing inventory and hedging its resulting exposures.
- Central counterparty
- A clearing corporation that interposes itself between buyer and seller through novation, guaranteeing performance and reducing bilateral counterparty credit risk.
- Variation margin
- The daily cash settlement of gains and losses from marking open positions to market, paid to or collected from the clearing member.
- Initial margin
- Collateral collected at trade inception to cover potential future exposure over the margin period of risk, typically estimated by a portfolio margining model.
- Maintenance margin
- The minimum equity a margin account must hold. Falling below it triggers a margin call to restore the account to the required level.
- Novation
- The legal process by which the clearing corporation replaces the original counterparties, becoming buyer to every seller and seller to every buyer.
- Client segregation
- The requirement to hold client collateral separately from the member's own funds, protecting clients if the member becomes insolvent.
- Default waterfall
- The sequence of funds used when a clearing member defaults: defaulter's margin, default fund contribution, and then CCP or mutualized resources.
- Cash settlement
- Settlement of a derivative by paying the final difference between the contract price and the settlement price, rather than delivering the underlying.
- Position limits
- Regulatory caps on the open interest a client or member may hold in a contract, aimed at preventing concentration and market manipulation.
- KYC requirement
- Mandatory client identification, risk profiling, and ongoing monitoring before an account may trade. It underpins anti-money-laundering compliance.
- SCORES
- SEBI's online complaint redressal system. Investors escalate unresolved grievances after first approaching the trading member and the exchange.
- Value at Risk
- A statistical estimate of the maximum loss over a given horizon at a stated confidence level. It does not measure losses beyond that threshold.
- Expected shortfall
- The average loss conditional on exceeding the VaR threshold. It captures tail risk that VaR ignores and is a coherent risk measure.
- Stress testing
- Evaluating portfolio losses under extreme but plausible scenarios, such as a sharp index fall or volatility spike, to complement statistical risk measures.
- Funding liquidity risk
- The risk of being unable to meet cash obligations such as margin calls, forcing liquidation of positions at unfavorable prices.
- Suitability assessment
- Matching a recommended product to the client's objectives, risk tolerance, horizon, and experience before executing the trade.
- Risk disclosure document
- A mandated document explaining leverage, margin calls, and potential loss of capital that the client must receive and acknowledge before trading derivatives.