Knowledge Base
Financial Instruments, Crypto-Assets, and Their Risks
Overview of traditional financial instruments and crypto-assets, along with associated risks. Covers equities, bonds, derivatives, structured products, and digital assets.
Skills
Questions
Which type of option can only be exercised at maturity?
European options can only be exercised at their expiry date, unlike American options which can be exercised at any time. This distinction influences the pricing and risk of options. For example, options on the CAC 40 on Euronext are European style.
Which type of derivative allows exposure to the CAC 40 index with limited initial investment?
Futures contracts on the CAC 40 index, such as the FCE-DPAR, allow exposure to the index with an initial investment limited to a small percentage of the notional value, thanks to central clearing and margin calls. This makes them accessible even with modest capital.
What is the main advantage of futures over forwards in terms of risk management?
Futures benefit from central clearing through a clearing house (such as LCH SA), which eliminates counterparty risk through daily margin calls. Forwards, traded over-the-counter, expose parties to mutual default risk, requiring collateral under EMIR.
What characteristic primarily distinguishes options from futures and swaps under the MiFID II Directive?
Under the MiFID II Directive, options are distinguished by their contractual asymmetry: they confer a right without an obligation, unlike futures and swaps which firmly commit both parties. This distinction is crucial for understanding the nature of derivative products.
The CDS market reached its historical peak in 2007 with a volume of EUR 9,000 billion.
The CDS market reached EUR 60,000 billion in 2007, before contracting sharply after the financial crisis to stabilise around EUR 9,000 billion. This information illustrates the impact of post-crisis regulations on derivative markets.
Swaptions are contracts that commit both parties to exchange financial flows at a future date.
Swaptions are not binding contracts; they only grant the right (but not the obligation) to enter into an interest rate swap at a future date. This distinguishes them from standard swaps, which are firm commitments. This nuance is essential for understanding the differences between derivative products.
Categorize items by dragging them to the appropriate zones
Items to categorize:
Exchange of indexed financial flows
Exchange of flows in different currencies
Protection against default risk
Interest rate swaps exchange fixed-rate payments for indexed payments, while currency swaps exchange cash flows in different currencies. CDS provide protection against default risk. This classification helps understand the economic objectives of each product type.
Credit Default Swap (CDS)
Click to see answer
A Credit Default Swap (CDS) is a derivative product that provides protection against the default risk of a reference issuer. The buyer pays a periodic premium, and the seller commits to providing compensation in the event of a credit event (bankruptcy, payment default, restructuring). The CDS market has decreased considerably since the 2007 financial crisis.