book iii -defnitions

7/23/2019 BOOK III -Defnitions

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BOOK III - DEFINITIONS, NOTES AND FORMULAS

CH1 Introduction: Future !nd O"tion M!r#et - Intitute $or Fin!nci!% M!r#et

&'111( Ue o$ Future Contr!ct to Miti)!te Ri#

!( A%%o* "roducer, ditri+utor, de!%er !nd inetor to !n!)e uncert!int. o$ "rice+( M!n!)e "rice ri#, +uine ri# /u""%. !nd de!nd, tor!)e "ro+%e, !ri!tion in

0u!%it., "rice tr!n"!renc. , re!%e "ro+%e, counter"!rt ri#, %!c# o$ t!nd!rdied contr!ct+e$ore Future

c( Stor!)ei( Be$ore M!r#et *ou%d coe to)et2er !nd e%% on M#t d!.( Bec!ue t2e. cou%d not

tore, eer.t2in) *ou%d +e du"ed(ii( Future e3c2!n)e "%!.ed ! !4or ro%e in dee%o" o$ tor!)e $!ctorie, , %!* !nd

re)u%!tion )oernin) t2e 2!nd%in) o$ cooditie !nd 2!e dee%o"ed .te $ort2e %icenin) !nd in"ection o$ *!re2oue(

d( 5u!%it. Ri# 6i( CBOT /C2ic!)o Bo!rd o$ Tr!de7 introduced )r!din) *ei)2in) !nd e!ureent

t!nd!rdii( St!nd!rdi!tion !%%o* $or ore tr!n"!rent, e8cient, !nd truted .te o$ tr!din),

enurin) t!nd!rdied de%ier!+%e )r!de(e( 9rice Dicoer.

i( Bu.er !nd e%%er counic!te co"etitie +id !nd oer $ro ! "2.ic!% or

e%ectronic %oc!tion(ii( Co"%eted tr!n!ction !re iedi!te%. counic!ted to ! *ide !udienceiii( St!nd!rdied "!.ent ! *e%% /c!2 7i( A%% tr!de ut +e c%e!red t2rou)2 e+er o$ t2e e3c2!n)e *2o eet e3c2!n)e

!""roe t!nd!rd($( Oettin) Tr!n!ction 6

i( A+i%it. to +u. !nd e%% $uture contr!ct 0uic#%. !nd e!i%. i cuci!% $or !n e8cient !ndeectie !r#et(

)( S"ecu%!tor 6 Atte"t to t!#e !d!nt!)e o$ "rice dicre"!ncie2( Hed)er - %oo#in) to tr!n$er ri#i( Future c%e!rin) 2oue 6 !%%o* $or oettin) tr!n!ction +. )u!r!nteein) t2!t t2e 2o%der o$

t2e %on) "oition i !+%e to e%% to !n. *i%%in) +u.er n t2e $uture !r#et(i( A%%o* $or %i0uid, %o* cot $uture !r#et(

4( Counter"!rt. Ri#i( Bot2 ide need to +e con;dent t2!t t2e ot2er "!rt. *i%% "er$or ! e3"ectedii( C%e!rin) 2oue )u!r!ntee t2e ;n!nci!% inte)rit. o$ eer. $uture contr!ct(

#( Tr!din) Ri#i( Minied +. 2!in) t!nd!rdied contr!ct under "u%i2ed e3c2!n)e ru%e t2!t

decri+e et2od o$ o"er!tion !nd "eritted tr!din) "rocedure(&( Future Contr!ct - i !n !)reeent +et*een t*o "!rtie to +u. !nd e%% ! "reet 0u!ntit., !nd

)r!de o$ ! "eci;c ite, e()( coodit., ecurit., currenc., or inde3 !t !n !)reed-u"on "rice on or+e$ore ! )ien d!t! I t2e $uture(

!( Bu.er 6 %on) $uture contr!ct !nd receie de%ier.+( Se%%er 6 2ort $uure contr!ct !nd!#e de%ier.c( Oettin) "oition 6 tr!n!ction c!n e3tin)ui2 /c%oe7 $uture contr!ct "oition(d( Sett%eent 6 c!n +e ! "2.ic!% de%ier. or in c!2, de"endin) on contr!ct "ec(

<( St!nd!rdied ter o$ $uture contr!ct!( Under%.in) intruent 6 !%o c!%%ed "ot intruent 6 t2e. "2.ic!% coodit. , ecurit.,inde3, or currenc. under%.in) t2e contr!ct

+( Contr!ct ie 6 Deterine 2o* uc2 o$ t2e under%.in) contr!ct re"reent(c( Sett%eent ec2!ni 6 /+. c!2 o$ "2.ic!% de%ier.7d( De%ier. D!te 6 /!%o c!%%ed M!turit. d!te7 Contrtu!% d!te *2ent2e +u.er i o+%i)!ted t "!.

t2e e%%er !nd t2e e%%er i o+%i)!ted to de%ier to t2e+u.er, or t2e d!te *2en c!2ett%eent t!#e "%!ce(

e( =r!de or 5u!%it. 6 De%ier. )r!de 2i)2er or %o*er t2!n "eci;ed )r!de i "eritted !t !"reiu or dicount to t2e $uture contr!ct )r!de(

>( Certi;ed Stoc# - A$ter "2.ic!% cooditie 2!e +een in"ected !nd !""roed $or de%ier.(Inentor. %ee% in$or!tion i !!i%!+%e $ro t2e e3c2!n)e *2ere $uture contr!ct !re tr!ded(



!( Une3"ected decre!e or incre!e in t2e certi;ed toc# o$ ! "!rticu%!r coodit. c!n"roduce !n iedi!te !r#et re"one(

?( DIFFERENCES +et*een E5UIT@ SECURITIES !nd FUTURES CONTRACTSE5UITIES SECURITIES FUTURES CONTRACTSDei)ned to !it in c!"it!% $or!tion Dei)ned $or ore ri# 2i$tin) !nd "rice dicoS2ortin) toc# re0uire +orro*in) 2!re !nd ot2erco"%ic!tion

S2ortin) i e!ier in t2e $uture !r#et( A S2oEer. %on) in $uture !r#et 62ortin) c!n 4u

! contr!ct(No ;nite tie$r!e to 2o%d toc#/+u. or e%%7 Finite tie$r!e(

Indiidu!% toc# do not 2!e %iit on "riceoeent or "oition ie(

Liit on "rice !nd "oition- r!n)e o$ "oi+%e"rice !nd !3iu "oition !%%o*ed $or ! )$uture intruent(

Finite nu+er o$ 2!re iued on indiidu!% toc# No %iit on nu+er o$ $uture contr!ct t2!t e3it !t !n. "oint

O*ner o$ e0uitie c!n re0uet toc# certi;c!te2o*in) o*ner2i"

No certi;c!te o$ o*ner2i" $or $uture contr!cRecord $ o*ner2i" i 2e%d *it2 t2e +ro#er!)e2oue t2rou)2 *2ic2 tr!de *! !de, !nd tr!con;r!tion uu!%%. ent to c%ient(

Stoc# !r#et 2!e ! "eci!%it to !int!in order%.#t on "!rticu%!r toc#

Future !r#et 2!e !n o"en-outcr. .te,*2ere e+er on t2e oor co"ete $or t2e +"rice

Re)u%!ted +. SEC !nd FINRA Re)u%!ted +. CFTC 6 coodit. $uture Tr!dinCoiion

( For*!rd Contr!ct!( Not t!nd!rdied !nd +et*een "ri!te "!rtie+( Ue$u% *2en !ctu!% de%ier i "re$erredc( Contr!ct c!n +e cutoied to need o$ t*o "!rtied( Coe !t 2i)2er cote( Le %i0uidit. t2!n $uture ocntr!ct$( Not )u!r!nteed +. centr!%ied c%e!rin) 2oue- *2ic2 introduce counter"!rt. ri# into t2e

!)reeent(( OLUME

!( T2e tot!% !ount o$ "urc2!e or !%e durin) ! tr!din) eion /not "ur2c!e !nd !%e7+( T2ere i ! +u.er !nd e%%er $or e!c2 contr!ct tr!ded ! ! reu%t, tot!% "urc2!e ut e0u!%

tot!% !%e(c( Tec2nic!%%., o%ue i no( o$ e3c2!n)e /! "urc2!e !nd !%e to)et2er7d( Tr!de t2!t c!nnot +e ett%ed !re c!%%ed OUT-TRADE DISCRE9ANC@e( OUT-TRADES 6

i( Reo%ed +. t2e e3c2!n)e or c%e!rin) 2oue !nd not inc%uded in t2e tot!% o%ued!t!(

( O9EN INTEREST!( Tot!% nu+er o$ $uture ocntr!ct t2!t re!in o"en !t t2e end o$ ! tr!din) eion i #no*n

! O"en Interet(+( O"en interet inc%ude t2oe contr!ct not .et GLI5UIDATED +. eit2er !n oettin) $uture

!r#et tr!n!ction or de%ier.(c( E() Cient A +u. one contr!ct/%on)7 o$ !nu!r. *2e!t $ro C%ient B /2ort "oition7, !nd

neit2er c%ient t!rted *it2 ! "oition in !nu!r. J2e!t, one $uture contr!ct *i%% +e cre!ted!nd o"en interet *i%% incre!e +. 1( /2orter did not 2!e J2e!t to e%%- 4ut enteredcontr!ct7 (

d( No*, i$ c%ient +e +u. *2e!t /enter into !n oettin) "oition or coerin) 2i 2ort "oition7!nd C%ient A Lon) "oition to o%d to ! ne* +u. /C%ient C, t2ere *i%% +e no c2!n)e to o"enInteret(

( Re0uiite $or Succe$u% Future M!r#et!( M#t i ore ucce$u% i$ t2ere i t2e e3itence o$ re!% econoic or +uine ri#( I$ t2ere i

%itt%e o%!ti%it. in t2e "rice o$ cooditie, etc( t2ere i %itt%e incentie to tr!de or !n!)eri#(

+( o%!ti%it. c!n +e d!"ened +. n!tur!% #t $orce +ut !%o +. )oernent !ction(i( I$ )oernent en!ct "rice contro%, t2en t2ere i no need $or 2ed)in) !nd ! !

reu%t, no need $or $uture !r#et(



c( For M#t "!rtici"!nti( An !!i%!+%e under%.in) c!2 !r#et 6 ut +e +!ed on re!% u""%. !nd de!nd

econoicii( Tr!n"!renc. 6 in$or!tion ut +e *ide%. !!i%!+%e i$ o"!)ue "eo"%e *i%% not trut

#t(iii( St!nd!rdi!tion 6 t2e )r!de or t."e o$ coodit. ut eet 0u!%it. t!nd!rd c!%%ed

$or in contr!ct(i( E8cient De%ier. in$r!tructure 6 e3c2!n)e 2!e !de de%ier. e!. *it2 c!2

ett%ed contr!ct( No ot2er %i0uid contr!ct 6 no ot2er %i0uid $uture contr!ct c!n +e !!i%!+%e to 2ed)e

t2e !e or ii%!r ri#(1'( USES o$ Future !nd O"tion

!( Hed)in) 6 to "roduce, ditri+ute, "roce, tore or net in !n under%.in) coodit. or;n!nci!% intruent( Hed)in) c!n %o*er +uine cot !nd !%%o* ri# to +e t!#en in ot2er!re!(

+( S"ecu%!tin) 6 doe not iti)!te ri# +ut i ri#-t!#in)( Eenti!% +ec!ue t2e. uu!%%. enterinto oettin) "oition( 9ro;t i t2e otie o$ ! "ecu%!tor(

c( C!rr.in) ! coodit. inentor. 6 Hed)er intereted c!n ue $uture to c!rr. cot *2o 2o%dinentor. unti% conu"tion(

i( Future "rice o$ten inc%ude !%% or "!rt o$ t2e cot o$ tor!)e, inur!nce, !nd interet"!.ent to c!rr. t2e coodit. unti% e3"ir!tion(

ii( A 2ort "oition in t2e coodit. c!n coer oe o$ t2ee cot(iii( A coodit. uer, c!n t!#e ! %on) "oition to c!rr. ! coodit. unti% needed( /doe

not need to tore it, +ut receie it unti% needed, t2ere$ore inentor. i t!#en +. ot2er"oition7

i(d( Ar+itr!)e - enure $uture !nd c!2 #t t!.in +!%!nce( Bu.in) c2e!"er !nd e%%in) in

oer"riced !r#et *i%% +rin) #t +!c# into !%i)nent !nd "roide ! ri#%e "ro;t $or !n!r+itr!)eur( Ar+itr!)e 2e" #ee" !r#et c%oer to $!ir !r#et !%ue(

e( 9oition t!#in) 6 t!#in) ! $uture "oition *it2out !n oettin) c!2 "oition *ou%d +econidered "ecu%!tion( /e()( e%%in) ! $uture/*it2 no one to +u. .et77

$( 9rice dicoer. 6 ! co"etitie !r#et 2e%" o et!+%i2 ! in)%e #no*n "rice( O"enne o$$uture !r#et !nd t2e "eed !t *2ic2 "rice !re diein!ted "ut !%% "!rtici"!nt on !%ee% "%!.in) ;e%d(

i( Aein) ri# i critic! $or 2ed)in) !nd "ecu%!tin), !nd !ein) ri# c!nnot2!""en *it2out eectie "rice dicoer.

)( 9!rtici"!nt !ctin) in t2eir o*n e%$-interet !#e t2e $uture !#et $unction, "roidin)%i0uidit. !nd "rice dicoer.( S"ecu%!tor t!#e on ri# to e!rn ! "oitie return !nd ri# i!+or+ed +. ot2er "ecu%!tor or 2ed)er(

i( Lon) ter "ecu%!tor 2e%" to oot2 "rice uctu!tion +. in4ectin) c!"it!% into t2e!r#et "%!ce(

CH& Future Indutr. Intitution !nd 9ro$eion!% - Intitute $or Fin!nci!% M!r#et&'11

1( Future E3c2!n)e!( Do not o*n t2e under%.in) intruent, nor do t2e. tr!de or t!#e "oition(+( For-"ro;t $uture E3c2!n)e iue t*o t."e o$ toc# 6 C%! A S2!re !nd C%! B S2!re

i( C%! A 6 re"reent e0uit. o*ner2i" in t2e e3c2!n)e !nd otin) ri)2tii( C%! B 6 re"reent tr!din) ri)2t( Tr!din) ri)2t !re o$ten %e!ed or ued direct%. +.

o*ner o$ C%! B 2!re(c( Ro%e i to "roide e%ectronic or "2.ic!% tr!din) $!ci%itie, ru%e to conduct tr!din), !nd

o"er!tion!% ec2!ni(d( Future e3c2!n)e e+er tr!de !on)t t2ee%e $or t2eir o*n !ccount or $or

cutoer !ccount(e( Dier $ro toc2 e3c2!n)e in t2!t t2e. *rite !%% ter !nd condition o$ t!nd!rdied

contr!ct&( Coon contr!ct ter

!( Cont!ctde%ier. ont2 !!i%!+%e $or tr!din)(+( Re0uired initi!% !nd !inten!nce !r)in %ee% $or e!c2 coodit.(



c( =r!de !nd%oc!tion dei)n!tion $or "2.ic!% de%ier. contr!ct(d( C!2 "rice erie /ued $r ;n!% ett%eent o$ c!2-ett%ed contr!ct7e( 9ricin) conention !nd iniu "rice uctu!tion($( Su"eriion o$ d!.-tod!. !ctiitie o$ !%% tr!din) "!rtici"!nt()( M!r#et Surei%%!nce /"reent !ni"u%!ition !nd con)etion72( Re!%-tie ditri+ution o$ "rice d!t!(

<( Or)!ni!tion o$ Future E3c2!n)e!( Future ec2!n)e "roide !n order%. !r#et $or tr!din) $uture !nd o"tion on $uture(+( On%. indiidu!% c!n o+t!in e3c2!n)e e+er2i"c( Jit2 e3c2!n)e !""ro!%, indiidu!% !. )r!nt oe e+er2i" "rii%e)e to !n !8%i!ted

"eron, or)!ni!tion, or cor"or!tion(d( Me+er2i" e%ected Bo!rd o$ Director oeree e3c2!n)ee( D!.-to-d!. !dinitr!tie oeri)2t i re"oni+i%it. o$ $u%%-tie, "!id, non-e+er

"reident( 9reident c!rrie out "o%icie !""roed +. t2e Bo!rd($( E3c2!n)e t! 2!nd%e d!. to d!. %e)!%, co"%i!nce, d!t! "rocein))( In U(S( eer. e3c2!n)e 2! !n !8%i!ted CLEARIN= HOUSE2( C%e!rin) 2oue 6

i( 9roide ;n!nci!% ec2!ni !nd )u!r!ntee "er$or!nce on t2e e3c2!n)e $uture!nd o"tion contr!ct(

ii( C%e!rin) 2oue !ct ! ! counter"!rt. +. u+titutin) ite%$ $or e!c2 counter"!rt. $ort2e "ur"oe o$ ett%in) )!in !nd %oe(

iii( It "!. out $und to t2oe receiin) "ro;t !nd co%%ect $und $ro t2oe *it2 %oe(i( Counter"!rt. u+titution i #no*n ! G"rinci"%e o$ u+titution

i( C%e!rin) 2oue $or ot US coodit. e3c2!n)e i or)!nied ! ! SE9ARATE e+ercor"or!tion( CME !nd N@ME i tructured o t2!t c%e!rin) 2oue i reco)nied ! !not2erde"!rtent(

4( C%e!rin) 2oue e+er2i" i c!re$u%%. creened *it2 trict t!nd!rd $or ;n!nci!% tren)t2,!dinitr!tie !+i%it., !nd inte)rit.(

#( Reenue $ro c%e!rin) 2oue i e!rned +. c2!r)in) $ee $or c%e!rin) tr!de, interet $roineted c!"it!%, te"or!r. inetent o$ e+er )u!r!nt. de"oit, !nd +. "roidin)ot2er erice uc2 ! 2!nd%in) o$ de%ier. notice(

>( E3c2!n)e Me+er2i" - indiidu!% *2o "!rtici"!te in e3c2!n)e tr!din) ut +e e3c2!n)ee+er or "roce tr!din) "rii%e)e(

!( Loc!% e+er 6 ue "eron!% c!"it!% to tr!de $or ! "eron!% !ccount( Re%ie on 2ort-tertr!din) #i%% !nd !r#et !n!%.i(

+( Sc!%"er e+er 6 tr!de $re0uent%. in !n !tte"t to !#e one. on !%% "rice

oeent(c( D!. Tr!der - tr!de $re0uent%. t2rou)2out t2e d!., +ut 2! ero /!t7 net "oition !t t2e end

o$ t2e d!.(d( F%oor Bro#er - tr!de $or ot2er !nd e!rn ! coiion(

?( Ru%e o$ e3c2!n)e e+er2i"!( C!n co%ete ! tr!n!ction !$ter !#in) !n o"en, co"etitie outcr. o$ t2e +id or oer in

2!nd(+( Due di%i)ence i re0uired +. t2e oor +ro#er *2en e3ecutin) order(c( Loe reutin) $ro +ro#er error !re t2e +ro#er %i!+i%it.(d( Bid or oer not !de o"en%. in t2e "it /i(e( non-co"etitie tr!de7 !re t."ic!%%.

conidered in!%id tr!de(e( Me+er "!rtici"!tin) in ! tr!de t2!t $!i% to con$or to e3c2!n)e ru%e !. +e u+4ect to

dici"%in!r. !ction

( Du!% Tr!din) 6 "r!ctice o$ e+er tr!din) $or t2eir o*n !ccount !nd $or cutoer !ccount( Ru%ere)!rd du!% tr!din) !re t2!t cutoer order 2!e "riorit. oer e+er order(

CLEARING HOUSE FUNCTIONS( Ori)in!% M!r)in 6 Me+er ;r !re re0uired to de"oit $und to u""ort o"en contr!ct u+itted

$or c%e!r!nce(!( Aount /"er contr!ct7 o$ ori)in!% !r)in i deterined +. t2e c%e!rin)2oue +o!rd o$

director(+( CFTC re)u%!te t2!t c%ient $und +e e)re)!ted $ro ! e+er ;r "ro"riet!r. $und(c( Me+er ut !int!in ! one !cct $or "ro"riet!r. $und !nd ! e"!r!te !cct $or c%ient

$und(



d( M!r)in de"oit $or cutoer !. inc%ude ot2er ne)oti!+%e intruent, uc2 ! *!re2ouerecei"t(

e( C%e!rin) 2oue e+er !. u+it %etter o$ credit, c!2, )oernent ecuritie, orre)itered ecuritie to !ti$. !r)in re0uireent(

( M!r)in %ee% 6 2itoric!% o%!ti%it. o$ $uture "rice !re o$ten ued to et !r)in %ee%( Lee% uedto "rotect t2e c%e!rin) 2oue !)!int one-d!. %!r)e "rice oeent(

!( S"ot ont2 "oition /t2oe "oition ne!r de%ier.7 !. 2!e dierent !r)in %ee% t2!n2ed)e "oition(

( M!r)in Co%%ection /)ro !nd Net "oition7!( M!r)in !. +e co%%ected +. c%e!rin) 2oue on eit2er )ro or net "oition +!i $or e!c2

cutoer(+( CME !nd N@ME re0uire )ro !r)inc( Soe e3c2!n)e !%%o* $or !r)in on net "otion( E()( %on) 1'' contr!ct !nd 2ort ''

contr!ct o$ u%. J2e!t, net +!i *ou%d c2!r)e !r)in on t2e net %on) 1'' contr!ct(d( I$ =ro, it *ou%d c2!r)e ! !r)in on t2e 1'' contr!ct(

1'( Sett%eent "rice 6 $or !ctie%. tr!ded de%ier. ont2, ett%eent rice uu!%. $!%% *it2in t2e r!n)eo$ "rice tr!ded !t t2e c%oe(

!( C%oin) +id !nd oer !re uu!%%. !er!)ed to re!c2 t2e ett%eent "rice(+( For in!ctie ont2 *it2 not uc2 !ctiit., ! noin!% "rice !. +e dei)n!ted +. !n

e3c2!n)e e+er coittee( A noin!% "rice i not !n !ctu!% tr!ded "rice +ut ! $!+ric!ted"rice +!ed on t2e c%oin) "rice o$ ii%!r contr!ctt2!t tr!ded on t2e c%oin) d!. in0uetion(

11( !ri!tion !r)in 6!( T2e ett%eent o$ d!i%. )!in !nd %oe +et*een e+er ;r(+( E3c2!n)e coittee, coittee on 0uot!tion deterine t2e ett%eent "rice $or e!c2

contr!ct $or tr!din) d!.c( C%e!rin)2oue e+er ;r !re re0uired to "!. to, receie $ro, t2e c%e!rin)2oue t2e

dierence +et*een t2e current ett%eent "rice !nd t2e tr!de "rice $or t2!t d!. or t2e"reiou d!. ett%etn "rice $or !n e3itin) "oition(

d( !ri!tion !r)in co%%ected e"!r!te%. $or e+er ;r "oition $ro c%ient !ccount"oition(

e( M!r)in i co%%ected +. !uto!tic de+itcredit +e$ore o"enin) o$ tr!din) on t2e $o%%o*in)+uine d!. to t2e e+er ;r 2oue !ccount or cutoer !r)in !ccount(

1&( =u!r!nt. De"oit -!( C%e!rin)2oue e+er ut !int!in ! %!r)e )u!r!nt. de"oit *it2 t2e c%e!rin) 2oue in

!ddition to ori)in!% !nd !ri!tion !r)in in order to !int!in t2eir o*n !nd cutoer

"oition(+( M!int!ined *it2 t2e c%e!rin)2oue ! %on) ! ;rc%ient i ! e+er o$ t2e c%e!rin)2oue(c( De"oit c!n +e !de *it2 c!2, %etter o$ credit, or ecuritie(

1<( De$!u%tin) C%ient!( Indiidu!% c%ient !ccount $!%% *it2 t2e c!rr.in) e+er ;r, uin) it o*n $nd i$ de%ier. o$

$und or ! i not !ti;ed(+( Coodit. Account A)reeent 6 )ie t2e +ro#er t2e ri)2t to %i0uid!te !n. cutoer

"oition, *it2out recoure, in t2e eent t2!t !r)in c!%% !re not et(c( Bro#e init !r)in c!%% !re !ti;ed "ro"t%. ! t2e. !re re"oni+%e $or !n. de;cit(

1>( C%e!rin) 9roce -!( Me+er "roide on)oin) d!t! on tr!de e3ecuted on +e2!%$ o$ cutoer t2rou)2out t2e

d!.(+( C%e!rin) 2oue ut 2!e con;red record o$ ! tr!de +ot2 $ro t2e +u.in) !nd e%%in)

c%e!rin) 2oue e+er +$ore it c!n inert ite%$ ! t2e o""oite "!rt. to ! tr!de /t2ecounter"!rt.7

c( C%e!rin)2oue doe not !ue %e)!% !nd ;n!nci!% o+%i)!tion o$ t2e ot2er "!rt. to t2e tr!deunti% t2e !ccur!c. o$ !%% re"orted tr!n!ction 2! +een eri;ed !nd t2e ori)in!% !r)in 2!+een de"oited(

d( Becoe +u.er $or !n.one *2o ! o%d !nd e%%er $or !n.one *2o 2! +ou)2te( Actin) ! ! counter"!rt. to eer. tr!de !%%o* tr!der to c%oe out "oition een *2en

ori)in!% counter"!rt. i not re!d. to c%oe out it o*n "oition($( OFFSETTIN= Tr!n!ction 6 on t2e c%e!rin) 2oue +oo# !%%o* tr!der to oe $ree%. in !nd

out o$ t2e $uture !r#et *it2out !n. o+%i)!tion to t2e ori)in!% "!rt. ino%ed()( Dierence +et**en "urc2!e "rice !nd !%e "rice re"reent tr!der )ro "ro;t(

1?( Ste" t!#en *2en e+er un!+%e to eet ;n!nci!% o+%i)!tion



!( So%ent e+er t!#e "oition o$ !%% o"en $u%%. !r)ined cutoer "oition( A%% under-!r)ined cutoer "oition !nd ;r "ro"riet!r. "oition !re %i0uid!ted(

+( I$ e+er cutoer !ccount i in de;cit o$ +ec!ue o$ %i0uidi!tion, !n. !ddition!% !r)ine+er 2!d de"oited i !""%ied to*!rd t2e de;cit on cutoer "oition(

c( I$ de$unct e+er de"oit !re inu8cient, e+er e3c2!n)e e+er2i" !. +e o%d!nd $und in )u!r!nt. $und !. +e ued(

d( I$ de;cit ti%% e3it, ur"%u $und o$ t2e c%e!rin) 2oue !. +e ued !t t2e dicretion o$c%e!rin)2oue +o!rd(

e( Contri+ution +. ot2er o%ent c%e!rin)2oue e+er to t2e )u!r!nt. $und !. !%o +eued( =u!r!nt. $und !. +e re"%eni2ed +. ! "ro r!t! "eci!% !eent !de +. t2ere!inin) e+er o$ t2e c%e!rin)2oue(

$( NOTE: ;n!nci!% inte)rit. o$ e!c2 $uture contr!ct i tren)t2ened +.:i( Se%ection criteri! o$ c%e!rin)2oue e+erii( =u!r!nt. $undiii( A+i%it. o$ t2e c%e!rin)2oue to !e e+er !+i%it. to $u%$u%% o+%i)!tion(

Mechanics of Futures Deliver1( Actu!% De%ier. 6 "2.ic!% tr!n$er o$ ! coodit. or ;n!nci!% intruent(

!( Fin!nci!% $u%;%%ent )u!r!nteed +. c%e!rin) 2oue, +ut "2.ic!% de%ier. i not(+( C%e!rin) 2oue e+er ;r )u!r!ntee "2.ic!% de%ier.( I$ cutoer de$!u%t, e+er ;r

i %i!+%e to $u%;%% o+%i)!tion(c( 92.ic!% de%ier. i !de e!ier +. C%e!rin) 2oue ! counter"!rt.

i( C%e!rin) 2oue receie de%ier. notice $ro e%%er/2ort7 !nd !i)n notice to+u.er /%on)7(

ii( C%e!rin) 2oue !. !%o !rr!n)e in"ection o$ cooditie, !ct ! de"oitor. $or*!re2oue recei"t, or receie de%ier. o$ $orei)n currencie !nd oe ;n!nci!%intruent(

1( Se%%er o"tion )ie t2e e%%er/2ort7 t2e ri)2t to dei)n!te t2e d!. *2en "2.ic!% de%ier. i to +e!de i$ ore t2!n one d!. i !%%o*ed

i( C!n !%o dei)n!te t2e %oc!tion or *!re2oue *2re t2e de%ier. *i%% +e deii( Bu.er 2! no !. in "eci;c %oc!tion, d!., or )r!de o$ t2e coodit. or ;n!nci!%

intruent /decided +. contr!ct7iii( Se%%er re!d. to !#e de%ier., e%%er intruct +ro#er to end Gnotice o$ intention to

de%ier Gi( De%ier. "rocedure c!n !r. *it2 contr!ct !nd e3c2!n)e(

+( E3c2!n)e 2!nd%ed +. C%e!rin) 2oue -i( Decide to !%%oc!te +!ed on o%det %on) "oition, %!r)et net %on) "oition o"en, r

%!r)et )ro %on) "oition o"en(ii( Bu.er !nd e%%er +rou)2t to)et2er +. c%e!rin)2oue(

1( C%e!rin) e+er o$ de%ier. cutoer ut "roide re0uired docuent&( Once "!.ent i receied, c%e!rin) 2oue *i% re%e!e docuent to receier

c!rr.in) ;r<( 9rocedure co"%eted *it2in tie "!n "eci;ed +. e3c2!n)e ru%e>( C%e!rin)2oue "roide c2ec# to t2e de%ierin) cutoer ;r to "roide to

it cutoer(1( O"en 9oition 6

i( Oet u" to !nd inc%udin) %!t tr!din) d!. o$ $uture contr!ct(ii( 9oition re!inin) o"en ut +e ett%ed +. !ctu!% de%ier. or c!2 ett%eent

de"endin) on e3c2!n)e "rocedure(iii( TENDER DA@ i t2e %!t d!. on *2ic2 notice o$ intention to !#e de%ier. !. +e

iued( L!t tr!din) d!. !nd tender d!. !re uu!%%. t2e !e(1( SE5UENCES OF DELIER@ FOR THREE T@9ES OF DELIER@ 9ROCEDURES

!( 92.ic!% Tr!din) *it2 Concurrent Tr!din) !nd De%ier.i( Firt Notice D!.

1( S2ort !., +ut not re0uired to, iue de%ier. notice&( Tr!din) continue !%on) *it2 de%ierie, 2ort !. iue notice, !d %on) !re

%i!+%e $or de%ier.(ii( L!t Notice D!. 6 %!t d!. $or de%ier. notice to +e entiii( L!t Tr!din) D!. 6 %!t d!. $or tr!din) t2e contr!ct(

+( 92.ic!% De%ier. Fo%%o*in) t2e End o$ Tr!din)i( L!t Tr!din) d!. 6 %!t d!. to tr!de contr!ct, re!inin) o"en "oition !re to +e

!ti;ed +. de%ier.(



ii( Firt Notice D!. 6 2ort, !., +ut !re not re0uired to, iue de%ier. notice on t2id!., u+e0uent d!., !ccordin) to ter o$ contr!ct(

iii( L!t notice D!. - %!t d!. ! 2ort c!n iue ! de%ier. notice(c( C!2 Sett%eent

i( L!t Tr!din) D!. 6 %!t d!. to tr!de contr!ct, re!inin) o"en contr!ct !re ett%ed!$ter tr!din) i oer

ii( C!2 Sett%eent D!. 6 !%% re!inin) o"en "oition !re ett%ed +. c!2 de+it or credituin) c!2-!r#et !%ue ut +e done +. e3c2!n)e "eci;ed d!te !nd tie(

d( S"ecu%!tor 6 2!e %itt%e interet in !ctu!% de%ier. o$ ! coodit.i( I$ de%ier. notice i receied, "ecu%!tor !re re0uired $or !%% "ic#in) u" !nd !%%

!oci!ted e3"ene o$ de%ier. !nd o*ner2i", uc2 ! c!rr.in) +ro#er $ee, interete3"ene, inur!nce, !ddition!% in"ection(

ii( One O"tion i $or t2e %on) "oition "ecu%!tor to e%% 2i "oition in t2e "ot ont2!nd +u. t2e !e nu+er o$ contr!ct $or ! %!ter ont2( T2i i #no*n ! GSJITCHIN= or ROLLIN= OER ! FUTURES 9OSITION T2e e3tr! cot o$ coiion!nd tr!n!ction $ee i %e e3"enie t2!t t!#in) o*ner2i"(

FUTURES MAR!ETS "ARTICI"ANTS&'( Future Coiion Merc2!nt /FCM7

!( Future +ro#er!e ;r dei)n!ted +. Coodit. E3c2!n)e Act to o"er!te !interedi!rie +et*een "u+%ic cutoer, 2ed)er !nd intitution!% inetor, !nd t2ee3c2!n)e(

+( A%o #no*n ! ! Coiion 2oue or C!rr.in) Fir(c( T2e.:

i( 9roide $!ci%itie to e3ecute cutoer orderii( M!int!in record o$ e!c2 cutoer o"en "oition, !r)in +!%!nce, !nd tr!n!ction(iii( E!rn ! coiion $or t2e erice it "roidei( On%. entit. t2!t c!n 2o%d cutoer $und ot2er t2!n c%e!rin)2oue( M!. +e $u%% erice or dicount ;r

i( M!. +e n!tion!%, re)ion!% +ro#er!)e oerin) ot2er ;n!nci!% ericeii( M!. 2!e ! "!rent co"!n. or re%!ted co"!n. in !)ri+uine, coerci!%

+!n#in), or ot2er coerci!% enter"rie(&1( Introducin) Bro#er

!( And indiidu!% or ;r t2!t 2! et!+%i2ed re%!tion2i" *it2 one or ore $uture +ro#er!)e;r

+( Re"oni+%e $or !int!in !nd ericin) cutoer !ccount !nd re%!tion2i"(c( Li#e FCM in t2!t it !%e $orce receie coiion(

d( Un%i#e FCM IB c!nnot 2o%d cutoer $und, o ! ! reu%t, !%% IB cutoer ut !int!in!ccount *it2 !n FCM *2ere e!c2 cutoer !ccount i identidied !nd c!rried e"!r!te%. ont2e +oo# o$ !n FCM(

e( T*o t."e 6 Inde"endent !nd )u!r!nteed IB ;r( /o"er!te inde"endent%. o$ !n. "!rticu%!r+ro#er!)e ;r !nd c!n eet re)u%!tor. re0uireent *2ere )u!r!nteed IB ;r 2! ! %e)!%!nd re)u%!tor. re%!tion2i" *it2 )u!r!ntor $uture coiion erc2!nt t2rou)2 *2ic2 IBintroduce it cutoer( FCM !nd IB ut +e re)iterd under Coodit. E3c2!n)e Act(

&&( Account E3ecutie!( O$ FCM !nd IB ut +e re)itered ! ASSOCIATE 9ERSONS(+( T2e. !re !)ent o$ FCM or IB !nd de!% direct%. *it2 ;r cutoer(c( Ro%e i to:

i( 9roide !""ro"ri!te doc $or ne* !ccount !nd con;r t2e. !re i)ned(ii( C%!ri$. tr!din) ru%e, dico%ure re0uireent, !nd "rocedure to cutoer

iii( In$or c%ient o$ "rice !nd !r#et condition(i( Enter order $or c%ient( Cone. e3ecuted "rice $ tr!de !nd "endin) order t!tue(

i( Act ! %i!ion +et*een t2e cutoer !nd t2e ;r ree!rc2 de"t(ii( Noti$. cutoer o$ !r)in c!%%iii( Identi$. t2eir cutoer !ccordin) to NFA ru%e &-<' o+t!in cutoer n!e, !ddre,

occu"!tion, eti!ted !nnu!% incoe !nd net *ort2, !""ro3( !)e, "reiouinetent !nd $uture tr!din) e3"erience( ' FOR DUE DILI=ENCE( 6 to enure$uture contr!ct !re ! !""ro"ri!te inetent e2ic%e(

i3(&<( Coodit. Tr!din) Adior /CTA7

!( Tr!de indiidu!% !ccount $or in)%e c%ient



+( Act ! !n indiidu!% or or)!ni!tion t2!t, $or co"en!tion !die $uture !nd o"tion on$uture

c( Sii%!r to +ro#er!)e !ccountd( 9o*er o$ !ttorne. )ie CTA dicretion!r. !ut2orit.e( Tr!din) "2i%oo"2. 2ou%d !c2iee inetor )o!%$( C!n tr!de !nd !n!)e $und)( I$ CTA !re !%o FCM, t2e. !. !cce"t $und $ro cutoer in CTA n!e2( Serice $ee inc%ude

i( 9er$or!nce/tr!din)7 $eeii( M!n!)eent $eeiii( Bro#er!)e coiion 6 not !%% CTA "!rtici"!te, +ut i$ coiion !re 2!red *it2

it FCM, it ut +e dic%oed to CTA c%ient(

&>( Coodit. 9oo% O"er!tor 6!( 9oo% t2e $und o$ !n. inetor !nd tr!de $or !%% indiidu!% under ! "oo%ed !ccount(+( Sii%!r to ! ecuritie utu!% $undc( Bene;t inc%ude:

i( 9ro$eion!% !n!)eent o$ %cinet $und $or ! %itte ! P?''' Indiidu!% !n!)ed!ccount !. 2!e ! iniu o$ ore t2!n P?','''(

ii( A%%o* !cce to dierent CTA *it2 dierent t.%e, .te, oerin) dieri;c!tion(iii( C9O uu!%%. t2e )ener!% "!rtner o$ ! %iited "!rtner2i" oerin) %iite %i!+i%it. $or

inetor(i( 9oo% oer $o*-t2rou)2 t!3!tion +ene;t !nd %iit inetor ri# to t2e c!"it!%

ineted(( Inetor in indiidu!% !ccount c!n %oe ore t2!n t2e. initi!%%. "%!ced in t2e

!ccount(i( H!e dio%ution c%!ue 6 ! unit *it2 ?Q dio%ution c%!ue !nd !n initi!% !%ue o$

P1''', *ou%d to" tr!din) *2en it !%ue re!c2ed &?' !nd inetor *ou%d receieP&?' o$ 2i +one. +!c#(

&?( Cutoer o$ !n FCM!( Fir or co"!nie *i2in) to 2ed)e+( Indiidu!% "ecu%!tie tr!derc( Mone. !n!)eent ;r, one. !n!)er, !nd intitution!% inetor(d( F%oor +ro#er not +e%on)in) to t2e c%e!rin)2oue 6 *i2in) to ue c%e!rin) $!ci%itie o$ t2e

coiion 2oue(e( Bro#er!)e ;r t2!t !re not e+er o$ ! "!rticu%!r e3c2!n)e or c%e!rin)2oue(

CH Hed)in) *it2 Future !nd O"tion - Intitute $or Fin!nci!% M!r#et &'111( BASICS OF HED=IN= 6

!( Future !nd o"tion r!re%. ued to !ctu!%%. !c0uire under%.in) !et(+( 92.ic!% de%ier. r!re%. occur *it2 $uture contr!ct "ri!ri%. +ec!ue

i( Contr!ct !re i!tc2ed in deired 0u!%it., %oc!tion, !nd tiin) re%!tie to !2ed)er "re$erence(

ii( R!t2er ued to contro% "rice ri# !oci!ted *it2 under%.in) !et(c( Hed)er 2ou%d ee# contr!ct t2!t c%oe%. !%i)n *it2 c2!r!cteritic o$ under%.in) !et to

iniie t2e ri# !oci!ted *it2 ! i!tc2ed 2ed)e:d( Fortun!te%. "rice corre%!tion +et*een $uture "rice !nd c!2 /"ot7 "rice o$ ! coodit.

tend to +e er. 2i)2( 6 BASIS ued to e3!ine re%!tion2i"(&( USE OF FUTURES TO MANA=E 9RICE RISK 6 HED=IN=

!( Future c!n +e ued in "%!ce o$ c!2 tr!n!ction t2!t *ou%d occur !t ! %!ter d!te( /ere ! !te"or!r. u+titute7 i"%. ! contr!ct(+( Future contr!ct !nd c!2 "oition c!n +e conidered e0u!% !nd o""oite "oitionc( Hed)in) *it2 Future

SITUATION HED=IN= STRATE=@Indiidu!% *2o o*n or *i%% oon o*n t2eunder%.in) !et !nd *!nt to %oc# in t2e "rice/e()( $!rer *2o *i%% 2!ret corn in t2ree ont27

Se%% $uture contr!ct no* !nd o! %!ter d!te *it2 t2e !%e o$ t2e t2e c!2 !r#et(

Indiidu!% *2o need to !c0uire t2e under%.in)!et in t2e $uture !nd *!nt to %oc# in t2e "rice(

Bu. $uture contr!ct no* !nd ede%ier. or "urc2!e in t2e c!2d!te !nd oet t2e $uture "oitt2!n t!#in) de%ier.7



<( B!i 6 De;ned ! t2e c!2 "rice %e t2e $uture "rice(

!( #asis $ S t − F 0

+( S t =¿ c!2 or /"ot "rice7 o$ t2e under%.in)

c( F 0 current "rice o$ t2e $uture contr!ct

>( 9oitie B!i 6 /c!2 oer $uture7 6 e3it *2en t2e c!2 "rice e3ceed t2e $uture "rice?( Ne)!tie +!i 6 /c!2 under $uture7 6 Future "rice e3ceed t2e c!2 "rice(( B!i Ri# 6 Een t2ou)2 $uture !nd o"tion reduce "rice ri#, t2e. do cont!in +!i ri#

!( 9otenti!% c2!n)e in +!i i un!oid!+%e, +ut o$ten !ued to +e t!+%e urin) 2ed)in)"eriod to !%%o* c%e!rer i%%utr!tion

+( Hed)er *2o uti%ie $uture c!n c2ooe ! et o$ "oition t2!t !re eit2er %on) t2e +!i or2ort t2e +!i(

( Lon) t2e +!i 6 ! et o$ "oition t2!t conit o$ ! 2ort $uture "oition !nd ! %on) c!2"oition/coodit., under%.in) !et7 (

!( 9oition %on) t2e +!i +ene;t *2en t2e +!i i tren)t2enin)(+( Occur *2en t2e c!2 "rice incre!e !t ! $!ter r!te t2!n t2e $uture "rice "rice or *2en

t2e c!2 "rice decre!e !t ! r!te %o*er t2!n t2e $uture "rice(c( SELLIN= HED=E /2ort Hed)e7 6 occur *2en t2e 2ed)er 2ort ! $uture contr!ct to 2ed)e

!)!int ! "rice decre!e in t2e e3itin) %on) c!2 "oition(d( A""ro"ri!te *2en ! 2ed)er "oee inentor. o$ !n !et !nd e3"ect "rice to dec%ine(e( E(=( ! )o%d-inin) co"!n. !int!in ! i)ni;c!nt "oition in t2e "reciou et!%( Ho*eer, +ec!ue

t2e "rice o$ )o%d i uce"ti+%e to !r#et "reure !nd !. uctu!te *i%d%. !t tie, t2e co"!n.!. c2ooe to 2ed)e it "oition /t2rou)2 t2e !%e o$ $uture contr!ct7 !nd t2u %oc# in ! )u!r!nteedr!n)e o$ !%ue( An indiidu!% or co"!n. t2!t doe t2i /o*n t2e "2.ic!% coodit. !nd 2ed)et2eir "oition7 i !id to +e %on) t2e +!i(

( S2ort t2e +!i 6 ! et o$ "oition t2!t conit o$ ! %on) $uture "oition !nd ! 2ort c!2 "oition(!( 9oition G2ort t2e +!i +ene;t *2en t2e +!i i *e!#enin)(+( Occur *2en $uture "rice incre!e !t ! $!ter r!te t2!n t2e c!2 "rice or *2en $uture

"rice decre!e !t ! r!te %o*er t2!n t2e c!2 "rice(c( A BU@IN= HED=E /%on) 2ed)e7 6 occur *2en t2e 2ed)er +u. ! $uture contr!ct to 2ed)e

!)!int !n incre!e in t2e !%ue o$ t2e !et t2!t under%ie ! 2ort "oition( /*!nt "rice todro"/+ut e3"ect "rice to rie7 to t!#e !d!nt!)e o$ %o*er "rice, +ut "ut ! "rice cei%in) onriin) "rice7

d( A""ro"ri!te *2en 2ed)er need to !c0uire inentor. !t oe "oint in t2e $uture !nd e3"ect"rice to rie( /+u. t2e "roduct !t ! %o*er "rice( Se%% it !t ! 2i)2er "rice( /2ort c!2 "oition7

e( E(=( A our i%%er *i%% need *2e!t to "roduce our( He "urc2!e *2e!t $uture( A rie in*2e!t "rice incre!e t2e cot o$ 2i in"ut !nd reduce 2i "ro;t( Ho*eer, t2e "ro;t on t2e%on) $uture "oition oet t2e incre!ed cot o$ *2e!t( T2e %on) "oition %oc# in t2e coto$ *2e!t t2!t 2e *i%% need to +u. in order to "roduce !nd e%% our, *2ic2 2e 2! !%re!d.!)reed to do( /+u. $uture under%.in) !t ! c2e!"er "rice *i%% oet 2i)2er $uture "rice7

$( Lon) 2ed)er *!nt t2e +!i to *e!#en ince it *i%% reduce t2e eectie "rice o$ "urc2!in)t2e coodit. in t2e c!2 !r#et !t ! %!ter d!te( Futures "rice % #asis $ E&ective"rice

( E3c2!n)e $or 92.ic!% /EF97 Tr!n!ction!( An o-e3c2!n)e, "ri!te tr!n!ction +et*een t*o "!rtie *2ere one "!rt. "urc2!e t2e

"2.ic!% !et !nd e%% ! $uture contr!ct on t2!t !et to ! counter"!rt. *2i%e t2e

counter"!rt. e%% t2e "2.ic!% !et !nd +u. ! $uture contr!ct(+( A)ree on !%% ti"u%!tion +e$ore tr!n!ction !nd !$ter tr!n!ction t2e. re"ort it to t2e!""ro"ri!te c%e!rin) 2oue

c( EF9 one e3ce"tion to US FEDERAL LAJ t2!t !%% tr!de t!#e "%!ce on t2e oor o$ t2ee3c2!n)e/i(e( c!nnot +e "re!rr!n)ed7( A%%o* EF9 tr!n!ction to occur durin) "eriod *2ene3c2!n)e i c%oed(

d( Tend to +e retricted to t2oe *2o !ctu!%%. tr!de t2e under%.in) !et( And !%%o* EF9"!rtie to e!i%. c%oe t2eir 2ed)e !t e3"ir!tion o$ t2e !)reeent *i%% !%%o*in) t2e to reoe!n. "rice or counter"!rt. !ri!+i%it. +ec!ue "rice !re ;3ed t2rou)2out t2e ter o$ t2etr!n!ction(

e( Fre0uent%. ued in ener). !nd ;n!nci!% $uture !r#et($( ENER=@ MARKET



i( 9rice o$ten 0uoted +!ed on +!i dierenti!%( T2e dierenti!% i t2e"rice dierencet2!t i !ttri+ut!+%e to dierence in t2e c2!r!cteriitic o$ t2e "2.ic!% !et !nd t2e"roduct "eci;ed in t2e $uture contr!ct(

)( FINANCIAL FUTURES MARKETi( Currenc. de!%er , tr!din) de#, 2ed)er, "ecu%!tor, ue EF9 to et!+%i2 or oet

2ed)e !nd i"roe tr!n!ction!% e8cienc.(ii( E()( ! )ien !r#et !. %!c# t2e nece!r. de"t2 $or %!r)e "oition to +e et!+%i2ed

!t ! in)%e "rice!nd ! "!rtici"!nt *2o *i2e to t!#e ! %!r)e "oition *i%% encounter"rice %i""!)e /dierence +et*een e3"ected tr!n!ction cot !nd t2e !ctu!% !ount"!id7

iii( B. uin) !n EF9, "!rtici"!nt c!n !oid t2i iue(1'( O"tion on Future

!( =ie t2e 2o%der t2e ri)2t to +u. or e%% ! "eci;ed $uture contr!ct on or +e$ore ! )ien d!t!!t ! )ien $uture "rice /t2e tri#e "rice7

+( Sii%!r to $uture, o"tion 2ed)er *ou%d e%ect o"tion in t2e !ount !nd t."e t2!t !%%o* $ort2e e%iin!tion o$ t2e ri# "reent in t2eir %on) or 2ort c!2 "oition( /t!# ! "oitionino"tion on $uture t2!t i e0u!% !nd o""oite to t2eir c!2 "oition7

c( MORE COM9LE +ec!ue t2e !re "riced +!ed on re%!tion2i" +et*een:i( T2e c!2 "rice !nd t2e $uture "riceii( T2e $uture "rice !nd t2e o"tion "rice(

Future "oiion !ued u"on o"tion e3ercie'uer Assu(es Seller Assu(es

Call o)tion Lon) Future 9oition S2ort Future 9oition"ut O)tion S2ort Future 9oition Lon) Future 9oition

11( Lon) 9ut O"tion on Future /"urc2!e 9ut O"tion on Future7!( C!n t!#e ! 2ort $uture "oition( /e%% $uture !t cert!in "rice7+( 9oint o$ ie* 6 2o%d inentor. or !et !nd *!nt to "rotect !)!int do*n*!rd "rice ri#(

Bu. "ut o"tion *i%% )u!r!ntee ! cert!in 2i)2er "rice(

c( Str!te). - +u. "ut o"tion $or P( !t t' !t Stri#e PK( I$ !t M!turit. +¿

( K − F T )¿

e3ecute

o"tion to e%% 2ort $uture( E()( Se%% $or 1<'' *2en .ou +ou)2t $or 1&''( P1'' "ro;t 6 cot o$o"tion(

i( I$ "rice )oe u", .ou c!n e%% !t 2i)2er "rice(ii( I$ "rice )oe do*n, .ou iniie ri# *it2 !+i%it. to e%% !t 2i)2er "rice/"ro;t $ro

o"tion on $uture i$ e3ecuted7iii( Un*inde c!2 "oition !t !turit. +ut .our %o !.+e iniied !nd un%iited

"otenti!% $or !%e )ro*t2 i$ "rice )oe u"(1&( S2ort C!%% o"tion on Future /e%% ! c!%% o"tion 7 e%% o"tion to +u. +ecoe 2ort Future "oition( 7

!( T!#e ! 2ort $uture "oition( /o"tion to +u. !t %o*er "rice 6 +ut e%%er 2o"in) "rice *i%% $!%%!nd o"tion *i%% +e out o$ t2e one.7

+( 9oint o$ ie*, 2o%d inentor., doe not e%% it in ;rt "eriod, +ut *!nt to "rotect !)!int"rice dro"( Se%% ! c!%%( I$ "rice )oe u" c!2 "oition *i%% +ecoe ore *ort2*i%e een i$o"tion e3"ire in one.(

c( T2i i *2. c!2 "oition i o""oite $uture "oition( /!%*!. de"end i$ .ou *!nt to e%% or+u.7

1<( Lon) C!%% O"tion on Future!(

1>( S2ort 9ut O"tion on Future!(

CH 1 Introduction - Hu%% O"tion Future !nd Ot2er Deri!tie Ed(1( O"en-Outcr. S.te&( E%ectronic tr!din) .te<( Ad!nt!)e !nd Di!d!nt!)e o$ oer-t2e counter tr!din)

!( Ad!nt!)e



i( Ter not et +. !n e3c2!n)eii( 9!rtici"!nt 2!e e3i+i%it. to ne)oti!teiii( In eent o$ iundert!ndin), c!%% !re recorded

+( Di!d!nt!)ei( OTC tr!din) 2! ore credit ri# t2!n e3c2!n)e tr!din)

>( O"tion Contr!ct!( Contr!ct t2!t in e3c2!n)e $or t2e o"tion "rice, )ie t2e o"tion +u.er t2e ri)2t, +ut not t2e

o+%i)!tion to +u. /or e%%7 !n !et !t t2e e3ercie "rice $ro /to7 t2e e%%er /or +u.er7 *it2in! "eci;ed tie "eriod, or de"endin) on t2e t."e o$ o"tion, ! "recie d!te /i(e( e3"ir!tiond!te7

+( C!%% O"tion 6 )ie t2e 2o%der t2e ri)2t to "urc2!e !n under%.in) !etc( 9ut O"tion 6 )ie +u.er t2e ri)2t to e%%(

?( For*!rd Contr!ct - contr!ct t2!t "eci;e t2e "rice !nd 0u!ntit. o$ !n !et to +e de%ieredoetie in t2e $uture(

!( no t!nd!rdi!tion+( one "!rt. t!#e %on) !nd ot2er "!rt. t!#e 2ort "oition(c( O$ten ued in $orei)n e3c2!n)e !r#et to +e ued to 2ed)e $orei)n e3c2!n)e ri#(

( Future Contr!ct!( More $or!%ied, %e)!%%. +indin) !)reeent to +u.e%% ! coodit. ;n!nci!% intruent in

! "re-dei)ned ont2 in t2e $uture, !t ! "rice !)reed u"on tod!. +. t2e +u.ere%%er( Futurecontr!ct !re 2i)2%. t!nd!rdied re)!rdin) 0u!%it., 0u!ntit., de%ier. tie, !nd %oc!tion $ore!c2 "eci;c coodit.

( C!%% o"tion 9!.o

!( Bu.er C T =max (0,ST − K )

+( Se%%er - C T

c( 9ro;t Bu.er C T −C 0

d( 9ro;t Se%%er C 0−C T

( 9ut O"tion "!.o

!( Bu.er PT =max(0, K −ST )

+( Se%%er - PT

c( 9ro;t Bu.er PT − P0

d( 9ro;t Se%%er P0− PT

( For*!rd Contr!ct 9!.o- Lon) !nd S2ort

!( Lon) - ST − K c!n 2!e "ro;t or %o +ec!ue .ou !re %oc#ed in to +u. een i$

Loss ST < K

+( Profit if ST > K

c( S2ort - K −ST c!n 2!e "ro;t !nd %o( Lo i$ ST > K Profit if K >ST

1'( Hed)in) 9!.o Str!te)ie 6Co"!re!( For*!rd ued to %oc# in "rice to e%iin!te ;n!nci!% e3"oure /ot%. "rice oeent7 BUT

)ie u" !n. "rice oeent t2!t !. 2!e+( Inetor *it2 %on) e3"oure /2o%d !et7 c!n 2ed)e +u. enterin) into ! 2ort "oition /2ort

$uture to e%% !t ! iniu e3ercie "rice K7c( Inetor *it2 2ort e3"oure /need to +u.7 c!n 2ed)e *it2 ! %on) $uture to +u. !t ! !3

"rice K ( o i$ "rice )oe !+oe, *e *i%% "!. no ore t2!n K 7d( O"tion !%o cre!te i)ni;c!nt %eer!)e ! inetor on%. need to "!. t2e o"tion "reiu t

"urc2!e !n o"tion inte!d o$ t2e $!ce-!%ue o$ t2e under%.in)( A.etric "!.o ! t2e.%iit %o to t2e o"tion "reiu +ut un%iited )!in $ro $!or!+%e oeent in t2eunder%.in) !%ue( For 2ed)in), !ct ! inur!nce

11( S"ecu%!tie Str!te)ie 6Co"!re



!( Moti!tion $or uin) $uture i t2!t %iited !ount o$ initi!% inetent i re0uired, !ndcre!te i)ni;c!nt %eer!)e(

+( Inetent re0uired i 4ut t2e initi!% !r)in(c( Future contr!ct c!n reu%t in %!r)e )!in or %!r)e %oe(d(

1&( Ar+itr!)e O""ortunit. 6e3"%!in 2o* t2e. !re te"or!r.!( Su""%. !nd de!nd $orce *i%% !d4ut "rice 0uic#%. !nd e%iin!te t2e !r+itr!)e "oition(

1<( Ar+itr!)eur1>( Soe ri# t2!t c!n !rie $ro deri!tie1?( Deri!tie - ! ;n!nci!% ecurit./e()( o"tion7 *2oe !%ue i deried in "!rt $ro !not2er ecurit.

c2!r!cteriitic or !%ue( T2e ot2er ecurit. i re$erred to ! t2e under%.in) !et( A deri!tieGderie it "rice $ro oe ot2er !ri!+%e(

1( M!r#et !#er 6 indiidu!% t2!t G!#e ! !r#et in ! ecurit.( T2e !r#et !#er !int!in +id !ndoer "rice in ! )ien ecurit. !nd t!nd re!d. to +u. !nd e%% %ot o$ !id ecurit., !t "u+%ic%.0uoted "rice(

1( S"ot contr!ct - !)reeent to +u.e%% !n !et tod!.(1( For*!rd contr!ct 6 "e"ci;e "rice0u!ntit. o$ !n !et to +e de%iere on or +e$ore ! $uture "re-

"eci;ed d!t(1( Future contr!ct - %e)!%%. +indin) !)reeent to +u.e%% ! coodit. or ;n!nci!% intruent in !

dei)n!ted $uture ont2 !t ! "reiou%. !)reed u"on "ric +. t2e +u.e%%er(&'( C!%% o"tion - )ie it 2o%der t2e ri)2t to +u. ! "eci;ed nu+er o$ 2!re o$ t2e under%.in)

ecurit. !t t2e )ien tri#e "rice /e3ercie "rice7 on or +e$ore t2e o"tion contr!ct( /+e$ore i !nAeric!n O"tion7

C!%% uit!+%e i$ inetor *i2e to +ene;t $ro or "rotect t2ee%e $ro !n incre!e in !et!%ue( Ho*eer, )ien !e +u%%i2 direction!% ie* on !et rice, *ritin) ! "ut "roide !niedi!te ino* o$ "reiu !)!int "otenti!% ri# o$ 2!in) to +u. !et !t t2e ti#e "rice i$ t2e



!%ue 2ou%d $!%%( 6 Bot2 tr!te)ie "roide ! "otenti!% )!in, +ut +ec!ue o$ t2e !.etric!%"!.o $ro t2e dierent ide o$ o"tion "oition "roide er. dierent ri#(

Coered C!%% 6 "roide t2e o""ortunit. $or t2e *rite to reduce t2e cot o$ o*ner2i" +. receiin)"reiu incoe u"-$ront(Coered 9ut 6 An incoe-)ener!tin) tr!te). !%%o*in) t2e *rite to reduce cot o$ ! $uture "urc2!e

&1( 9ut o"tion 6 )ie t2e inetor t2e ri)2t to e%% ! ;3ed nu+er o$ 2!re !t ! ;3ed "rice *it2in !)ien "re-"eci;ed tie "eriod(

&&( S2ort C!%% o"tion 6 o+%i)!tion to e%% !et i$ o"tion i e3ecuted +. C!%% O"tion +u.er&<( S2ort 9ut o"tion - o+%i)!tion to +u. !et i$ o"tion i e3ecuted +. 9ut o"tion +u.er&>( Euro"e!n O"tion 6 O"tion t2!t ut +e e3ercied or not e3ercie !t o"tion !turit.( /on%. tie

)r!nted to e3ercie7&?( Aeric!n o"tion 6 c!n +e e3ercied !n. tie on or +e$ore O"tion !turit. d!te(&( !%ue o$ Aeric!n Euro"e!n O"tion -

!( Aeric!n O"tion *i%% +e *ort2 ore t2!n Euro"e!n O"tion *2en t2e ri)2t to e3ercie iALUABLE, !nd t2e.*i%% 2!e e0u!% !%ue *2en it i not(

&( Lon) 9oition - re$er to !ctu!%%. o*nin) t2e ecurit.(&( S2ort 9oition - *2en ! "eron e%% ! ecurit. 2e doe not o*n( An inetor&( Stri#e 9rice 6 "rice !t *2ic2e t2e ecurit. under%.in) !n o"tion contr!ct !. +e +ou)2to%d<'( E3"ir!tion - d!te i t2e %!t d!te on *2ic2 !n o"tion !. +e e3ercied(<1( Bid "rice 6 G0uoted +id or t2e 2i)2et "rice,*2ic2 ! e!%er i *i%%in) to "!. to "urc2!e ! ecurit.<&( Oer "rice 6 /!# "roce7 i "rice !t *2ic2 t2e ecurit. i oered $or !%e, !%o #no*n ! t2e G!#in)

"rice(<<( Bid-!# "re!d - dierence +et*een t2e !# "rice !nd t2e +id-"rice(<>( Hed)er 6 reduce ri# t."ic!%%. t2rou)2 t2e ue o$ $or*!rd contr!ct or o"tion(<?( S"ecu%!tor 6 t!#e "oition in t2e !r#et in order to "ro;t $ro "oition( C!n ue $uture $or %!r)e

"otenti!% )!in %o( Uin) o"tion %e ri#. ince !3iu %o i curt!i%ed +. o"tion "reiu,+ut c!n +e 2i)2%. %eer!)ed

<( Ar+itr!)eur 6 t!#e oettin) "oition in ;n!nci!% intruent in order to %oc# in ! ri#%e "ro;t(

CH & Mec2!nic o$ Future M!r#et - Hu%% O"tion Future !nd Ot2erDeri!tie Ed(

1( Co"!re !nd Contr!t For*!rd !nd Future Contr!ct(!( Future contr!ct 6

i( E3c2!n)e tr!ded o+i)!tion to +u. or e%%ii( Mot $uture "oition not 2e%d to t!#e de%ier. o$ under%.in), inte!d t2e. !re c%oed

out or reered "rior to ett%eent d!te(iii( 9urc2!e o$ $uture 6 )one %on)( Se%%er o$ Future 6 =one 2orti( Future ued +. "ecu%!to to )!in e3"oure to c2!n)e in "rice o$ t2e !et

under%.in) $uture contr!ct(( Hed)er *i%% ue $uture contr!ct to reduce e3"oure to "rice c2!n)e in t2e !et(

&( O"en Interet 6 t2e tot!% nu+er o$ %on) "oition in ! )ie $uture contr!ct( It !%o e0u!% t2e tot!%nu+er o$ 2ort "oition in ! $uture contr!ct( 9oi+%e t2!t on !n. )ien d!. $or t2e tr!din)o%ue on! contr!ct to +e 2i)2er t2!n it o"en interet(

*+ Characteristics of Futures Contract ,!( 5u!%it. o$ Under%.in) !et 6 "eci;c!tion o$ t2e 0u!%it. o$ t2e under%.in) under t2e

contr!ct( M!. not !e one i$ contr!ct i ! ;n!nci!% !et(

+( Contr!ct Sie 6 "eci;e t2e 0u!ntit. o$ t2e !et t2!t ut +e de%iered "er contr!ct(c( De%ier. Tie 6 contr!ct re$erred to +. t2e ont2 in *2ic2 de%ier. i to t!#e "%!ce( Soe

contr!ct not ett%ed +. de%ier. +ut +. "!.ent in c!2, +!ed on dierence +et*een$uture "rice !nd t2e !r#et "rice !t ett%eent(

d( De%ier. Loc!tion - e3c2!n)e "eci;e t2e "%!ce *2ere de%ier. *i%% t!#e "%!ce(e( "rice -uotation an. tic/ si0e 6 e3c2!n)e deterine 2o* t2e "rice o$ ! contr!ct *i%% +e

0uoted ! *e%% ! iniu "rice uctu!tion /tic# ie7 $or t2e contr!ct( E()( )r!in 0uoted !Pdo%%!r+u2e% ( iniu tic# ie o$ o$ ! cent "er +u2e%( P(''&? !nd )r!in contr!ct o$?''' +u2e% iniu tic# ie o$ /(''&?V?'''7 1&(?' "er contr!ct(

$( Dail )rice li(its - e3c2!n)e et !3iu "rice oeent $or ! contr!ct durin) t2ed!.( J2en contr!ct oe do*n +. it d!i%. "rice %iit, it i !id to +e G%iit do*n *2en



contr!ct oe u" +. it "rice %iit, it i !id to +e G%iit u"( I$ t2!t 2!""en, tr!din) ic%oed $or t2i contr!ct(

)( "osition li(its - e3c2!n)e et !3iu nu+er o$ contr!ct t2!t ! "ecu%!tor !. 2o%din order to "reent "ecu%!to $ro 2!in) !n undue inuence on t2e !r#et( Suc2 %iit todont !""%. to 2ed)er(

>( Coner)ence o$ Future !nd S"ot "rice!( B!i i t2e dierence +et*een "ot "rice !nd t2e $uture "rice(#+ 'asis $ s)ot )rice , futures )ricec+ A !turit. ne!r, +!i coner)e to*!rd ero( At E3"ir!tion, t2e "ot "rice ut e0u!%

t2e $uture "rice +ec!ue t2e $uture "rice 2! +ecoe t2e "rice tod!. $or t2e de%ier.tod!. *2ic2 i t2e !e ! t2e "ot( Ar+itr!)e *i%% $orce t2e "rice to +e t2e !e !tcontr!ct e3"ir!tion(

1+ O"er!tion o$ M!r)ina+ M!r)in i c!2 or 2i)2%. %i0uid co%%!ter!% "%!ced in !n !ccount to enure t2!t !n. tr!din)

%oe *i%% +e et(#+ M!r#in) to M!r#et i t2e d!i%. "rocedure o$ !d4utin) t2e !r)in !ccount +!%!nce $or d!i%.

oeent in t2e $uture "rice( T2e !ount re0uired to o"en ! $uture "oition i c!%%ed t2eGIniti!% M!r)in(

c+ M!inten!nce M!r)in i t2e iniu !r)in !ccount +!%!nce re0uired to ret!in t2e $uture"oition( J2en t2e !r)in !ccount +!%!nce $!%% +e%o* t2e !inten!nce !r)in, t2e inetor)et ! !r)in c!%%, !nd 2e ut +rin) t2e !r)in !ccount +!c# to t2e initi!% !r)in !ount(

.+ !ri!tion M!r)in 6 t2e !ount nece!r. to +rin) t2e +rin) t2e !r)in !%ue +!c# u" toIniti!% M!r)in i$ it $!%% +e%o* t2e !inten!nce !r)in(

e( De"endin) on t2e t."e o$ c%inet, t."ic!%%. +ro#er or +ro#er!)e 2oue re0uire c%ient to "ot! +!%!nce in t2e !r)in !ccount ore t2!n t2e !inten!nce !r)in re0uireentet!+%i2ed +. e3c2!n)e( M!n!)eent o$ d!i%. c!2 o* !re *it2dr!*n or contri+uted!""ro"ri!te%. +. t2e c%e!rin)2oue(

( C%e!rin)2oue 6 e!c2 e3c2!n)e 2! one(!( =u!r!ntee t2!t tr!de in t2e $uture !r#et *i%% 2onor t2eir o+%i)!tion(+( C%e!rin)2oue doe t2i +. "%ittin) e!c2 tr!de once it i !de !nd !ctin) ! t2e o""oite

ide o$ e!c2 "oition(c( Act ! +u.er to e%%er !nd e%%er to +u.er( B. doin) t2i, c%e!rin)2oue !%%o* eit2er ide o$

t2e tr!de to reere "oition !t ! $uture d!te *it2out 2!in) to contr!ct t2e ot2er ide o$t2e initi!% tr!de(

d( T2i !%%o* tr!der to enter t2e !r#et #no*in) t2!t t2e. *i%% +e !+%e to reere t2eir"oition !t ! $uture d!te(

e( Tr!der $ree $ro *orr.in) !+out counter"!rt. de$!utin) ince t2e counter"!rt. i no* t2ec%e!rin)2oue( In 2itor. o$ US $uture tr!din), c%e!rin)2oue 2! neer de$!u%ted(

$( A%% e+er co%%!ter!%ie it, enurin) t2!t no d!$u%!t t!#e "%!ce( A%% tr!de )o t2rou)2 t2e%e!rin)2oue e+er, *2o ut "ot ! c%e!rin) !r)in /)u!rr!nt. !r)in7 in !e *!.!n inetor 2! ! !r)in !ccount *it2 ! +ro#er( Enure c%e!rin)2oue i %i0uid !t !%% tie(

( Co%%!ter%i!tion in Oer t2e Counter M!r#et /OTC7!( Su+4ect to ! )ood de!% o$ credit ri# ince t2e ot2er ide o$ !n OTC contr!ct cou%d de$!u%t on

it "!.ent(+( A !r#ed to !r#et $e!ture $or OTC !r#et *2ere !n. %o i etted in c!2 !t t2e end o$

t2e tr!din) d!.( A c!2 "!.ent i !de to t2e "!rt. *it2 ! "oitie !ccount +!%!nce( T2i iii%!r to tr!din) on !r)in *2ere $uture tr!der need to retore $und i$ t2e !%%u eo$ t2econtr!ct dro" +e%o* t2e !inten!nce !r)in(

c( Recent%. "!ed %e)i%!tion re0uire OTC !r#et to ue ! c%e!rin) 2oue !nd t2ere$ore

inetor etc( to "ot ! !r)in !ccount !nd !n. !ri!tion !r)in on ! d!i%. +!i( Creditri# !ued +. c%e!rin)2oue(

( Ar)uent $or ue o$ c%e!rin) 2oue in OTC !r#et(!( Auto!tic "otin) o$ co%%!ter!%+( Incre!ed tr!n"!renc. o$ OTC tr!de( =oernent "u2 $or ue o$ c%e!rin)2oue to %iit

.teic ri#, *2ic2 i t2e ri# t2!t ! $!i%ure +. ! i)ni;c!nt ;n!nci!% intitution *i% i"!ctot2er intitution

c( Reduced ;n!nci!% .te credit ri#( Nor!% Future ( Inerted Future M!r#et(

!( Sett%eent 9rice 6 !n!%o)ou to t2e c%oin) "rice $or ! toc# +ut i not i"%. t2e "rice o$ t2e%!t tr!de(



i( It i !n !er!)e o$ t2e "rice o$ t2e tr!de durin) t2e %!t "eriod o$ tr!din)- c!%%ed t2eGC%oin) 9eriod, *2ic2 i et +. t2e e3c2!n)e( T2i $e!ture o$ t2e ett%eet "rice"reent M!ni"u%!tion +. tr!der(

ii( Sett%eent "rice i ued to !#e !r)in c!%cu%!tion ! t2e end o$ e!c2 tr!din) d!.(+( Nor!% M!r#et 6 incre!ed ett%eent "rice oer tie indic!te ! nor!% !r#et(c( Decre!ein) ett%eent "rice oer tie indic!te !n inerted !r#et(

1'( Mec2!nic o$ De%ier. 9roce(!( 92.ic!% De%ier. 6

i( Terin!te t2e contr!ct +. de%ierin) t2e )oodcoodit.( T2e %oc!tion $or de%ier.,ter o$ de%ir. !nd det!i% o$ e3!ct%. *2!t i to +e de%iered !re !%% "eci;ed in t2eGNotice o$ Intention to De%ier ;%e( E!c2 e3c2!n)e 2! "eci;c ru%e ! to t2econditin $or !#in) !n intent to de%ier(

ii( 9rice "!id or receied i deterined +. t2e ett%eent "eriod on t2e e3c2!n)e-deterined %!t tr!din) d!. o$ t2e contr!ct(

+( C!2-ett%eent contr!ct 6 de%ier. not !n o"tion !nd $uture !ccount i !r#ed to !r#et+!ed on t2e ett%eent "rice on t2e %!t d!. o$ tr!din)(

c+ Reverse of O&settin23i( Jit2 $uture, t2e ot2er ide o$ .our "oition i 2e%d +. t2e c%e!rin)2oue- i$ .ou !#e

!n e3!ct !n o""oite tr!de /!turit., 0u!ntit., !nd )ood7 to .our current "oition,t2e c%e!rin)2oue *i%% net .our "oition out, %e!in) .ou *it2 ! ero +!%!nce(

ii( Contr!ct "rice c!n diern +et*een t*o contr!ct(1( E()( i$ .ou !re %on) one contr!ct o$ )o%d !t P' "er ounce !nd u+e0uent%.

e%% /t!#in) 2ort "oition7 !n identic!% )o%d contr!ct *2en "rice i P' "erounc, P&' u%ti"%ed +. nu+er o$ ounce o$ )o%d "eci;ed in t2e contr!ct *i%%+e deducted $ro t2e !r)in de"oit/7 in .our !ccount(

iii( S!%e o$ $uture contr!ct end t2e e3"oure to $uture "rice uctu!tion on t2e ;rtcontr!ct( @our "oition 2! +een REERSED or CLOSED OUT, +. c%oin) ! tr!de(

d( E3c2!n)e $or 92.ic!% 6i( @ou ;nd ! tr!der *it2 !n o""oite "oition to .our o*n !nd de%ier )ood !nd ett%e

u" +et*een .oure%e, o t2e oor o$ t2e e3c2!n)e /!n e3-"it tr!n!ction7 T2i it2e o%e e3ce"tion to $eder!% %!* t2!t re0uire !%% tr!de to occur on t2e oor o t2ee3c2!n)e( E3c2!n)e i t2en noti;ed(

ii( Dier $ro de%ier. in t2!t tr!der !ctu!%%. e3c2!n)e t2e )ood, t2e ontr!ct i notc%oed on t2e oor o$ t2e ec2!n)e, !nd t2e t*o tr!der "ri!te%. ne)toti!te ter o$t2e tr!n!ction( RE=ULAR de%ier. ONL@ re0uire one tr!der !nd t2e c%e!rin)2oue(

44+T5"ES OF ORDERS!( M!r#et order 6 order to +u. or e%% !t t2e +et "rice !!i%!+%e(

i( Dicretion!r. order 6 ! !r#et order *2ere t2e +ro#er 2! t2e o"tion to de%!.tr!n!ction in e!rc2 o$ ! +etter "rice (

+( Liit Order 6 order to +u. or e%% !*!. $ro t2e current !r#et "rice(i( Liit Bu. Order 6 i "%!ced +e%o* t2e current "rice(ii( Liit Se%% Order 6 i "%!ced !+oe t2e current "riceiii( Liit Order 2!e ! tie %iit, uc2 ! int!nt!neou, one d!., one *ee#, one

ont2, or )ood ti%% c!nce%ed(i( Liit order !re turned oer to t2e "eci!%it +. t2e coiion +ro#er(

c( Sto"-%o Order 6 !re ued to "reent %oe or "rotect "ro;t(i( Sto)6loss Sell - !$r!id o$ ! dro" in "rice, !nd i$ it doe, .ou *!nt +ro#er to e%% it(ii( Sto)6loss #u - !$r!id o$ ! rie in "rice, i$ it doe, .ou *!nt +ro#er to +u. it( 6

uu!%%. co+ined *it2 ! 2ort !%e to %iit %oe( /i$ t2e toc# "rice rie to t2eGto" "rice, t2e +ro#er enter ! !r#et to +u. t2e toc#( 7

d( Sto"-Liit Order 6 ! co+in!tion o$ ! to" !nd %iit order(i( T2e to" "rice !nd %iit "rice ut +e "eci;ed, o t2!t once t2e to" %ee% i

re!c2ed, or +ettered, t2e order *ou%d turn ! %iit order !nd 2o"e$u%%. tr!n!ct !t t2e%iit "rice(

e( M!r#et-i$-touc2ed Order /MIT order7 6 order t2!t *ou%d +ecoe !r#et order once !"eci;ed "rice i re!c2 in t2e !r#et "%!ce(

$( Tie-o$-D!. Order - For t2oe order t2!t re!in outt!ndin) unti% t2e dei)n!ted "ricer!n)e i re!c2ed, t2e tr!der !#in) t2e order need to indic!te t2e tie "eriod $or t2eorder(



)( =ood-ti%%-C!nce%ed /=T=7 order /!(#(! o"en order7 - order t2!t re!in o"en unti% t2e.eit2er tr!n!ct o !re c!nce%ed( A "o"u%!r et2od to u+ittin) ! %iit order i to 2!e it!uto!tic!%%. c!nce%ed !t t2e end o$ t2e tr!din) d!. in *2ic2 it *! u+itted(

2( Fi%%-or-Ki%% order - ut +e e3ecuted iedi!te%. or t2e tr!de *i%% not t!#e "%!ce(1&( RE=ULATION

!( Coodit. !nd Future Tr!din) Coiion 6 re"oni+%e $or re)u%!tin) $uture !r#et(i( Licene $uture e3c2!n)e ! *e%% ! tr!der *2o oer $uture tr!din) erice to

"u+%ic(ii( A%o !""roe ne* $uture contr!ct !nd !n. reiion to e3itin) $uture contr!ct(iii( J2en !""roin), it ut enure e!c2 contr!ct ere ue$u% econoic "ur"oe( /$or

eit2er 2ed)in) or "ecu%!tin)7i( Re"oni+%e $or counic!tin) "rice to "u+%ic, !ddrein) "u+%ic co"%!int, !nd

t!#i) dici"%in!r. !ction !)!int e+er *2o io%!te $uture e3c2!n)e ru%e(+( N!tion!% Future Aoci!tion /NFA7 6c( Securitie !nd E3c2!n)e Coiion -d( Feder!% Reere Bo!rde( U(S( Tre!ur. De"!rtent 6$( SEC, Fed, !nd Tre!ur. !re !in%. concered *it2 2o* $uture tr!din) i"!ct "ot !r#et

tr!din) in toc# !nd +ond()( NFA 2! ore "roinent ro%e +. !tte"tin) to "reent $r!ud !nd enurin) t2!t $uture

!r#et o"er!te in +et interet o$ t2e "u+%ic( E() o$ $uture $r!ud inc%ude cornerin) t2e!r#et( /t!#in) e3ceie %on) "oition *2i%e inuencin) t2e u""%. o$ t2e coodit.7 !nd$ront-runnin) /tr!der uin) "rii%e)ed in$or!tion to tr!de in t2eir o*n !ccount +e$orecutoer !ccount(7

1<( Accountin)!( J2en !ccountin) $or c2!n)e in !r#et !%ue o$ $uture contr!ct, c2!n)e ut +e

reco)nied *2en t2e. occur+( Hed)e !ccountin) 6 !n Ge3ce"tion t2!t "eci;e )!in%oe $ro ! 2ed)in) intruent +e

reco)nied in t2e !e "eriod ! )!in%oe $ro t2e !et +ein) 2ed)ed(c( Under FAS 4** 7Financial Accountin2 'oar. 8FAS'9 St!teent No(1<<W t2e $!ir !r#et

!%ue o$ !%% deri!tie contr!ct ut +e inc%uded on t2e +!%!nce 2eet(i( To ue t2i !ccountin) et2od, it ut +e 2o*n t2!t t2e 2ed)in) intruent

$re0uent%. !nd eectie%. oet intended ri# e3"oure(1>( T!3e

!( Cor"or!te T!3 "!.er 6 c!"it!% )!in t!3ed !t t2e !e %ee% ! ordin!r. incoe !nd c!"it!%%oe !re retricted(

+( Non-cor"or!te t!3 "!.er 6 C!"it!% )!in !re t!3ed !t t2e !e %ee% ! ordin!r. incoe, +u%on)-ter )!in /inetent 2e%d oer one .e!r7 !re u+4ect o$ !3iu 1?Q t!3 r!te(Anot2er dierence i t2!t c!"it!% %oe !re deducti+%e $or non-cor"or!te t!3"!.er(

c( Future contr!ct 6 $or t!3 "ur"oe, contr!ct !re conidered c%oed out !t t2e end o$ e!c2.e!r( T2i )ie rie to :;<=; rule for non6cor)orate ta> )aers *2ere c!"it!%)!in%oe !re tre!ted ! 'Q %on) ter !nd >'Q 2ort ter(

i( Ru%e doe not !""%. to 2ed)in) !ctiitie( Uin) $uture $or 2ed)in) "ur"oe ut +edec%!red on t2e !e d!. t2e tr!n!ction i entered( =!in%oe on 2ed)in)tr!n!ction t!3ed !t !e r!te ! ordin!r. incoe(

CH <VV Hed)in) tr!te)ie Uin) Future - Hu%% O"tion Future !nd Ot2er

Deri!tie Ed(1( S2ort Hed)e - occur *2en t2e 2ed)er 2ort /e%%7 ! $uture contr!ct to 2ed)e !)!int ! "rice

decre!e in t2e e3itin) %on) "oition(!( J2en t2e "rice o$ t2e 2ed)e !et decre!e, t2e 2ort "oition re!%ie ! "oitie return,

oettin) t2e dec%ine in !et !%ue(+( S2ort 2ed)e !""ro"ri!te *2en .ou 2!e ! %on) "oition !nd e3"ect "rice to dec%ine(

&( Lon) 2ed)e - - occur *2en t2e 2ed)er +u. /)oe %on)7 ! $uture contr!ct to 2ed)e !)!int !nincre!e in t2e !%ue o$ t2e !et t2!t under%ie ! 2ort "oition(

!( An incre!e in t2e !%ue o$ ! 2orted !et *i%% reu%t in ! %o to t2e 2ort e%%er(+( One 2ed)e i to oet ! %o in t2e 2ort "oition *it2 ! )!in $ro t2e %on) $uture "oition(c( Lon) 2ed)e !""ro"ri!te *2en .ou 2!e ! 2ort "oition !nd e3"ect "rice to rie(

<( Ad!nt!)e o$ Hed)in) -



!( Reduce or e%iin!te t2e "rice o$ ri# o$ !n !et or ! "ort$o%io $ro !ntici"!ted ne)!tieoeent in t2e "rice o$ !n under%.in)(

+( Loc# in "rice !nd "reent %oe(c( Ho%d !n !et, ! 2ort 2ed)e i !d!nt!)eoud( Need to +u. !n !et, %on) 2ed)e !d!nt!)eou to %iit %o(

>( Di!d!nt!)e o$ Hed)in) 6!( Hed)in) reduce ri# +ut t2ere i +e%ie$ t2!t 2!re2o%der c!n ore e!i%. 2ed)e ri# on

t2eir o*n(+( I$ co"etitor do not 2ed)e, t2ere i !n incentie to #ee" t2e t!tu 0uo( In t2i *!.,

co"!n. enure t2!t "ro;t!+i%it. *i%% re!in ore t!+%e t2!n i$ it *ere to 2ed)e $re0uentc2!n)e(

?( 9er$ect Hed)e 6 *2en !%% e3itin) "oition c2!r!cteritic !tc2 "er$ect%. *it2 t2oe o$ t2e $uturecontr!ct "eci;c!tion( Lo on ! 2ed)e "oition *i%% +e "er$ect%. oet +. t2e )!in on t2e $uture"oition( 9er$ect 2ed)e !re not er. coon(

!( Aet in e3itin) "oition i o$ten not t2e !e ! t2!t o$ t2e under%.in) $uture/e() *e !.+e 2ed)in) ! cor"or!te +ond "ort$o%io *it2 ! $uture contr!ct on US tre!ur. Bond7

+( Hed)in) 2orion !. not !tc2 "er$ect%. *it2 t2e !turit. o$ t2e $uture contr!ct(c( E3itence o$ eit2er %e!d to +!i ri#(

( B!i - in ! 2ed)e i de;ned ! t2e dierence +et*een t2e "ot "rice on ! 2ed)e !et !nd t2e$uture "rice o$ t2e 2ed)in) intruent /e()( $uture contr!ct7 #asis $ s)ot )rice of asset #ein2he.2e. , futures )rice of contract use. to he.2e+ J2en 2ed)e !et !nd 2ed)in) intruent!re t2e !e, t2e +!i *i%% +e ero !t !turit.( For Fin!nci!% Aet Future 6 'asis $ futures)rice6S)ot "rice+

!(( Stren)t2enin) B!i 6 J2en "ot "rice incre!e $!ter t2!n $uture "rice oer t2e 2ed)in) 2orion(

B!i incre!e !nd ! tren)t2enin) +!i i !id to occur(( Je!#enin) B!i - *2en $uture "rice incre!e $!ter t2!n t2e "ot "rice !nd t2e +!i decre!e(( B!i ri# 6 *2en 2ed)in) ! c2!n)e in +!i i un!oid!+%e( T2i i t2e c2!n)e in +!i oer t2e

2ed)e 2orion(!( To iniie +!i ri#, 2ed)er 2ou%d e%ect t2e contr!ct on !n !et t2!t i ot 2i)2%.

corre%!ted *it2 t2e "ot "oition !nd ! contr!ct !turit. t2!t i c%oet to t2e 2ed)in)2orion(

+( Contr!ct Li0uidit. !%o i"ort!nt *2en e%ectin) ! $uture contr!ct $or 2ed)in)(1'( Source o$ B!i Ri# 6

!( Interru"tion in t2e coner)ence o$ t2e Future !nd S"ot 9rice 6i( Nor!%%. "ot coner)e to $uture "rice ! !turit. decre!e !nd +!i coner)e

to '(ii( I$ "oition i un*ound "rior to !turit., return to $uture "oition cou%d +e dierent

$ro c!2 "oition(iii( More r!"id coner)ence reu%t in ore r!"id tr!n$er o$ !r)in "!.ent(i( Le r!"id Coner)ence reu%t *ou%d de%!. "!.ent(( Interru"tion in coner)ence cou%d reu%t in "!.ent $ro e%%er to t2e +u.er(

+( Chan2es in the cost of carr 6i( Inc%ude tor!)e !nd !$e#ee"in), interet, inur!nce !nd re%!ted cot( E()( !n

incre!e in interet r!te incre!e t2e o""ortunit. cot o$ 2o%din) t2e !et, t2ecot o$ c!rr., !d 2ence t2e +!i o$ t2e contr!ct rie( C!2 "rice )oe u"X /!ect"eron *it2 %on) e3"oure /2ort 2ed)e7 !%re!d. *it2 contr!ct !%re!d. !de(

c( I()erfect Matchin2 +et*een t2e c!2 !et !nd t2e 2ed)e !et(i( cro 2ed)in) 6 oetie ue$u% to 2ed)e ! c!2 "oition *it2 ! 2ed)e !et t2!t i

c%oe%. re%!ted +ut dierent $ro t2e c!2 !et(ii( !turit. or dur!tion i!tc2 6 Hed)in) ! "ort$o%io o$ ort)!)e *it2 1'-.e!r

Tre!ur. note !. ee re!on!+%e i$ t2e eectie dur!tion o$ t2e ort)!)e!tc2e t2e dur!tion o$ t2e t-note( Ho*eer, i$ r!te $!%% !nd t2e ort)!)e "re"!.$!ter/reu%tin) in ! 2orter dur!tion7 t2e "oition *i%% not +e !tc2ed(

iii( Li0uidit. Mi!tc2 - 2ed)in! %i0uid !et *it2 ore %i0uid *i%% reu%t in )re!ter +!iri#( Dierence in %i0uidit. !. reu%t in %!r)e )!" +et*een t2e "rice o$ t2e t*o!et( 6 ! "rice c2!n)e occur !t dierent r!te( B!i ri# i inere%. "ro"ortion!%to t2e %i0uidit. o$ t2e 2ed)e !et(

i( Credit ri# i!tc2 - *idenin) or n!rro*in) o$ credit "re!d contitute !not2er$or o$ +!i ri# *2en t2e credit ri# o$ t2e 2ed)ed !et i dierent /or +ecoedierent7 $ro t2e credit ri# o$ t2e 2ed)e intruent(



11( O)ti(al He.2e Ratio - incor"or!te t2e i"er$ect re%!tion2i" +et*een t2e "ot !nd $uture"oition +. c!%cu%!tin) t2e de)ree o$ corre%!tion +et*een t2e r!te( Hed)e r!tion t2!t iniiet2e !ri!nce o$ t2e co+ined 2ed)e "oition(

1&( Hed)e R!tio 6 t2e ie o$ t2e $uture "oition re%!tie to t2e "ot "oition(

a+ OHR= ρS , F

σ S

σ F

+( T2e Bet! o$ "ot "rice *it2 re"ect to $uture contr!ct "rice ince:

i+ ρ=

Co vS , F

σ S σ F ∧Co v S , F

σ S σ F

× σ S

σ F

= βS , F

1<( Eectiene o$ t2e Hed)e - e!ure t2e !ri!nce t2! i reduced +. i"%eentin) t2e o"ti!

2ed)e( T2i eectiene c!n +e e!%u!ted *it2 ! coe8cient o$ Deterin!tion / R2¿ ter *2ere

t2e inde"endent !ri!+%e i t2e c2!n)e in $uture "rice !nd t2e de"endent !ri!+%e i t2e c2!n)ein "ot "rice(

!( Rec!%% R2

e!ure t2e )oodne-o$-;t o$ ! re)reion(

+( Bet! o$ "ot "rice *(r(t to $uture "rice i e0u!% to t2e 2ed)e r!tion /HR7 *2ic2 i !%o t2e%o"e o$ t2e re)reion(

c( R2

e!ure $or t2i i"%e %ine!r re)reion i t2e 0u!re o$ t2e corre%!tion coe8cient /

ρ2 ¿ +et*een "ot !nd $uture "rice(

1>( Co"ute O"ti!% Nu+er o$ Future Contr!ct 6!( Coon 2ed)in) !""%ic!tion i t2e 2ed)in) o$ e0uit. "ort$o%io uin) $uture contr!ct on

toc# indice( T2e nu+er o$ $uture contr!ct re0uired to co"%ete%. 2ed)e !n e0uit."oition i deterined *it2 t2e $o%%o*in) $oru%!:

#+ No+ of contracts $

β portfolio×( portfolio value

valueof futures contract )= β portfolio×( portfoliovalue

futures price×contractmultiplier )

c( E()( P&'i% )ro*t2 "ort$o%io, +et! 1(> re%!tie to SY9?''( SY9 Future tr!din) !t 1,1?'( And

u%ti"%ier i &?'( =o!% to 2ed)e e3"oure to !r#et ri# oer t2e ne3t $e* ont2(i( @ou !re %on) SY9?'', o .ou 2ou%d conduct ! 2ort 2ed)e, !nd e%% $uture contr!ct(

ii( No( o$ contr!ct 1.4×( 20,000,000

1,150×250 )=97contracts

1?( T!i%in) t2e Hed)e -!( A 2ed)er !. !ctu!%%. oer-2ed)e t2e under%.in) e3"oure i$ d!i%. ett%eent i not "ro"er%.

!ccounted $or( To correct $or t2e "oi+i%it. o$ oer-2ed)in), ! 2ed)er c!n i"%eent !tr!i%in) t2e 2ed)e tr!te).(

+( ETRA STE9 needed to c!rr. out t2i tr!te). i to u%ti"%. t2e 2ed)e r!tion +. t2e d!i%."ot "rice to $uture "rice r!tio(

c( IN 9RACTICE, NOT e8cient to !d4ut t2e 2ed)e $or eer. d!i%. c2!n)e in t2e "ot-to-$uturer!tio(

d( E()( no* SY9 S"ot 9rice i 1,'? !nd Future i 1,1,'( T2e nu+er o$ contr!ct needed!$ter !#in) ! t!i%in) 2ed)e !d4utent i HRV/S"ot S9?''Fut S9?''7

i( 97×( 1,1601095 )=92contracts

ii( Se%% t2ree contr!ct (1( Ho* to !d4ut 9ort$o%io Bet! 6

!( Hed)in) !n e3itin) e0uit. "ort$o%io i !n !tte"t to reduce t2e .te!tic ri# o$ t2e"ort$o%io(

+( I$ CA9M +et! i ued t2en 2ed)in) +oi% do*n to reduction o$ "ort$o%io +et!(c( BV +e t!r)et +et! !nd B +e +et! "ort$o%io +e$ore tr!te).(d( To co"uter t2e nu+er o$ $uture , *e ue:



i( No+ of Contracts ( β¿− β )( P ! )

ii( Ne)!tie !%ue indic!te e%%in) /decre!in) .teic ri#7( 9oitie !%ue indic!te+u.in) /incre!in) .teic ri#7(

e( H!e 1''i% dieri;ed "ort$o%io( B 1(& ( <ont2 SY9?'' Inde3 i 1,''( Co"%ete%. 2ed)e.teic ri#(

i( (0−1.2 )( 100,000,0001,080×250 )=−444.44 ne)!tie i)n indic!te *e need to e%% >>>

contr!ct(1( Ro%%in) ! Hed)e For*!rd - J2en 2ed)in) 2orion i %on) re%!tie to t2e !turit. o$ t2e $uture

ued in t2e 2ed)in) tr!te)., 2ed)er 2!e to +e ro%%ed $or*!rd ! t2e $uture contr!ct in t2e2ed)e coe to !turit. or e3"ir!tion(

!( A !turit. d!te !""ro!c2e, t2e 2ed)er ut c%oe out t2e e3itin) "oition !nd re"%!ce it*it2 !not2er contr!ct *it2 ! %!ter !turit.( 6 c!%%ed ro%%in) t2e 2ed)e $or*!rd(

+( Not on%. e3"oed to +!i ri# o$ ori)in!% 2ed)e, t2e. !re !%o e3"oed to t2e +!i ri# o$ !ne* "otion e!c2 tie t2e 2ed)e i ro%%ed $or*!rd( 6c!%%ed ro%%oer ri#(

CH >VV Interet R!te - Hu%% O"tion Future !nd Ot2er Deri!tie Ed(1( Tre!ur. R!te 6 r!te t2!t corre"ond to )oernent +orro*in) in it o*n currenc.( T2e. !re

conidered ri#-$ree r!te(

&( LIBOR 6 London Inter+!n# Oered R!te 6 t2e r!te !t *2ic2 %!r)e intern!tion!% +!n# $und t2eir!ctiitie( Soe credit ri# e3it *it2 LIBOR(<( Re"o R!te 6 re" or re"ut2!e !)reeent r!te i t2e i"%ied r!te on ! re"urc2!e !)reeent( In

!)reeent, one "!rt. !)ree to e%% ! ecurit. to !not2er *it2 !n undert!ndin) t2!t t2e e%%in)"!rt. *i%% +u. it +!c# %!ter !t ! "eci;ed 2i)2er "rice( /interet r!te i"%ied +. t2e "rice dierenti!%i t2e re"o r!te7 6 e()( oerni)2t re"urc2!e !)reeent(

!( Lon)er ter re"o c!%%ed Gter re"o+( De"edin) on "!rtie !nd tructure , t2ere i oe credit ri# ino%ed(

>( Reere F%o!ter /inere F%o!ter7 6 De+t intruent *2oe cou"on "!.ent uctu!te inere%.*it2 t2e re$erenced r!te /e()( LIBOR7 ( e() inere o!ter cou"on r!te *i%% incre!e *2en LIBORdecre!e !nd ice er!(

?( Fed Fund R!te 6( J2. do tr!der in deri!tie not ue TBi%% or T-Bond -

!( R!te too %o* to +e ri# $ree /ince "!rt o$ t2e de!nd $or t2ee +ond coe $ro $u%;%%in)re)u%!tor. re0uireent, *2ic2 drie "rice u" !nd r!te do*n7 ( Inte!d t2e. ue LIBORr!te $or 2ort ter ri# $ree r!te, LIBOR +etter re"reent tr!der o""ortunit. cot o$c!"it!%(

( Co"oundin) - Deri!tie "ricin) ue continuou tie !t2 !nd !ue return !recontinuou%. coounded(

!( T2eoretic!% contruct on%.( 6conertin) Continuou to Dicrete i tr!i)2t$or*!rd(

+( Dicrete Co"oundin) - F " 1= ! (1+ R

# )m× n

c( Continuou Co"oundin) - F " 1= ! e

R C n

d( Settin) t2e e0u!% !nd o%in) $or Rc ! (1+

R

# )m× n

= ! e R

C n

i+ m× n ln(1+ R

m )= Rc n , Rc=m ×ln(1+ R

m )

ii+

e

m×(¿¿ Rc

m −1)

R=¿



e( A incre!e R− Rc $0

( S"ot R!te 6 r!te t2!t corre"ond to ero-cou"on +ond .ie%d( T2e. !re t2e !""ro"ri!te dicountr!te $or ! in)%e c!2o* !t ! "!rticu%!r $uture tie or !turit.(

!( S"ot r!te !re !%o o$ten c!%%ed ero r!te(+( Mot interet r!te t2!t !re o+ered in t2e !r#et, uc2 ! cou"on +ond .ie%d, !re NOT

"ot r!te(( Cou"on Bond 9rice 6 !n intruent t2!t !#e ! erie o$ c!2 o*(1'( Zero-Cou"on +ond 6 e!c2 c!2 o* conidred in io%!tion( A cou"on +ond i ! erie o$ ero cou"on

+ond, !nd it !%ue, !uin) continuou co"oundin) !nd ei!nnu!% cou"on i:

a+

F" ×e¿

¿ (¿ % &

m × & ¿)

c

m×∑

'=1

&

e

− % '

m× '

¿

(=¿

+( c !nnu!% cou"onc( N nu+er o$ ei!nnu!% "!.ent "eriodd( [4 +ond e0ui!%ent "ot r!te t2!t corre"ond to 4 "eriod /4&7 on ! continuou%.

co"ounded +!i(e( F 6 $!ce !%ue o$ t2e +ond($( !%ue o$ t2e +ond i t2e "reent !%ue o$ t2e c!2 o*, *2ere e!c2 c!2 o* i dicounted

!t t2e !""ro"ri!te "ot r!te $or it !turit.()( - No o$ co"oundin) "eriod

11( Bond @ie%d - i t2e in)%e dicount r!te t2!t e0u!te t2e "reent !%ue o$ ! +ond to it !r#et "rice(Oer!%% R!te o$ return on t2e +ond(

1&( 9!r @ie%d 6 r!te !t *2ic2 !#e t2e "rice o$ ! +ond e0u!% to it "!r !%ue( J2en +ond i tr!din) !t"!r, te cou"on *i%% +e e0u!% to t2e +ond .ie%d(

1<( Boottr!""in) S"ot R!te 6!( T2eoretic!% "ot cure deried +. inter"retin) e!c2 Tre!ur. +ond/T-+ond7 ! ! "!c#!)e o$

ero-cou"on +ond( Uin) t2e "rice $or e!c2 +ond, t2e "ot cure i co"uted uin) t2e

+oottr!""in) et2odo%o).(+( Find ont2, t2en ue ont2 in 1 .r ei-!nnu!% cou"on +ond, to +oottr!" 1 .e!r "ot/ero-r!te7

1>( For*!rd R!te 6 interet r!te i"%ied +. t2e "ot cure $or ! "eci;ed $uture "eriod(

a+ e R2×

T 2m=e

R 1T 1m × e

R F)* (T 2−T 1)m

#+ R F)*= R

2T

2− R

1T

1

T 2−T 1=

R2T

2+ R

2T

1− R

2T

1− R

1T

1

T 2−T 1= R

2+( R2

− R1)

T 1

T 2−T 1

c+ S2!"e o$ t2e "ot cure !nd $or*!rd cure c!n +e !de(i+ Second ter !%*!. "oitie $or u"*!rd %o"in) cure( J2en t2ere i !n u"*!rd

%o"in) cure , corre"ondin) $*d cure i u"*!rd %o"in) !nd !+oe "ot cure(

ii+ J2en R1\R&, cure i do*n*!rd %o"in), $or*!rd r!te cure i do*n*!rd %o"in)!nd +e%o* t2e "ot cure(

1?( For*!rd R!te A)reeent 6 i ! $or*!rd contr!ct o+%i)!tin) t*o "!rtie to !)ree t2!t ! cert!ininteret *i%% !""%. to ! "rinci"!% !ount durin) ! "eci;ed $uture tie(

!( For*!rd r!te "%!. ! cruci!% ro%e in t2e !%u!tion o$ FRA(+(

1( Dur!tion o$ ! Bond 6 i t2e !er!)e tie unti% t2e c!2 o* on t2e +ond !re receied(!( For Zero-cou"on +ond 6 t2i i i"%. Tie to M!turit.(+( For cou"on +ond, it dur!tion *i%% +e nece!ri%. t2!n it !turit.(c( Jei)2t on tie in .e!r unti% e!c2 c!2 o* i to +e receied !re t2e "ro"ortion o$ t2e

+ond !%ue re"reented +. e!c2 ot2e cou"on "!.ent !nd t2e !turit. "!.ent(d( DURATION FORMULA $or Continuou%. Co"ounded Return !re



i( +uration=∑i=1

n

t i ×(c ' e− t i

( )ii( t =time∈ ears

iii( . continuou%. co"ounded .ie%d /dicount r!te7 +!ed on t2e Bond 9rice B(1( QC2!n)e in Bond 9rice

!( Ue$u%ne o$ Dur!tion e!ure %ie in t2e $!ct t2!t t2e !""ro3i!te c2!n)e in t2e +ond

"rice, B, $or ! "!r!%%et 2i$t in t2e .ie%d cure o$ - i:

#+ -(

( =−*uration× -

c+ Note: C2!n)e in .ie%d i o$ten e3"reed ! ! +!i "oint c2!n)e.+ 1 +!i "oint i '('1Q '('''1e+ 1'' +!i "oint c2!n)e i e0u!% to '('1 1Q c2!n)e in .ie%d(f+ @ <(?Q . c2!n)e 1? +!i "oint u"( '('<? ] '(''1? '(<1 <(1Q2+ OrX <(?Q ] (1?Q <(1Q

1( Modi;ed Dur!tion - i ued *2en t2e .ie%d )ien i oet2in) ot2er t2!n ! continuou%.co"ounded r!te( J2en .ie%d i e3"reed ! ! ei!nnu!%%. co"ounded r!te, $or e3!"%e(

!( Mo.i?e. Duration

*uration

1+ m

, *2ere i t2e nu+er o$ co"oundin) "eriod "er

.e!r(+( A )oe to in;nit. , t*o e!ure +ecoe e0u!%(

1( Dollar Duration 6 i"%. odi;ed dur!tion u%ti"%ied +. t2e 9rice o$ t2e Bond(&'( Liit!tion o$ Dur!tion 6

!( Dur!tion i )ood !""ro3i!tion $or "rice c2!n)e $or !n o"tion $ree +ond, +ut it on%. )ood$or re%!tie%. !%% c2!n)e in interet r!te( /i(e( deri!tie%o"e int!nt!neou c2!n)e,increent!% c2!n)e7

+( A r!te c2!n)e )ro* %!r)er, cur!ture o$ t2e +ond "rice.ie%d re%!tion2i" +ecoe orei"ort!nt, /ore cone37 !nd Line!r eti!te o$ "rice c2!n)e, uc2 ! dur!tion, *i%%cont!in error(

c( In $!ct, re%!tion2i" i not %ine!r +ut cone3, !nd cone3it. 2o* t2!t t2e dierence+et*een !ctu!% !nd eti!ted "rice *iden ! t2e .ie%d *in) )ro*(

d( Jidenin) Error in eti!ted "rice i due to t2e cur!ture o$ t2e !ctu!% "rice "!t2( 6 #no*n !DE=REE o$ CONEIT@(

&1( Cone3it. - !ccount $or !ount o$ error in t2e eti!ted "rice c2!n)e +!ed on dur!tion( Ot2er*ord, it "ic# u" *2ere dur!tion %e$t o !nd conert t2e tr!i)2t /eti!ted "rice7 %ine into !cured %ine t2!t ore c%oe%. re"reent t2e cone3it. /!ctu!% "rice7 %ine(

&&( Cone3it. Eect 6 $oru%! needed to o+t!in !n eti!te o$ t2e "ercent!)e c2!n)e in t2e +ond "ricedue to cone3it.(

a+ Conve>it E&ect $1

2×convexit × -

2

+( Cone3it. eect i t."ic!%%. 0uite !%%( Rec!%% cone3it. i i"%. correctin) t2e error, o

.ou *i%% e3"ect cone3it. to 2!e ! uc2 !%%er eect t2!t dur!tion(c( For o"tion-$ree +ond , cone3it. eect i !%*!. "oitie no !tter *2ic2 *!. r!te oe(

For o"tion-Free +ond, cone3it. i !%*!. !dded to dur!tion eect to odi$. "rice o%!ti%it.error e+edded in dur!tion(

.+ This .ecreases the .ro) in )rice 8.ue to an increase in iel.s9 an. a..s to the risein )rice8.ue to a fall in iel.s9

Percenta.e(on* pricec/an.e( - (

( )=*urationeffect +convexit effect

&<( Uin) Cone3it. to I"roe 9rice C2!n)e Eti!te -



!( Eti!te t2e c2!n)e o$ 1'' +!i "oint incre!e !nd decre!e in 1'-.e!r, ?Q,o"tion-$ree+ond current%. tr!din) !t "!r, uin) dur!tion-coneit. !""ro!c2( Bond dur!tion i !ndcone3it. o$ '

+( -(

( =−7× .01+

1

290× .01

2=−.0655=−6.55

c(

.01

−¿¿

-(( =−7×−.01+

1

290× ¿

d(&>( T2eorie o$ Ter Structure -

!( E3"ect!tion t2eor. u))et t2!t $or*!rd r!te corre"ond to e3"ected $uture "ot r!te(i( T2!t i, $or*!rd r!te !re )ood "redictor o$ e3"ected $uture "ot r!te(ii( In re!%it., e3"ect!tion t2eor. $!i% to e3"%!in !%% $uture "ot r!te e3"ect!tion(

+( M!r#et Se)ent!tion T2eor.i( Bond !r#et i e)ented into dierent !turit. ector !nd t2!t u""%. !nd

de!nd $or +ond in e!c2 !turit. r!n)e dict!te r!te in t2!t !turit. r!n)e(c( Li0uidit. 9re$erence t2eor.

i( Mot de"oitor "re$er 2ort-ter %i0uid de"oit( In order to co!3 t2e to %end

%on)er ter, t2e interedi!r. *i%% r!ie %on)er-ter r!te +. !ddin) ! GLi0uidit."reiu

CH ? Deterin!tion o$ For*!rd !nd Future 9rice - Hu%% O"tion Future !ndOt2er Deri!tie Ed(

1( Inetent Aet - !n !et t2!t i 2e%d $or t2e "ur"oe o$ inetin) !nd )ro*t2 e()( toc# !nd+ond(

&( Conu"tion Aet - !n !et 2e%d $or t2e "ur"oe o$ conu"tion( 6 e()( cooditie , uc2 !)ood, et!%, ener). , )!X

<( S2ort S!%e - !re order to e%% ecuritie t2!t e%%er doe not o*n( A%o #no*n ! 2ortin) !nd i"oi+%e *it2 Goe inetent !et(

!( For ! S2ort !%e, t2e 2ort e%%eri( /17 iu%!teneou%. +orro* !nd e%% ecuritie t2rou)2 ! +ro#erii( /&7 ut return t2e ecuritie !t t2e re0uet o$ t2e %ender or *2en t2e 2ort !%e i

c%oed out , !ndiii( /<7 ut #ee" ! "ortion o$ t2e "roceed o$ t2e 2ort !%e on de"oit *it2 t2e +ro#er(

>( S2ort S0ueee - J2en t2e 2ort e%%er !. +e $orced to c%oe 2i "oition i$ t2e +ro#er run out o$ecuritie to +orro*( T2i i #no*n ! ! 2ort 0ueee !nd 2orter *i%% need to c%oe 2i "oitioniedi!te%.(

?( Ru%e !""%. to 2ort e%%in) 6!( S2ort e%%er ut "!. !%% diidend due to t2e %ender o$ t2e ecurit.+( S2ort e%%er ut de"oit co%%!ter!% to )u!r!ntee t2e eentu!% re"urc2!e o$ t2e ecurit.(

( Net 69ro;t $ro S2ort S!%e o$ Diidend 9!.in) Stoc# -!(

( Co"!re For*!rd !nd Future contr!ct -!( For*!rd !nd Future SIMILAR :

i( C!n +e eit2er de%ier!+%e or c!2 ett%eent contr!ct

ii( Are "riced to 2!e ero !%ue !t tie !n inetor enter into t2e contr!ct(+( For*!rd !nd Future DIFFER:

i( Future tr!ded on or)!nied e3c2!n)e( For*!rd !re "ri!te contr!ct !nd do nottr!de on e3c2!n)e(

ii( Future 2i)2%. t!nd!rdied( For*!rd !re cutoied contr!ct !ti$.in) need o$"!rtie ino%ed(

iii( Sin)%e c%e!rin)2oue i counter"!rt. $or !%% $uture contr!ct( For*!rd !re contr!ct*it2 ori)in!tin) counter"!rt.

i( =oernent re)u%!te $uture !r#et( For*!rd contr!ct !re uu!%%. not re)u%!ted(( For*!rd 9rice Mode%

!( Au"tioni( No tr!n!ction cot or 2ort-!%e retriction(



ii( S!e T!3 r!te on !%% net "ro;tiii( Borro*in) !nd %endin) !t t2e ri#-$ree r!tei( Ar+itr!)e o""ortunitie !re e3"%oited ! t2e. !rie

+( For*!rd 9rice F 0=S0 erT

i( r 6 cot o$ +orro*in) $und to +. t2e under%.in) !et !nd c!rr.in) it $or*!rd to T(

ii( If if F 0>S0erT

, !r+itr!)e c!n "ro;t +. e%%in) For*!rd 2ort !nd +u.in) t2e !et

*it2 +orro*ed $und(

iii( If F 0<S0erT

, !r+itr!)e c!n "ro;t e%%in) So 2ort, %endin) out e3ce "roceed !nd

+u.in) F'(( Re%!tion2i" +et*een For*!rd !nd S"ot 9rice -

!( T2e $or*!rd "rice i t2e e3"ected re!%ied "rice !t tie , T, !t ! )ro*t2 r!te /cot o$ c!rr.7 or(

+( I$ one i ore e3"enie t2!t t2e ot2er +!ed on e3"ect!tion !nd *2!t .ou c!n e!rn2o%din) t2e !et, .ou 2ort/e%%7 t2e ore e3"enie, !nd nu. t2e c2e!" one( At !turit.

1'( For*!rd "rice uin) cot-o$-c!rr. ode% -!( Since t2e o*ner o$ t2e $or*!rd contr!ct doe not receie !n. o$ t2e c!2 o* $ro t2e

under%.in) !et +et*een contr!ct ori)in!tion !nd de%ier., t2e "reent !%ue o$ t2eec!2%o* ut +e deducted $ro t2e "ot "rice *2en c!%cu%!tin) t2e $or*!rd "rice(

+( T2i i ot e!i%. een *2en t2e under%.in) !et !#e "eriodic "!.ent( I t2en

re"reent t2e "reent !%ue o$ t2e c!2o* oer T .e!r(c+ F 0=(S0− 0 ) erT

11( Eect o$ #no*n Diidend to For*!rd 9rice -!( Since diidend c!n +e re"reented ! ! "ercent!)e !nd !ue it i "!id continuou%.(

Lettin) 0 re"reent t2e continuou%. co"ounded diidend .ie%d "!id +. t2e under%.in)!et e3"reed on ! "er !nnu +!i( T2e $or*!rd "rice e0u!tion +ecoe:

#+ F 0=S

0e

( r−1 )T

1&( !%ue o$ ! For*!rd Contr!ct -!( @ou "rice ! $or*!rd contr!ct o t2!t it initi!% !%ue i ero( t2ere$ore,

+( f =

( F

0−S

0e

rT

)=0

f , value of a for@ar. contract(c( A$ter it ince"tion( T2e contr!ct c!n 2!e ! "oitie or ne)!tie !%ue on%. !$ter contr!ct i

entered into (

d( I$ *e denoted o+%i)!ted de%ier. "rice ! K , t2en t2e !%ue o$ ! lon2 contr!ct *it2 no

c!2 o* i :

e( S0− K erT

! t2e current "rice oer t2e de%ier. "rice(

$( S0− 0 − K erT

*it2 #no*n c!2 o*

)( S0e−1T − K e

rT

*it2 ! continuou diidend .ie%d(

1<( Currenc. Future : C!%cu%!te Forei)n E3c2!n)e r!te uin) Interet 9!rit. re%!tion2i"!( Interet R!te "!rit. t!te t2!t t2e $or*!rd e3c2!n)e r!te, F, /e!ured in doetic "er unit

$orei)n currenc.7, ut +e re%!ted to t2e "ot e3c2!n)e r!te, S, !nd to t2e interet r!te

dierenti!% +et*een t2e doetic !nd Forei)n Currenc. + r−rf

+( F 0=S

0e

( r−r f )T

T2i i ! no !r+itr!)e re%!tion2i" ! *e%%(

c( S!e ! uin) ! diidend .ie%d +ec!ue o$ t2e ot2er "eron e!rnin) return ̂ Forei)n ri#$ree r!te in $orei)n currenc.(

d( I$ S[o i doetic currenc. t2en .ou ue r ! doetic !nd r[$ ! $orei)n( Doetic ie( S[o doetic currenc.$orei)n currenc.(

1>( For*!rd ( Future 9rice -



!( J2en interet r!te !re #no*n oer t2e %i$e o$ t2e contr!ct, it c!n +e 2o*n t2!t $or*!rd!nd $uture !re t2e !e(

+( A""ro3( !e *2en T i !%%(c( I$ under%.in) i "oitie%. corre%!ted *it2 interet r!te, R 6 Future ore !%u!+%e(

i( J2en interet r!te incre!e, $uture i )re!ter t2!n $or*!rd( /ore !%u!+%e7"roceed )ro* !t ! +etter r!te( J2en interet r!te decre!e-cot o$ +orro*in) tore;n!nce !r)in "!.ent i c2e!"er(

d( I$ under%.in) i ne)!tie%. corre%!ted 6 For*!rd ore !%u!+%e(i( I$ S[' incre!e, re!%ie ! $uture )!in, +ut "roceed reineted !t ! !%%er r!te(ii( I$ S[' decre!e, interet incre!e, iedi!te $uture %o !nd %o i re;n!nced !t

! 2i)2er r!te(iii( For*!rd ore !%u!+%e 2ere(

1?( Coodit. Future -!( J2en under%.in) i ! conu"tion !et /coodit.7, t2e "ricin) re%!tion2i" dee%o"ed i

not !de0u!te( T2ere !re tor!)e cot, c!rr.in) cot, conenience .ie%d, etc t2!t need to+e conidered(

+(2not /avin.

3 − present value of stora.ecosts4u−carrin. costs −convenience iel* (¿/ol*asset )

c( Incoe -

S

(¿¿ 0+3 )erT −stora.ecostis accounte* for∈for)ar* price

F 0=¿

e3"reed ! ! #no*n

c!2o*(

d( Stor!)e Cot ! continuou .ie%d 6 F 0=S0e( r+u ) T

! ! continuou .ie%d

e( I$ o*ner doe not *!nt to e%%, t2ere i ! +ene;t to o*nin) conu!+%e !et co"!red to$uture contr!ct, t2en e0u!tion !+oe +ecoe:

i+

S

(¿¿ 0+3 )erT

F 0 5¿

ii+ F 05 S

0e

( r+u )T

$( Conenience @ie%d 6 i$ *e introduce ! conenience .ie%d , ., to +!%!nce E0u!tion !nd ,*e 2!e:

i( F 0e

t =S0e

(r+u) T

to +!%!nce t2e eect !nd t2en:

ii( F 0=S

0e

( r+u− ) T

! conenience .ie%d *2ic2 i i"%. t2e .ie%d re0uired to "roduce

!n e0u!%it. !nd i t2u ! e!ure o$ t2e +ene;t o$ o*nin) "ot, or "2.ic!%,conu"tion cooditie(

1( De%ier. O"tion in Future !r#et /2o* do t2e. inuence $uture "rice7!( Soe $uture )r!nt de%ier. o"tion to t2e 2ort 6 o"tion ! to *2ere, *2en !nd *2!t to

de%ier- *2ic2 i t2en !d4uted +. t2e e3c2!n)ed or !d4uted +. ti"u%!tion o$ contr!ct(+( Soe Tre!ur. Bond )ie t2e 2ort e%%er o"tion t2!t !re !cce"t!+%e to de%ier(

c( I$ cot o$ c!rr. \ conenience .ie%d, it +ene;ci!% to de%ier contr!ct e!r%.( Scen!rio u))ett2!t $uture "rice *i%% incre!e oer tie +ec!ue t2e e%%er/2orter7 2! !n incentie tode%ier. e!r%.(

d( J2en cot o$ c!rr. i %e _ conenience .ie%d, t2e 2ort "oition *i%% de%!. de%ier. incet2e $uture "rice i e3"ected to $!%% oer tie( /co"!re t2i to ! 2i)2er r!te in $orei)ne3c2!n)e c!e o$ e!rnin) /conenience7 on t2e ot2er ide *2en .ou dont 2!e t2e !et(

1( Re%!tion2i" +et*een Current Future 9rice !nd E3"ected Future S"ot 9rice!( Cot o$ c!rr. ode% i *ide%. ued(

+( A%o F 0= 6 (ST )−expectationst/eor

i( T2i t2eor. !ct to #ee" t2e $uture "rice in %ine *it2 e3"ected "ot "rice 6 uin)onte c!r%o iu%!tion or !rtin)!%e "ricin)(



ii( M!n. $!ctor !ect t2e dierence in "rice( A u))eted i$ t2ere *! no dierence int2e r!te o$ return, cot o$ c!rr., etc( t2ere *ou%d +e no incentie to tr!de/+u. or e%%7t2e "roduct /contr!ct7

1( Cot o$ C!rr. ( E3"ect!tion 6!( Ke.ne u))et ode% i !*ed +ec!ue it "roide no incentie $or "ecu%!tor to enter

!r#et /+ec!ue o$ 2o%din) !et !nd *!ntin) !et in $uture7 /$or "roducer or ditri+utoron%.7

+( Su))et t2!t t2ere need to +e !n e3"ect!tion o$ "ro;t )re!ter t2!n ri# $ree r!te

F 0< 6 (ST ) !nd ut continuou%. incre!e durin) t2e ter o$ t2e contr!ct( C!%%ed

NORMAL BACKJARDATIONc( Aet under%.in) contr!ct e32i+it "oitie .teic ri#(d( And t2e uer o$ t2e coodit. .ou !#` 6 "ecu%!tor ut +e enticed to t!#e on ri# o$

$uture "rice i$ t2e. *i%% enter ot2er ide o$ t2e contr!ct $ro t2e 2ed)er( T2ere$ore, F[' \E/S[T7

e( Ke.ne c!%%ed t2i e3"ect!tion ! cont!n)o(1( Nor!% +!c#*!rd!tion -

!( Re$er to *2ere t2e $uture "rice i +e%o* t2e "ot "rice( For t2i to occur t2ere ut +ei)ni;c!nt +ene;t to 2o%din) t2e !et( T2i i)2t occur i$ t2ere !re +ene;t to 2o%d t2e!et t2!t oet o""ortunit. cot o$ 2o%din) t2e !et /ri# $ree r!te7 !nd !ddition!% net2o%din) cot(

+( I$ no +ene;t to 2o%d !et uc2 ! diidend, cou"on, 2i)2er conenience .ie%d, cont!n)o*i%% occur +ec!ue t2e $uture "rice *i%% +e )re!ter t2!n t2e "ot "rice(

CH VV Interet R!te Future - Hu%% O"tion Future !nd Ot2er Deri!tie Ed(1( D!. count conention $or dierent M!r#et 6

!( Da count conventions "%!. ! ro%e *2en co"utin) t2e interet t2!t !ccrue on ! ;3edincoe ecurit.(

+( J2en ! +ond i "urc2!ed, t2e +u.er ut "!. !n. accrue. interest e!rned t2rou)2 tot2e ett%eent d!te(

+ Accrue. Interest $

¿ *as

¿ lastcoupon¿t/e settlement*ate ¿¿*as∈coupon perio*

!( US !r#et t2ree coon%. ued d!. count conention:i( US Treasur #on.s ue actual<actualii( T6'ills actual<*:; d!. countiii( US cor)orate !nd unici"!% +ond use *;<*:; - /<' d!.ont2 <' d!..r 7i( US (one (ar/et intruent /Tre!ur. +i%%7 ue !ctu!%<'

<( T-Bond 5uot!tion 6!( Bond !re 0uoted re%!tie to ! P1'' "!r !ount in do%%!r !nd <&nd( E()( ! ?-'? i+( ? ?<& or '?(1?&?c( 5uoted "rice /or c%e!n "rice7 not t2e !e ! t2e c!2 "rice(

d( cas/ price=1uote price+accrue* interest "rice t2!t t2e e%%er o$ t2e +ond ut +e "!id to

)ie u" o*ner2i"(

e(>( Clean an. Dirt )rices $or US Tre!ur. Bond 6a+ Cash )rice , Invoice )rice or .irt )rice#+ -uote. )rice , clean )rice+c+.+ -uote. )rice $ cash )rice , accrue. intereste+ Clean )rice $ .irt )rice , accrue. interest$( T-+ond current "rice !t 1'&-11 /1'& 11<&7 ( c!2 "rice i :

i( 1'&(<><? ]&(1>?( Conerion o$ Discount Rate to a )rice for US Treasur 'ill ,

!( T6'ills !nd ot2er one. !r#et intruent ue:i( A dicount $!ctor r!te +!i !nd

ii+ An actual<*:; .a count+



+( A T-+i%% *it2 P1'' $!ce !%ue *it2 n d!. to !turit. !nd ! c!2 "rice o$ @ i 0uoted !:

c( T-Bi%% dicount r!te 360

n (100−7 )

d( C!2 9rice , @ $ F " 100−rannual∗( n

360 ) $ FB , accrue. interest(

e( T2i i re$erred to ! t2e dicount r!te in !nnu!% ter( Ho*eer, t2i dicount r!te i not t2e!ctu!% r!te e!rned on t2e T-Bi%%(

$( E()( .ou 2!e ! 1'-d!. T-Bi%% *it2 dicount r!te, or 0uoted r!te o$ ;e/i(e( !nnu!%ied r!teo$ interet e!rned i ?Q o$ $!ce !%ue7( I$ $!ce!%ue i P1'', *2!t i t2e true r!te o$ interet!nd t2e c!2 "rice`

)( Interet 1''V('?V/1'<'7 P&(? $or ! 1'-d!. "eriod( True r!te i t2en &(?1'' &(?Q2( C!2 "rice F - t-Bi%% !nnu!%ied r!teV/n&'7

i( 1'' - ('?V/1'<'7 P(?( US Tre!ur. +ond $uture contr!ct conerion $!ctor -

!( In UD Tre!ur. Bond /T-Bond7 Future contr!ct, !n. )oernent +ond *it2 ore t2!n 1?.e!r to !turit. on t2e ;rt o$ t2e de%ier. ont2 /!nd not c!%%!+%e *it2in 1? .e!r7 ide%ier!+%e on t2e contr!ct(

+( T2i "roduce ! %!r)e u""%. o$ "otenti!% +ond t2!t !re de%ier!+%e on t2e contr!ct !ndreduce t2e %i#e%i2ood o$ !r#et !ni"u%!tion(

c( Since t2e de%ier!+%e +ond 2!e er. dierent !r#et !%ue, CBOT 2! cre!ted

Conversion Factors d( Conerion $!ctor 6 de;ne t2e )rice receive. # the short )osition o$ t2e contr!ct( /t2e

2ort "oition i de%ierin) t2e contr!ct to t2e%on)7e+ C!2 receied -uote. futures )rice CF % Accrue. interest

i( cas/ price=8FP×CF + !0 5F9 6 0uoted $uture "rice /ot recent ett%eent

"rice7

ii( CF −conversionfactor fort/e2o*n *elivere*

iii( Accrued interet ince t2e %!t cou"on d!te on t2e +ond de%iered($( Conerion $!ctor !re u""%ied +. CBOT on ! d!i%. +!i()( Conerion $!ctor c!%cu%!ted !: /dicounted "rice o$ +ond-!ccrued interet7$!ce !%ue

i( E()(

CF = P " 2on*− !0

F" 9P1>& AI& F 1'' , CF 1>'1''1(>

( C!%cu%!te cot o$ de%ierin) +ond into ! Tre!ur. +ond $uture contr!ct -!( C2e!"et to De%ier Bond

i( Conerion !ctor .te i not "er$ect !nd o$ten reu%t in one +ond t2!t i t2ec2e!"et /or ot "ro;t!+%e7 to de%ier( T2e "rocedure to deterine *2ic2 +ond it2e c2e!"et-to-de%ier +ond /CTD7 i ! $o%%o*:

ii( C!2 receied +. 2ort 8-F"CF9%AI iii( Cot to "urc2!e +ond /0uoted +ond "rice ] AI 7i( CTD +ond iniie t2e $o%%o*in)

1( min8uote* (on* Price−(8FP×CF ) T2i c!%cu%!te t2e cot o$ de%ierin)

t2e +ond(&( SEE )a2e 4: #oo/ III Sch@eser for i()ortant )ractice )ro#le(+

( I"!ct o$ %ee% !nd 2!"e o$ .ie%d cure on t2e c2e!"et-to-de%ier Tre!ur. +ond deciion!( J2en .ie%d\Q CTD +ond tend to +e %o*-cou"on, %on) !turit. +ond+( J2en .ie%d !re _ Q CTD +ond t2en to +e 2i)2-cou"on, 2ort !turit. +ondc( @ie%d cure i u"*!rd %o"in), CTD +ond tend to 2!e %on)er !turitied( @ie%d cure i do*n*!rd %o"in) CTD +ond tend to 2!e 2orter !turitie(e(



( C!%cu%!te t2eoretic!% $uture "rice $or Tre!ur. +ond $uture 6

1'( Fin!% Contr!ct 9rice on Eurodo%%!r Future contr!ct /US do%%!r de"oited outide US7!( E()( t2e <ont2 Eurodo%%!r $uture contr!ct tr!de on t2e C2ic!)o Merc!nti%e E3c2!n)e

/CME7 !nd i t2e ot "o"u%!r interet r!te $uture in t2e US(+( Contr!ct ett%e in c!2 !nd t2e iniu "rice c2!n)e i one Gtic# *2ic2 i 1 +!i "oint

'('1Q or '('''1 /11''t2 o$ ! "ercent7c(

11( Co"ute Eurodo%%!r $uture contr!ct cone3it. !d4utent -!( D!i%. !r#in) ot !r#et !"ect o$ t2e $uture contr!ct c!n reu%t in dierence +et*een

!ctu!% $or*!rd r!te !nd t2oe i"%ied +. $uture contr!ct(+( T2e dierence i reduced +. uin) t2e cone3it. !d4utent(c( In )ener!%, %on)-d!ted Eurodo%%!r $uture contr!ct reu%t in i"%ied $or*!rd r!te %!r)er t2!n

!ctu!% $or*!rd r!te(

i+ actual for)ar* rate=for)ar* rateimplie* 2 futures−1

2σ

2T 1T 2

ii( T 1=maturit onfuturesontract

iii( T 2=time¿maturitof t/erateun*erlin.t/econtract

i(

σ 2=annualst* *evof t/e c/an.e∈t/erateun*erlin.t/e futures contract ,∨90−*a L0(OR



1&( Eurodo%%!r $uture 6contr!ct t2!t ett%ed to /e%%Bu.7 US do%%!r de"oited in !n Oere! B!n# !t !r!te "eci;ed +. ! F 1'' 6 t2e r!te(

1<( Eurodo%%!r $uture to e3tend IBOR Zero cure!( For*!rd r!te i"%ied +. cone3it.-!d4uted Eurodo%%!r uture c!n +e ued to "rouce ! LIBOR

S"ot cure /!%o c!%%ed LIBOR ero Cure ince "ot r!te !re oetie re$erred to ! eror!te7

+( Rec!%%: Rf)*= R

2T

2− R

1T

1

T 2−T 1

c( So%in) $or R2,R

2= R f)* (T 2−T 1 )+ R1 T 1

T 2

d( =ien t2e ;rt Li+or "ot r!te R1 !nd t2e %en)t2 o$ e!c2 $or*!rd contr!3t "eriod , *e c!n

c!%cu%!te ne3t "ot r!te R[& ( T2e r!te i t2e )ener!ted LIBOR S"ot/Ero7 Cure(

1>( Dur!tion-B!ed Hed)in) -!( O+4ectie i to cre!te ! co+ined "oition t2!t doe not c2!n)e in !%ue *2en t2e .ie%d

c2!n)e +. ! !%% !ount(+( In ot2er *ord, ! "oition t2!t 2! ! dur!tion o$ ero need to+e "roduced(c( T2e co+ined "oition conit o$ our "ort$o%io *it2 ! HED=E HORIZON ALUE o$ 9 !nd !

$uture "oition *it2 ! contr!ct !%ue o$ F(

d( Denote t2e dur!tion o$ t2e "ort$o%io !t t2e 2ed)in) 2orion ! + P !nd t2e corre"ondin)

dur!tion o$ t2e $uture contr!ct ! + F ( Ue t2i not!tion, t2e dur!tion-+!ed 2ed)e r!tion

c!n +e e3"reed ! $o%%o*:

i( & =− P × + P

F × + F N no( o contr!ct to 2ed)e(

ii( Minu i)n u))et t2!t t2e $uture "oition i t2e o""oite o$ t2e ori)in!% "oition(iii( I$ t2e inetor i %on) t2e "ort$o%io, 2e ut 2ort N contr!ct to "roduce ! "oition

*it2 ero dur!tion(1?( Liit!tion o$ Dur!tion -

!( T2e "rice .ie%d re%!tion2i" o$ ! +ond i cone3, e!nin) it i non%ine!r in 2!"e(+( VVDur!tion e!ure !re %ine!r !""ro3i!tion o$ t2i re%!tion2i"(c( T2ere$ore, ! t2e c2!n)e in .ie%d incre!e, t2e dur!tion e!ure +ecoe "ro)reie%.

%e !ccur!te(d( Moreoer, dur!tion i"%ie t2!t !%% .ie%d !re "er$ect%. corre%!ted( Bot2 o$ t2ee !u"tion

"%!ce %iit!tion on t2e ue o$ dur!tion ! ! in)%e ri# e!ureent too%(

CH VV S*!" - Hu%% O"tion Future !nd Ot2er Deri!tie Ed(1( 9%!in !ni%%! *!" 6 A *!" o$ "!.ent /interet "t7 *2ere Co"!n. !)ree to "!. Co"!n. @

! "eriodic ;3ed r!te on ! notion!% 9rinci"!% oer t2e tenor o$ t2e *!"( In return Co"!n. @ !)reeto "!. Co"!n. ! "eriodic o!tin) r!te on t2e !e notion!% "rinci"!%(

!( Bot2 "!.ent in !e currenc.+( Mot Interet r!te S*!" ue LIBORc( No need $or e3c2!n)e o$ "rinci"!% ince in !e currenc. 6 re!on it c!%%ed ! notion!%

"rinci"!%(

d( Fi3ed Le) c!2o* & × 1

m ×(r L0(OR−r¿)

e( F%o!tin) Le) C!2o* & × 1

m ×(r¿−r L0(OR)

&( S*!" to Tr!n$or ! Li!+i%it. !nd Aet!( S*!" c!n +e ued to tr!n$er !n. tie o$ "!.ent or recei"t( A .ou c2!n)e t2e t."e o$

recei"t"t, o doe .our e3"oure(<( Ho* !re *!" ii%!r to For*!rd

!( S*!" t."ic!%%. re0uire n "!.ent +. eit2er "!rt. or initi!tion



+( S*!" !re cuto intruentc( S*!" !re not tr!ded in !n. or)!nied econd!r. !r#etd( S*!" !re %!r)e%. unre)u%!tede( De$!u%t ri# i !n i"ort!nt !"ect o$ contr!ct$( Mot "!rtici"!nt in t2e *!" #t !re %!r)e intitution)( Indiidu!% !re r!re%. *!" !r#et "!rtici"!nt

>( Ro%e o$ ;n!nci!% interedi!rie!( S*!" interedi!rie +rin) to)et2er "!rtie *2o need o""oite ide o$ ! *!"(+( De!%er, %!r)e +!n#, +ro#er !ct ! "rinci"!% in tr!de 4ut ! $or*!rd contr!ct(c( M!n. c!e *!" "!rt. on oettin) ide o$ t2e *!" ince +ot2 *i%% tr!n!ct *it2 !n

interedi!r.(d( Interedi!rie t."ic!%%. e!rn ! "re!d o$ !+out <-> +!i "oint( ('<-('>Q "oint $or +rin)in)

t*o non;n!nci!% co"!nie to)et2er in ! *!" !)reeente( Fee $or interedi!r. ri# ino%ed( I$ one "!rt. de$!u%t, interedi!r. re"oni+%e $or !#i)

t2e ot2er "!rt. *2o%e?( Ro%e o$ con;r!tion in ! *!" tr!n!ction 6

!( Con;r!tion ! dr!$ted +. Intern!tion!% S*!" !nd Deri!tie Aoci!tion /ISDA7 out%inedet!i% o$ t2e *!" !)reeent(

+( Re"reent!tie o$ e!c2 "!rt. i)n t2e con;r!tion, enurin) t2e. !)ree *it2 !%% *!"det!i%/uc2 ! tenor !nd ;3edo!tin) r!te7 !nd t2e te" t!#en in t2e eent o$ ! de$!u%t(

( Co"!r!tie !d!nt!)e !r)uent $or e3itence o$ interet r!te *!"(!(+( @ c( Fi3ed 6 ?Q d( F%o!t 6 LIBOR ]1'+"e( Fi3ed 6 (?Q )( F%o!t 6 LIBOR ]1''+"2( Co"!n. @ 2! !+o%ute !d!nt!)e in +ot2 !r#et +ut ! co"!r!tie !d!nt!)e in ;3ed

!r#eti( Dierenti!% in ;3ed i 1(?Q or 1?'+!i "oint ( corre"ondin) dierenti!% ' +!i "oint

4( J2en ! co"!r!tie !d!nt!)e e3it , ! *!" !rr!n)eent *i%% reduce t2e cot o$ +ot2"!rtie(

#( Here, t2e net "otenti!% +orro*in) !in) +. enterin) into ! *!" i t2e dierence +et*eent2e dierence, or '+"(

%( B. enterin) into ! *!", net !in) 2!red i '+"((

( E3"%!in oe critici o$ co"!r!tie !d!nt!)e !r)uent o$ IRS*!"!( 9ro+%e i t2!t it !ue c!n +orro* !t Li+or ] 1Q oer t2e %i$e o$ t2e *!"(+( A%o i)nore t2e credit ri# t!#en on +. @ enterin) into t2e *!"( / ore %i!+%e to de$!u%t7c( I$ *ere to r!ie $und +. +orro*in) in !r#et direct%., no credit ri# i t!#en, o "er2!"

!in) i co"en!tion $or t2!t ri#(d( S!e critici e3it *2en !n interedi!r. i ino%ed(

( Ho* !re dicount r!te co"uted in Interet R!te S*!"!( S*!" i ! e0uence o$ c!2%o*, !nd !%ue i deterined +. dicountin) c!2o* +!c# to

"reent(+( T2e $or*!rd r!te i"%ied +. eit2er $or*!rd r!te !)reeent/FRA7 or t2e cone3it.-

!d4uted Eurodo%%!r $uture !re ued to "roduce ! LIBOR "ot cure( T2e *!" c!2 o* !ret2en dicounted uin) t2e corre"ondin) "ot r!te $ro t2i cure(

c( T2e *!" c!2%o* !re t2en dicounted uin) t2e corre"ondin) "ot r!te $ro t2i cure(

d( T2e connection +et*een R F = R2+( R2

− R1 )

T 1

T 2−T 1

( !%u!tion o$ !n Interet R!te S*!" *it2 Bond

!( " s)ap ( 9 )=( flt −( fix ¿le.

+( " s)ap (7 )=(fix−( flt float le.

c( " s)ap ( 9 )+" s)ap (7 )=0 B. dei)n o t*o "oition irror e!c2 ot2er !t t!rt o$ contr!ct(

1'( !%ue !n Interet R!te S*!" *it2 FRA!( FRA i i"%. !"eriodic "!.ent in ! *!"( A *!" c!n t2en +e re)!rded ! t2e u o$ FRA

( !%uin) t2e *!" t2en re%ie on uin) t2e e3"ected $or*!rd r!te to $orec!t t2e e3"ectednet c!2 o* !nd t2en dicount t2ee e3"ected c!2 o* !t t2e corre"ondin) "otr!te(- conitent *it2 $or*!rd r!te e3"ect!tion(



11( Mec2!nic o$ ! Currenc. S*!" 6!( E3c2!n)e +ot2 "rinci"!% !nd interet r!te "!.ent *it2 "!.ent in dierent currencie(+( T2e e3c2!n)e r!te ued in currenc. *!" i t2e "ot e3c2!n)e r!te(c( Sii%!r to interet *!" +ut "rinci"!% !re e3c2!n)ed !t t2e ince"tion o$ t2e currenc. *!"

o t2!t t2e. 2!e e0u!% !%ue uin) t2e "ot e3c2!n)e r!te(d( 9eriodic c!2 o* t2rou)2out *!" !re not netted ! t2e. !re in interet r!te *!"(

1&( Fi3ed-For-Fi3ed Currenc. S*!" 6!( T*o co"!nie A !nd B+( A 9!. Q =B9 to Co"!n. B !nd receie ?Q in USD $ro Co"!n. B(c( Ho*eer, ince "rinci"!% in ! currenc. *!" !re not t2e !e currenc., e3c2!n)ed !t

ince"tion(d( Co"!n. A "!. 1?i% USD B "!. =B9 1''i%e( A 2! eectie%. +orro* =B9 $ro B !nd o it ut "!. interet on t2!t %o!n($( Sii%!r%. B 2! +orro*ed USD $ro A()( At t2e end o$ t2e *!", t2e "rinci"!% !re re-e3c2!n)ed(2( A 2! %on) "oition in USD /ino*7 !nd 2ort "oition in =B9/outo*7

i( !−" S)ap (3S+ )=(3S+−(S0× (:(P )

4( S0=spotrate∈3S+ per :(P

#( (3S+= P" of 3S+ pmts (:(P= P" of :(P pmts

1<( !%ue o$ ! currenc. +!ed *!" on t*o iu%t!neou +ond "oition!( C!%cu%!te t2e !%ue o$ e!c2 cou"on c!2o* !t t2e t!ted e3c2!n)e r!te

+( E()( ∑i−1

T

(C F 3S+−S iC F :(P ) er t i+ ( F " 3S+−ST F " :(P )

1>( C!%cu%!te !%ue o$ currenc. *!" on ! e0uence o$ FRA!( In t2i c!e, 4ut ue t2e corre"ondin) $or*!rd e3c2 r!te $or t2e c!2o* "t(

1?( Ho* c!n ! currenc. *!" +e ued to tr!n$or !n !et or %i!+i%it. 6 c!%cu%!te it c!2 o*!( Su""oe ! co"!n.,A, 2! ! do%%!r-+!ed %i!+i%it.( B. enterin) into ! currenc. *!", t2e

%i!+i%it. 2! +ecoe ! "ound-+!ed %i!+i%it. !t t2e =B9 ;3ed /or o!tin)7 r!te(+( Co"!r!tie Ad!nt!)e

i( T."ic!%%. doetic +orro* 2! !n e!ier tie +orro*in) in 2i o*n currenc.( O$ten

reu%t in co"!r!tie !d!nt!)e t2!t c!n +e e3"%oited in ! currenc. *!"(ii( S!e !n!%o). o$ t2!t o$ interet r!te *!"

1( Credit ri# e3"oure in ! *!" "oition!( J2en one ide o$ ! *!" 2! ! "oitie !%ue, t2e ot2er ide 2! ! ne)!tie !%ue(

+( I$ " S)ap ( ! )>0∧" S)ap (( )<0. J2eneer A !%ue incre!e, B !%ue +ecoe ore

ne)!tie( T2i reu%t in credit ri# to A ince %i#e%i2ood o$ de$!u%t incre!e ! B 2! ! %!r)er!nd %!r)er "t to !#e to A(

c( 9otenti!% %oe in *!" !re uc2 !%%er t2!n t2e "otenti!% %oe $ro de$!u%t on de+t*it2 t2e !e "rinci"!%( !%ue o$ t2e S*!" i )ener!%%. uc2 !%%er t2!n t2e !%ue o$ t2ede+t(

1( Decri+e dierent t."e o$ *!", inc%udin) coodit., o%!ti%it., !nd e3otic *!"

!( E0uit. S*!" 6i( T2e return on ! toc#, ! "ort$o%io, or ! toc# inde3 i "!id e!c2 "eriod +. one "!rt. inreurn $or ! ;3ed-r!te or o!tin)-r!te "t(

ii( Return c!n +e t2e c!"it!% !""reci!tion or t2e tot!% return inc%udin) diidend on t2etoc#, "ort$o%io or inde3(

iii( E() to reduce e0uit. ri#, "ort$o%io !n!)er enter in! 1-.r 0u!rter%. "!. S9?'' inde3*!" !n !)ree to receie ! ;3ed r!te( Qincr in inde3 i netted !)!int ;3ed r!te( I$inde3 i ne)!tie, ;3ed r!te "!.er ut !%o "!. Qdec%ine in inde3( I$

i( E0uit. *!" c!n !%o +e o!tin) on +ot2 ide !nd !re not #no*n unti% t2e end o$t2e 0u!rter(

( For interet *!" +ot2 ;3ed !nd o!tin) !re #no*n !t t2e +e)innin) o$ t2e 0u!rter(+( S*!" on ! in)%e toc#

i( Moti!ted +. ! deire to "rotect t2e !%ue o$ ! "oition oer t2e "eriod o$ ! *!"(



ii( To "rotect %!r)e c!"it!% )!in in ! in)%e toc#, !nd to !oid ! !%e $or t!3 or contro%re!on, !n inetor cou%d enter into !n e0uit. *!" ! t2e e0uit. return "!.er !ndreceie ! ;3ed r!te in return(

iii( An. dec%ine in t2e toc# "rice *ou%d +e "!id to t2e inetor !t ett%eent d!te, "%ut2e ;3ed r!te "!.ent( I$ t2e toc# !""reci!te, t2e inetor ut "!. t2e!""reci!tion %e t2e ;3ed "!.ent(

c( S*!"tioni( I !n o"tion *2ic2 )ie t2e 2o%der t2e ri)2t to enter into !n interet r!te *!"(

S*!"tion c!n +e Aeric!n or E0uro"e!n St.%e o"tion( Li#e !n. o"tion, ! *!"tioni "urc2!ed $or ! "reiu t2!t de"end on t2e tri#e r!te "eci;ed on t2e *!"tion

d( Coodit. S*!"i( A)reeent to "!. ! ;3ed-r!te $or t2e u%ti-"eriod de%ier. o$ ! coodit. !nd

receie ! corre"ondin) o!tin) r!te +!ed on t2e !er!)e coodit. "ot r!te !tt2e tie o$ de%ier.(

ii( Mot coon ue i to !n!)e t2e cot o$ "urc2!in) ener). reource uc2 ! oi%!nd e%ectricit.(

e( o%!ti%it. S*!"i( T2e e3c2!n)in) o$ o%!ti%it. +!ed on t2e notion!% "rinci"!%( One ide o$ t2e *!"

"!. +!ed on t2e "re-"eci;ed o%!ti%it. *2i%e t2e ot2er ide "!. +!ed on2itoric!% o%!ti%it.(

$( Ot2er t."e o$ *!" 6 !ccru!% *!", c!nce%!+%e *!", inde3 !ortiin) *!", !ndcont!nt !turit. *!"(

i( S*!" !%o oetie ued $or e3otic tructure(

CH 1' Mec2!nic o$ O"tion M!r#et - Hu%% O"tion Future !nd Ot2er Deri!tie

Ed(1( O"tion t."e, "oition !ri!tion !nd t."ic!% under%.in) !et in o"tion

!( O"tion 2!e !.etric "!.o( Bu.er 2! t2e ri)2t to e3ercie t2e o"tion +ut noto+%i)!ted(

+( M!3 %o i t2e "reiu "!.ed to enter t2e contr!ct( 9otenti!% )!in i t2eoretic!%%. in;nite(c( T*o eenti!% t."e +. E3ercie Tie 6 Euro"e!n O"tion !nd Aeric!n O"tion(d( O"tion *riter o+%i)!ted to e%% /C!%% Jriter7 or +u. /9ut Jriter7 !t M!turit., T(e( O"tion +u.er 2o%d ri)2t to +u. /C!%% +u.er7 or e%% /9ut Bu.er7 !t M!turit. T or +e$ore T

/Aeric!n O"tion7

$( 9!.o C!%% O"tion Bu.er !3/',ST − K

7 69reiu( OrC T −C

0

)( 9!. o to C!%% O"tion Jriter 9reiu ] K −ST Or C 0−C T

2( 9!.o to 9ut O"tion Bu.er max (0, K −ST ) -9reiu Or PT − P0

i( 9!.o to 9ut O"tion Jriter 9reiu ] ST − K Or P0− PT

4(&( C!%% O"tion !nd 9ut O"tion "!.o /LON= !nd SHORT7

!( See !+oe(+( See "!)e 1?< o$ c2*eer note(

<( T."ic!% Under%.in) !et!( Stoc# O"tion 6 t."ic!%%. e3c2!n)e tr!ded, Aeric!n t.%e o"tion

!( Nor!%%. $or ! 1'' 2!re( E()( O"tion "rice i 9rice2!re ( i$ "rice <(' Contr!ct*ou%d cot P<'(

+( A$ter iu!nce, toc# o"ton contr!ct !re !d4uted $o toc# "%it +ut not c!2diidend(

c( 9ri!r. e3c2!n)e !re CBOE, N@SE Eurone3t, Intern!tion!% Securitie E3c2!n)e(+( Currenc. O"tion

!( Ri)2t to +u. or e%% !n !ount o$ $orei)n currenc. +ed on ! doetic currenc.!ount(

+( Mot%. tr!ded on OTC !r#et, re!inder on E3c2!n)e tr!ded !r#et(c( NASDA5 OM tr!de Euro"e!n t.%e o"tion $or eer!% currencied( Unit ie $or currenc. o"tion i uc2 %!r)er t2!n toc#o"tion( 6 e() 1 i%%ion unit

$or .en !nd 1',''' unit $or ot2er currencie(



c( Inde3 O"tion!( Uu!%. Euro"e!n St.%e o"tion !nd !re c!2 ett%ed(+( C!n +e $ound on OTC !nd e3c2!n)e tr!ded !r#et(c( E()( "!.o o$ c!%% i i t2e !ount inde3 %ee% !t e3"ir!tion e3ceed ! "eci;ed %ee%

u%ti"%ied +. t2e contr!ct u%ti"%ier /t."ic!%%. 1'' or &' $or !%%er inde3 o"tion7

d( Future O"tion!( Aeric!n-t.%e, e3c2!n)e tr!ded o"tion !re ot o$ten uti%ied $or $uture ocntr!ct+( T2e $uture o"tin e3"ir!tion d!te i et to ! d!te 2ort%. +e$ore t2e e3"ir!tion o$ t2e

$uture contr!ct(c( M!r#et !%ue o$ t2e under%.in) !et $or $uture o"tion i t2e !%ue o$ t2e under%.in)

$uture contr!ct( T2e "!.o $or c!%% o"tion i c!%cu%!ted ! t2e $uture "rice %e t2etri#e "rice, *2i%e t2e "!.o $or "ut o"tion i c!%cu%!ted ! t2e tri#e "rice %e t2e$uture "rice(

>( Stoc# O"tion contr!ct S"eci;c!tion!( E3"ir!tion 6

!( E3"ir!tion d!te dict!te 2o* o"tion i n!ed( E,), une 9ut O"tion on Inte% e!nt2!t O"tion e3"ire in une(

+( Actu!% d!. o$ e3"ir!tion i S!turd!. $o%%o*in) t2e t2ird Frid!. o$ t2e e3"ir!tion ont2c( Dierent e3"ir!tion c.c%e dict!te t2e !ctu!% e3"ir!tion ont2 o$ ! toc# o"tion oer

! )ien .e!r(d( Lon)-ter e0uit. !ntici"!tion ecuritie /LEA9S7 !re i"%. %on)-d!te o"tion *i2

e3"ir!tion )re!ter t2!n one .e!r( A%% Le!" 2!e !nu!r. e3"ir!tion(+( Stri#e 9rice

!( Dict!ted +. !%ue o$ t2e toc#(+( Lo* !%ue toc# 2!e !%%er tri#e increent t2!n 2i)2er-!%ue toc#(c( T."ic!%%. P&' !%ue tc# 2!e increent o$ &(?' tri#e( Stoc# "riced !t P?' 2!e

P? increent(c( Mone.ne, Tie !%ue, !nd Intrinic !%ue

!( O"tion c%! 6 re$er to !% o"tion o$ t2e !e t."e, *2et2er c!%% or "ut+( O"tion erie 6 re$er to !n o"tion c%! *it2 t2e !e e3"ir!tion( under%.in)c( Out o$ t2e one. 6

1( c!%% *2en tri#e i !+oe under%.in) !et "rice&( 9ut 6 *2en under%.in) !et i !+oe tri#e(

d( At t2e one. 6 under%.in) !et e0u!% tri#e

e( In t2e one. 61( C!%% - Under%.in) !et "rice i !+oe tri#e&( 9ut 6 Stri#e i !+oe Under%.in) !et "rice

$( Tie !%ue 6 dierence +et*een t2e o"tion "reiu !nd t2e intrinic !%ue(1( 9reiu intrinic !%ue] o"tion tie !%ue(&( A ! )ener!% ru%e, t2e ore tie t2!t re!in unti% e3"ir!tion, t2e )re!ter t2e

tie !%ue o$ t2e o"tion( T2i i +ec!ue inetor !re *i%%in) to "!. ! 2i)2er"reiu $or ore tie ince t2e contr!ct *i%% 2!e %on)er to +ecoe"ro;t!+%e due to ! $!or!+%e oe in t2e under%.in)(

)( Intrinic !%ue 6 !3iu o$ ero or t2e dierence +et*een t2e under%.in) !et !ndt2e tri#e "rice( C!%% !3/', S[T 6 K7 9ut !3/', K 6 S[T7

?( Nont!nd!rd 9roduct!( FLE O"tion 6 e3c2!n)e tr!ded o"tion on e0uit. indice !nd e0uitie t2!t !%%o*

oe !%ter!tion o$ t2e o"tion contr!ct "eci;c!tion1( Nont!nd!rd ter inc%ude !%ter!tion o$ t2e tri#e "rice, dierent e3"ir!tion

d!te, or Euro"e!n t.%e/r!t2er t2!n t!nd!rd Aeric!n St.%e7&( Dee%o"ed to co"ete *it2 nont!nd!rd "roduct t2!t tr!de OTC( Min ie

contr!ct i $or 1'' 2!re(+( ETF O"tion 6 ii%!r to inde3 o"tion, ETF o"tion !re Aeric!n t.%e o"tion !nd

uti%ie de%ier. o$ 2!re r!t2er t2!n c!2 !t ett%eent(c( Jee#%. O"tion - Jee#%. !re 2ort-ter o"tion t2!t !re cre!ted on ! T2urd!. !nd

2!e !n e3"ir!tion d!te on Frid!. o$ t2e ne3t *ee#(



d( Bin!r. O"tion 6 )ener!te dicontinuou "!.o "ro;%e +ec!ue t2e. "!. on%. one"rice( /P1''7 !t e3"ir!tion i$ t2e !et i !+oe t2e tri#e "rice( Bin!r. e!n one o$t*o t!te( /O"tion "!. P1'' or "!. not2in)7

e( CEBO 6 "eci;c $or o$ ! credit de$!u%t *!"/CDS7 ( T2e "!. o$ in ! CEBO itri))ered i$ t2e re$erence entit. uer ! 0u!%i$.in) credit eent( /e()( +!n#ru"tc.,ied de+t "!.ent, or de+t retructurin)7 "rior to t2e o"tion e3"ir!tion d!te/*2ic2 !%*!. occur in Dece+er7( O"tion "!.o, i$ !n., occur on t2e e3"ir!tiond!te( CEBO !re Euro"e!n o"tion t2!t !re c!2 ett%ed(

$( DOOM O"tion - T2ee "ut o"tion !re tructured to on%. +e in t2e one. in t2eeent o$ ! %!r)e-do*n*!rd "rice oeent in t2e under%.in) !et( Due to t2eirtructure, t2e tri#e "rice o$ t2ee o"tion i 0uite %o*( In ter o$ "rotection, DOOMo"tion !re ii%!r to credit de$!u%t *!"( Note t2!t t2i o"tion t."e i !%*!.tructure ! ! "ut o"tion(

+( Eect o$ diidend !nd toc# "%it!( In )ener!%, o"tion !re not !d4uted $or c!2 diidend- *2ic2 2! o"tion "ricin)

cone0uence( To +e incor"or!ted into !%u!tion ode%+( O"tion !re !d4uted $or toc# "%it( For e3!"%e, i$ toc2 ! ! &-$or-1 toc# "%it(

T2en t2e tri#e "rice *i%% +e reduced +. one-2!%$ !nd t2e nu+er o$ 2!re under%.in)t2e !et dou+%e(

c( I$ toc# e32i+it ! B $or A toc# "%it( Stri#e "rice /AB7VK /tri#e "rice7d( No o$ 2!re in under%.in) !re u%ti"%ied /BA7Vno(o$2!ree( VV/ree!rc27 E()( toc# diidend !re de!%t *it2 in !e !nner i$ toc# "!. ! &?Q

diidend( Tre!ted ! ! ?-$or-> toc# "%it(c( 9oition !nd E3ercie Liit

a+ Nu+er o$ o"tion ! tr!der c!n 2!e on one toc# i %iited +. t2e e3c2!n)e( T2i i! )osition li(it+

+( E>ercise li(it e0u!% t2e "oition %iit !nd "eci;e t2e !3iu nu+er o$o"tion contr!ct t2!t c!n +e e3ercied +. !n indiidu!% oer !n. ? conecutie+uine d!.(

( Moti!tion $or Lon) S2ort 9oition on C!%% !d 9ut

!( Lon2 Call i ! +u%%i2 or !ccuu%!tie "oition( @ou e3"ect t2e toc# to )o u"( @ou !. *!ntto o*n ! c!%% $or t2e "ur"oe o$ e3erciin) t2e c!%% !nd +u.in) t2e toc# !t t2e tri#e "rice,*2en t2e "rice in t2e !r#et i 2i)2er t2!n t2e tri#e "rice( Or .ou !. *!nt to o*n t2e c!%%

i"%. ! ! tr!der - .ou e3"ect it to +e *ort2 ore oetie +e$ore e3"ir!tion t2!n it ino*, !nd .ou intend to e%% t2e o"tion *2en .ou 2!e ! "ro;t(

+( Short Call i ! +e!ri2 or neutr!% "oition, or ! *!. to e%% toc# !t ! t!r)et "rice( A !tr!der, .ou e3"ect t2e toc# to eit2er )o do*n, or not )o u"( I$ t2e toc# )oe do*n !$ter.ou e%% ! c!%%, t2e c!%% *i%% +e *ort2 %e, !nd .ou c!n +u. it +!c# !t ! "ro;t(

!( A 2ort c!%% c!n !%o +e ued ! ! *!. to e%% toc# !t ! t!r)et "rice( For int!nce, i$.ou +ou)2t toc# !t P<', .ou !. t2in# t2!t P<? i ! $!ir "rice $or e%%in) .our toc#,o .ou cou%d e%% ! <? tri#e c!%%( I$ t2e toc# i not oer P<? !t e3"ir!tion, .ou #ee"+ot2 t2e "reiu receied !nd t2e toc#( I$ t2e toc# i oer P<? !t e3"ir!tion, .ou*i%% #ee" t2e "reiu, !nd e%% .our toc# $or P<? ! 2!re( T2i "!rticu%!r tr!te). ic!%%ed t2e Coered C!%% or +u.-*rite(

c( Lon2 "ut i ! +e!ri2 or "rotectie "oition( @ou eit2er e3"ect t2e toc# to )o do*n, or .ou*!nt to "rotect toc# .ou current%. o*n in t2e eent t2e toc# doe )o do*n( @ou !. tr!det2e "ut( I$ t2e toc# )oe do*n !$ter .ou +u. ! "ut, t2e "ut *i%% +e *ort2 ore, !nd .ou c!ne%% it $or ! )!in( @ou !. e3ercie t2e "ut i$ .ou o*n t2e toc# !nd t2e toc# dro", ince.our %on) "ut )ie .ou t2e ri)2t to e%% .our toc# !t ! 2i)2er "rice t2!n t2e current !r#et(

d( Short "ut i ! +u%%i2, neutr!%, or !ccuu%!tie "oition( @ou eit2er e3"ect t2e toc# to )ou", or not )o do*n, or .ou !re intereted in +u.in) t2e toc# !t ! %o*er "rice t2!n t2ecurrent !r#et( @ou c!n tr!de t2e 2ort "ut( I$ .ou e%% ! "ut, !nd t2e toc# )oe u", t2e "ut*i%% +e *ort2 %e t2!n *2!t .ou o%d it $or, !nd .ou c!n +u. it +!c# $or ! )!in( @ou c!n !%o2o%d t2e 2ort "ut unti% e3"ir!tion( I$ t2e toc# "rice t!. oer t2e tri#e "rice o$ t2e "ut, t2e"ut *i%% e3"ire *ort2%e !nd .ou *i%% #ee" t2e entire "reiu receied, *it2out $urt2er

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o+%i)!tion( @ou c!n !%o e%% ! "ut *it2 t2e intention o$ +u.in) toc# !t %e t2!n t2e current!r#et !%ue(

( Decri+e +!ic o"tion tr!din)!( =ener!% 6 O"tion !re 0uoted re%!tie to one under%.in) toc#( To )et tot!% cot- .ou ut

u%ti"%. tie no o$ 2!re "er contr!ct(!( 5uote *i%% !%o inc%ude t2e tri#e, e3"ir!tion ont2, o%ue, !nd t2e o"tion c%!(+( M!r#et !#er *i%% 0uote +id !nd oer/or !#7 "rice *2eneer nece!r.(c( T2e. "ro;t on +id-oer "re!d !nd !dd %i0uidit. to t2e !r#et(d( F%oor +ro#er re"reent ! "!rticu%!r ;r !nd e3ecute tr!de $or t2e )ener!% "u+%ic(e( Order +oo# o8ci!% enter Liit order re%!.ed $ro t2e oor +ro#er( An oettin)

tr!de t!#e "%!ce *2en ! %on) /2ort7 o"tion "oition i oet *it2 ! !%e /"urc2!e7o$ t2e !e o"tion(

$( I$ tr!de i not !n oettin) tr!de, t2en o"en interet incre!e +. one contr!ct(+( J2!t !re t2e !riou coiion

!( !r. +!ed on tr!de ie !nd +ro#er t."e /dicount ( $u%% erice7+( T."ic!% tructure coiion r!te ! ! ;3ed !ount "%u ! "ercent!)e o$ t2e tr!de

!ount(c( 1Q o$ tr!de !ount $or toc#( De"endin) on o"tion tr!de !ount, ;3ed $ee ] 3Q o$

tr!de !ount( Soe !%o 2!e ! !3 c2!r)e "er contr!ct(d( P1' o"tion "riceV1''2!re P1''' contr!ct, no* coiioni P<' $ee] (

Q/1'''7 P< do%%!rc( M!r)in re0uireent(

!( O"tion *it2 !turitie o$ ont2 o$ $e*er c!nnot +e "urc2!ed on !r)in(Leer!)e *ou%d +ecoe too 2i)2( For o"tion *it2 %on) !turitie, inetor c!n+orro* ! !3iu o$ &?Q o$ o"tion !%ue(

+( M!r)in $or o"tion *riter de"end on t2e !ount !nd "oition o$ contr!ct *ritten(c+ Na/e. O)tions , /or Uncoered O"tion7 6 o"tion in *2ic2 t2e *riter doe not !%o

o*n ! "oition in t2e under%.in) !et( T2e ie o$ t2e initi!% !nd !inten!nce !r)in$or n!#e o"tion *ritin) i e0u!% to t2e o"tion "reiu "%u ! "ercent!)e o$ t2eunder%.in) 2!re "rice( er. "ecu%!tie(

.+ Covere. calls , Jritin) Coered C!%% /e%%in) ! c!%% o"tion on ! toc# t2!t i o*ned+. t2e e%%er o$ t2e o"tion7 i $!r %e ri#. t2!n n!#ed c!%% *ritin)

d( O"tion C%e!rin) Cor"or!tion 6 )u!r!ntee t2!t +u.er !nd e%%er in t2e e3c2!n)e tr!dedo"ion !r#et *i%% 2onor t2eir o+%i)!tion !nd record !% o"tion "oition( E3c2!n)e tr!dedo"tion 2!e no de$!u%t ri# +ec!ue o$ t2e OCC, *2i%e OTC o"tion "oe de$!u%t ri#(

!( A%% tr!de c%e!red +. one o$ it c%e!rin) e+er(+( Me+er ut et net c!"it!% re0uireent !nd 2e%" ;n!nce !n eer)enc. $und

t2!t i uti%ied in t2e eent o$ ! e+er de$!u%t(c( Jriter Mut "ot !r)in !nd +u.er de"oite re0uired $und +. t2e ornin) o$ t2e

+uine d!. iedi!te%. $o%%o*in) t2e d!. t2e o"tion i "urc2!ed(e( E3erciin) !n O"tion

!( J2en inetor e3ercie !n o"tion "rior to contr!ct e3"ir!tion, 2er +ro#er cont!ct!i)ned OCC e+er re"oni+%e $or c%e!rin) t2!t +ro#er tr!de(

+( OCC e+er t2en u+it !n e3ercie order to t2e OCC *2ic2 !tc2e it *it2 !c%e!rin) e+er *2o identi;e !n inetor *2o 2! *ritten ! toc# o"tion(

c( Ai)ned inetor ut e%%/i$ ! c!%% o"tion7 or +u. /i$ ! "ut o"tion7 t2e under%.in) !tt2e "eci;ed tri#e "rice on t2e t2ird +uine d!. !$ter t2e order to e3ercie ireceied(

d( Une3ercied o"tion e3"irin) in t2e one. !$ter !ccountin) $or tr!n!ction cot *i%%+e e3ercied +. +ro#er(

$( Ot2er O"tion-Li#e Securitie!( J!rr!nt 6 o$ten iued +. ! co"!n. to !#e ! +ond iue ore !ttr!ctie !nd *i%%

t."ic!%%. tr!de e"!r!te%. $ro t2e +ond !t oe "oint( J!rr!nt !re %i#e c!%% o"tione3ce"t t2!t, u"on e3ercie, t2e co"!n. receie t2e tri#e "rice !nd !. iue ne*2!re to de%ier(

+( S!e ditinction !""%ie to e"%o.ee toc# o"tion, *2ic2 !re iued ! !n incentieto co"!n. e"%o.ee !nd "roide ! +ene;t i$ t2e toc# "rice rie !+oe t2ee3ercie "rice( J2en !n e"%o.ee e3ercie incentie toc# o"tion, !n. 2!reiued +. t2e co"!n. *i% incre!e t2e nu+er o$ 2!re outt!ndin)(



c( Conerti+%e +ond 6cont!in ! "roiion t2!t )ie t2e +ond2o%der t2e o"tion o$e3c2!n)in) t2e +ond $or ! "eci;ed nu+er o$ 2!re o$ t2e co"!n. coontoc#( At e3ercie, t2e ne*%. iued 2!re incre!e t2e nu+er o$ 2!reoutt!ndin) !nd de+t i retired +!ed on t2e !ount o$ +ond e3c2!n)ed $or t2e2!re(

T2ere i ! "otenti!% $or di%ution "$ t2e ;r coon 2!re $ro ne*%. iued 2!re*it2 *!rr!nt , e"%o.ee toc# o"tion, !nd conerti+%e +ond t2!t doe not e3it $ore3c2!n)e tr!ded o"tion(

CH 11 9ro"ertie o$ Stoc# O"tion - Hu%% O"tion Future !nd Ot2er Deri!tie

Ed(1( F!ctor t2!t !ect O"tion "rice

!( Current toc# "ricei( A S incre!e, c!%% incre!eii( A S decre!e, "ut incre!eiii( A o"tion +ecoe c%oer to in-t2e-one., it !%ue incre!e(

+( Stri#e "rice o$ t2e o"tion 6i( Eect o$ tri#e "rice on o"tion *i%% +e e3!ct%. o""oite(ii( A incre!e, C!%% decre!eiii( A Incre!e, 9ut Incre!ei( O"tion !%ue *i%% incre!e ! it +ecoe c%oer to or ore in-t2e-one.(

c( Tie to e3"ir!tion /!turit.7 6i( For Aeric!n O"tion 6 incre!in), T, e3"ir!tion, *i%% incre!e o"tion !%ue(ii( T incre!e, %i#e%i2ood o$ in-t2e-one. incre!e(iii( Euro"e!n O"tion not )ener!%%. t2e !e( 6 i$ ! diidend i e3"ected in & ont2( A 1

ont2 o"tion *ou%d +e *ort2 ore t2!n ! < ont2 o"tion( /< ont2 o"tion "rice *i%%$!%% *2en diidend i "!id in & ont27

d( r 6 2ort ter ri# $ree interet r!te oer Ti( A ri# $ree r!te incre!e, t2e !%ue o$ c!%% *i%% incre!e( /+ec!ue !%ue o$ toc# *i%%

incre!e( S['earT ( 2i)2er r /o""ortunit. cotr!te o$ return7 !#e ! 2i)2er S[T !ndo"tion !%ue *i%% incre!e( 6 to inure no !r+itr!)e(

e( D 6 "reent !%ue o$ t2e diidend o$ t2e under%.in) toc#(i( O"tion o*ner doe not 2!e !cce to c!2 o* o$ t2e under%.in) toc#, !nd t2e

toc# "rice decre!e *2en ! diidend i "!id( T2u, ! t2e diidend incre!e, t2e

!%ue o$ t2e c!%% /"ut7 *i%% decre!e /incre!e7(

$( σ −¿ e3"ected o%!ti%it. o$ toc# "rice oer T(

i( A o%!ti%it. incre!e, o"tion !%ue incre!e( T2i i due to !.etric "!.o o$o"tion(

ii( Lon) o"tion 2!e ! !3iu %o e0u!% to "reiu( Incr o%!ti%it. on%. incre!ec2!n)e o$ e3"irin) in t2e one.(

iii( o%!ti%it. i conidered ot i"ort!nt $!ctor in o"tion !%u!tion(J2en e!%u!tin) ! c2!n)e in !n. one o$ t2e $!ctor, 2o%d t2e ot2er $!ctor cont!nt( E()(

-C

-σ ∨

-C

- S ∨

-C

-r ∨

-C

-t

FACTOR 6Call 6 Put ! Call ! P

S0

] - ] -

- ] - ] T `de"end `de"end ] ]

σ ] ] ] ]

r ] - ] -D - ] - ]

&( U""er 9ricin) Bound $or Euro"e!n !nd Aeric!n O"tionU""ER 'OUNDS



!( C!%% o"tion C 6 5 S0

, C ! 5 S0 i$ t2i doe not e3it .ou cou%d e%% o"tion !nd +u.

under%.in)

+( 9ut O"tion P 6 5 9 , P ! 5 9 i$ t2i doe not e3it, .ou cou%d e%% "ut !nd inet "roceed !t

rf

c( Euro 9ut O"tion, ince c!nnot e3ercie e!r%., it c!n neer +e *ort2 ore t2!n "reent !%ue

o$ tri#e "rice - P 6 5 9 e−rT

<( LOER 'OUNDS 6 Euro"e!n C!%% O"tion!( Conider & "ort$o%io

i( 9ort$o%io 91 : '1 Euro C!%%, c, *it2 e3ercie "rice "%u ! ero-Cou"on ri# $ree +ondt2!t "!. !t T(

ii( 9ort$o%io 9&: one 2!re o$ t2e under%.in) toc#(+( At T, 9ort$o%io 91 *i%% !%*!. +e t2e )re!ter o$ /*2en t2e o"tio e3"ire out o$ t2e one.7 or

ST /*2en "ort$o%io e3"ire in t2e one.(

c( At T, 9ort$o%io 9& *i%% +e *ort2 ST

d( 91 i !%*!. *ort2 ! uc2 ! 9&( I$ *e #no* !t T, P1; P2 , it !%*!. 2! to +e true

ot2er*ie, !r+itr!)e *ou%d +e "oi+%e( T2ereore *e c!n t!te(

i+ C 6+ 9 e−rT

;S0 an.

Smax (¿¿0− 9 e

−rT ,0)

C 6 ; ¿

>( LOJER Bound on Euro"e!n 9ut 9rice on non diidend "!.in) toc#(

!( Conider "ort$o%io 91, ! "ut, P 6 , !nd one 2!re o$ t2e under%.in) toc#(

+( Conider ! "ort$o%io 9&, ! ero-cou"on ri# $ree +ond t2!t "!. !t T(c( At T, "ort$o%io 91 *i%% !%*!. +e ore t2!n 9&, ot2er*ie !r+itr!)e(

d( So, P 6+ST ; 9 erT ∨ P 6+S

0; 9 e

−rT ∧so,P 6 ;max ( 9 e−rT −S

0,0 )

?( 9ut 6C!%% 9!rit.

!( 9ut c!%% "!rit. i +!ed on t*o "ort$o%io co+in!tion : ! ;duci!r. c!%% !nd ! "rotectie "ut(+( Fi.uciar call 6 i ! co+in!tion o$ ! "ure-dicount/i(e( ero-cou"on7, ri#%e +ond t2!t

"!. !t !turit. !nd ! c!%% *it2 e3ercie ( +ond "!. $or tri#e !t T+ C 6+ 9 e−rT

i( 9!.o i i$ out-o$-t2e one. !nd ]/S-7S i$ in-t2e-one.(c( "rotective "ut - S2!re o$ toc# to)et2er *it2 ! "ut o"tion( /2o%d toc# to de%ier7 !t T, "!.

o i ST i$ out-o$-t2e one. or - ST +ST = 9 i$ in-t2e-one.( P 6+S0

d( NOTE: on !e tri#e , *2en "ut i in t2e one., c!%% i out o$ t2e one., !nd +ot2"ort$o%io "!. !t !turit.( Sii%!r%., *2en "ut i out o$ t2e one., !nd c!%% i in t2eone., +ot2 "ort$o%io "!. S !t e3"ir!tion( /%oer "!., *inner receie7

e( 9UT-CALL 9ARIT@ 2o%d t2!t "ort$o%io *it2 identic!% "!.o

i+

P 6+S0=C 6+ 9 e−rT

$( E0ui!%encie o$ 9ut-C!%% 9!rit.

i( S0=C 6− P 6+ 9 e−rT

ii( P 6=C 6−S0+ 9 e−rT

iii( C 6=S0− 9 e−rT + P0

i( 9 e−rT = P 6+S0−C 6

( 9!. o on ! %on) toc# c!n +e sntheticall cre!ted *it2 ! %on) c!%% , ! 2ort "ut,!nd ! %on) "oition in ! ri# $ree dicount +ond(



i( Mut 2!e !e tri#e !nd !turit. $or e0u!%it. contr!int to 2o%d(( E3"%!in e!r%. e3ercie on Aeric!n C!%% !nd 9ut O"tion

!( For C!%% O"tion, ince Aeric!n c!n +e e3ercied e!r%., Aeric!n O"tion c!n !%*!. +eued to re"%ic!te t2eir corre"ondin) Euro"e!n o"tion( I$ e3ercie !t d!. one, "!.o i S[' 6

, *2ic2 i neer %!r)er t2!n S0− 9 e−rT

, *2ic2 i !t %e!t t2e "rice o$ ! Euro"e!n c!%%

o"tion, t2ere$ore, it i neer o"ti!% to e3ercie e!r%.( I$ 2e e3ercied e!r%., 2e *i%% "!. ,*2ic2 i ore t2!n it "reent !%ue !nd 2e cou%d 2!e 2e%d t2!t c!2 !nd ineted it !t ri#$ree r!te(

+( Neer o"ti!% to e3ercie e!r%. in Aeric!n O"tion 6 /t2eoretic!%%., +ut !%*!. e3it"oi+i%it. o$ 2u)e "rice *in)7

i(

S

max (¿¿0− 9 e−rT

,0)C ! ; C 6 ;¿

c( "ut O)tion 6 !e !r)uent $or c!%%(

i( P ! ; P 6 ;max ( 9 e−rT −S

0,0)

ii( Aeric!n 9ut !re o"ti!%%. e3ercie e!r%. i$ u8cient%. in t2e one.( In e3tree

c!e, *2en S0 i c%oe to ero, t2e $uture !%ue o$ t2e e3ercied c!2 !%ue

9 e

rT

i !%*!. *ort2 ore t2!n %!ter e3ercie ( *e "%!ce !n een tron)er +oundince it c!n !%*!. +e e3ercied e!r%.(

iii( P ! ;max ( 9 −S0,0 ) +c i %!r)er t2!n 9( More %i#e%i2ood o$ e!r%. dro" !nd e!r%.

e3ercie "oi+i%it.( So *e need ! tron)er +ound(( FI=URE OF BOUNDS FOR O"tion C%!e

O)tion Mini(u( Balue Ma>i(u( Balue

Euro C!%% S

c;max (¿¿0− 9 e−rT

,0)¿

S0

Euro 9ut p; max ( 9 e−rT −S

0,0) 9 e

−rT

Aer C!%% S

c;max (¿¿0− 9 e−rT

,0)C ;¿

S0

Aer 9ut P;max ( 9 −S0 ,0 )

( I"!ct o$ Diidend on 9ricin) Bound!( Stoc# o"tion 2!e e3"ir!tion o$ %e t2!n ! .e!r( Diidend c!n +e eti!ted 0uite

!ccur!te%.(+( To "reent !r+itr!)e, toc# "rice !%ue ut decre!e +. t2e !ount o$ t2e diidend(c( Incre!e !%ue o$ "ut !nd decre!e !%ue o$ c!%%(

d( Lo*er +ound on C!%% c; S0− +− 9 e−rT

e( Lo*er +ound on 9ut p; 9 e−rT −S0+ +

( 9ut-C!%% 9!rit. *it2 Diident

!( P 6+S0=C 6+ 9 e−rT + + D i t2e 9 o$ Diidend(

CH 1&VV Tr!din) Str!te)ie Ino%in) O"tion - Hu%% O"tion Future !nd Ot2erDeri!tie Ed(

1( Coered C!%% -!( e%% ! c!%% o"tion on ! toc# t2!t i o*ned +. t2e o"tion *riter(



+( B. *ritin) out o$ t2e one. c!%% o"tion, t2e co+ined "oition c!" t2e u"ide "otenti!% !tt2e tri#e "rice( In return $or "otenti!% )!in in toc# "rice +e.ond tri#e "rice, *rite receiet2e o"tion "reiu(

c( Str!te). i ued to )ener!te c!2 on ! toc# t2!t i not e3"ected to incre!e !+oe t2ee3ercie "rice oer t2e %i$e o$ t2e o"tion(

&( 9rotectie 9ut 6!( !t t2e one. %on) "ut "oition i co+ined *it2 t2e under%.in) toc#( /!%o c!%%ed "ort$o%io

inur!nce or ! 2ed)ed "ort$o%io7+( Ho%din) ! %on) "oition in under%.in) !nd +u.in) ! "ut o"tion(c( Ue to "ut %iit on do*nide ri# !t t2e cot o$ t2e "ut "reiu(d( Bene;t $ro toc# "rice incre!e, +ut *i%% +e %o*er +. !ount "!id $or "ut(e( See ") 1 $or "!.o di!)r!( Eenti!% +ecoe ! %on) c!%% "!.o(

<( Bu%% C!%% S"re!d 6!( Bu.er o$ t2e "re!d "urc2!e ! c!%% o"tion *it2 %o*er #, !nd u+idie it +. e%%in) ! c!%%

*it2 2i)2er K(+( E3"ect toc# "rice to rie !nd ;ni2 in-t2e-one. $or "urc2!ed c!%%, +ut not $or *ritten c!%%

*it2 2i)2er K( /out-o$-t2e one.7 *ritten c!%%(

>( Be!r C!%% S"re!d 6!( i t2e !%e o$ ! +u%% "re!d( Be!r "re!d tr!der, *i%% "urc2!e t2e c!%% *it2 2i)2er e3ercie

"rice !nd e%% t2e c!%% *it2 %o*er e3ercie "rice(+( Dei)ned to "ro;t $ro $!%%in) toc# "rice( /+e!r tr!te).7c( A toc# "rice $!%%, inetor #ee" "reiu $ro *ritten c!%% /%o*er K7, net t2e %on) c!%%

cot /2i)2er K7d( 9ur"oe o$ %on) c!%% i to "rotect $ro %!r)e incre!e in toc# "rice( /2i)2er K7

?( 9ut S"re!d 6 c!n +e ued to re"%ic!te C!%% "re!d ! *e%%(!( Bu%% 9ut S"re!d 6 %on) "ut *it2 %o* tri#e !nd ! 2ort "ut *it2 2i)2 tri#e(



i( Bet i"%eented in ! +u%%i2 !r#et( @ou e%% ! 2ort "ut *2ic2 e!n .ou !reo+%i)!ted to +u.(

ii( But .ou $ee% toc# *i%% )o u"(, o .ou re!" t2e "roceed $ro t2e 2ort "ut !t 2i)2 K(iii( Me!n*2i%e .ou )o %on) ! "ut !t %o* # /%e %i#e%. to $!%% in t2e one., +ut c2e!"er to

cur+ %oe !nd "rotect !)!int 2ort "ut( Inetent i %e t2!n re0uired to +u. t2etoc#(

i( @ou *ou%d enter ! Bu%% "ut "re!d i$ .ou $ee% toc# *i%% end u" !t or !+oe 2ort "ut(( Le ;n!ncin) $or !r)in re0uireent ! *e%%(

+( Be!r 9ut S"re!d 6 inetor +u. ! "ut *it2 2i)2er e3ercie K, !nd e%% ! "ut *it2 %o*er K(

( Butter. S"re!d 6 ino%ed t2e "urc2!e or !%e o$ t2ree dierent c!%%"ut o"tion((

!( Butter. C!%% S"re!d 6i( Bu. one c!%% *it2 %o*er e3ercie, Kii( Bu. !not2er *it2 2i)2er e3ercie, Kiii( Se%% t*o c!%% *it2 !n e3ercie in +et*een(i( Eenti!%%. +ettin) t2!t t2e toc# "rice *i%% t!. ne!r t2e tri#e "rice o$ t2e *ritten

c!%%(( Lo t2!t t2e +utter. "re!d +u.er ut!in i$ t2e toc# "rice tr!. $ro t2i %ee% i%iited(

+( Butter. 9ut S"re!d - +u. %o* !nd 2i)2 tri#e "ut o"tion !nd e%% t*o "ut *it2 !ninteredi!te tri#e "rice(

c(



( C!%end!r S"re!d 6 tr!n!ctin) in t*o o"tion t2!t 2!e t2e !e tri#e "rice +ut dierente3"ir!tion(

!( Neutr!% C!%end!r S"re!d 6 i$ tri#e "rice i c%oe to t2e current "rice+( Bu%%i2 C!%end!r S"re!d 6 2! tri#e "rice !+oe t2e current "ricec( Be!ri2 C!%end!r S"re!d 6 2! tri#e "rice +e%o* t2e current toc# "riced( Reere C!%end!r S"re!d 6 "roduce ! "!.o t2!t i o""oite o$ t2e )r!"2 in ;) ( Inte!d

o$ e%%in) ! 2ort-d!te o"tion !nd +u.in) ! %on)-d!te o"tion, t2e inetor o$ ! reerec!%end!r *i%% +u. ! 2ort-d!te o"tion !nd e%% ! %on)-d!te o"tion( T2e inetor *i%% "ro;t*2en t2e toc# i *e%% !+oe or +e%o* t2e tri#e !nd *i%% ier %o i$ t2e toc# i ne!r t2etri#e "rice( /+et on 2i)2 o%!ti%it.7 )ood $or tie o$ 2i)2 o%!ti%it.(

( Di!)on!% S"re!d 6 Sii%!r to c!%end!r "re!d e3ce"t t2!t inte!d o$ uin) o"tion *it2 t2e !etri#e "rice !nd dierent e3"ir!tion, t2e o"tion in ! di!)on!% "re!d c!n 2!e dierent tri#e"rice in !ddition to dierent e3"ir!tion(

1'( Bo3 S"re!d - ! co+in!tion o$ ! +u%% c!%% "re!d !nd +e!r "ut "re!d on t2e !e !et11( Lon) Str!dd%e/+otto tr!dd%e or tr!dd%e "urc2!e7 6 "urc2!in) ! c!%% !nd ! "ut *it2 !e tri#e

"rice !nd e3"ir!tion(!( End u" *it2 ! "ro;t di!)r!, %oe ne!r tri#e+( Str!te). "ro;t *it2 2i)2 o%!ti%it., !nd toc# oe tron)%. In eit2er direction(

1&( S2ort Str!dd%e /to" tr!dd%e7 6 e%% +ot2 o"tion !nd +et on %itt%e oeent in t2e toc#( S2orttr!dd%e on t2e !e t2in) ! t2e +utter. "re!d or c!%end!r "re!d, e3ce"t %oe !re %iited(

!( Bet t2!t "ro;t ore i$ correct !nd %oe ore i$ incorrect( Str!dd%e !re .,etric !round t2etri#e "rice(

1<( Lon) Str!n)%e - ii%!r to tr!dd%e, +ut o"tion "urc2!ed !re %i)2t%. out o$ t2e one., o c2e!"erto i"%eent t2!n ! tr!dd%e( 9!.o ii%!r to ! tr!dd%e e3ce"t $or ! !t ection +et*een t2etri#e "rice( Bc it i c2e!"er, toc# *i%% 2!e to oe ore re%!tie to ! tr!dd%e +e$ore tr!n)%e"!. o( A%o .etric !round tri#e(

1>( S2ort Str!n)%e 6 ii%!r to ! 2ort tr!dd%e(1?( Stri" 6 ino%e "urc2!in) t*o "ut !nd one c!%% *it2 !e tri#e !nd e3"ir!tion( A.etric

"!.o( A tri" i +ettin) on o%!ti%it. +ut i ore +e!ri2 ince it "!. o ore on t2e do*nide(1( Str!" 6 "urc2!in) t*o c!%% !nd one "ut *it2 !e tri#e "ric !nd e3"ir!tion( Str!" +et on

o%!ti%it. +ut i ore +u%%i2 ince it "!. o ore on t2e u"ide(1( Co%%!r 6 co+in!tion o$ ! "rotectie "ut !nd ! coered c!%%( T2e uu!% )!% i $or t2e o*ner o$ t2e

under.in) !et to +u. ! "rotectie "ut !nd t2en e%% ! c!%% to "!. $or t2e "ut(1( Zero-Cot Co%%!r 6 i$ "reiu o$ t*o !re !e /"rot "ut !nd co c!%%7, t2en it i ! ero cot co%%!r(1( Interet R!te C!" 6 !n !)reeent *2ic2 one "!rt. !)ree to "!. t2e ot2er !t re)u%!r inter!% oe

! cert!in "eriod o$ tie *2en t2e +enc2!r# interet r!te/LIBOR7 e3ceed t2e tri#e "eci;ed int2e contr!ct(

!( Stri#e r!te i c!" r!te+( E()( e%%er o$ ! c!" i)2t !)ree to "!. t2e +u.er !t t2e end o$ !n. 0u!rter oer t2e ne3t t*o

.r i$ LIBOR i )re!ter t2!n ! c!" r!te o$ Q( C!%%ed C!" +ec!ue "!.er doe not "!. oert2e r!te /! c!"7

c( C!" +u.er "!. ! "reiu to t2e e%%er !nd e3ecie t2e c!" i$ t2e !r#et r!te o$ intretrie !+oe t2e c!" tri#e(

&'( C!"%et 6 *2en interet r!te c!" i u%ti-"eriod !)reeent, ! c!" i !ctu!%%. ! "ort$o%io o$ c!%%o"tion on LIBOR c!%%ed c!"%et( For e()( & .r c!" i !ctu!%%. ! "ort$o%io o$ *ei)2t interet r!teo"tion *it2 dierent !turit. d!te(

&1( Interet R!te F%oor 6 !)reeent in *2ic2 one "!rt. !)ree to "!. t2e ot2er !t re)u%!r inter!%oer ! cert!in "eriod *2en t2e +enc2!r# interet r!te /e()( LIBOR7 $!%% +e%o* t2e tri#e r!te

"eci;ed in t2e contr!ct( Stri#e r!te i t2e oor r!te(!( Bu.er o$ t2e oor +ene;t $ro !n interet r!te decre!e( A i$ 2e +u. ! "ut o"tion(+(

&&( F%oor%et 6 "ort$o%io o$ "ut o"tion on LIBOR&<( Lon) C!" 6 e0ui!%ent to ! "ort$o%io o$ %on) "ut o"tion on ;3ed-incoe ecuriti. "rice( /o"tion to

e%% +ond i$ "rice $!%%, *2ic2 e!n interet r!te roe, +ut .ou e%% $or !t %e!t tri#e, *2ic2 e!n.ou "!. !t ot t2e c!" r!te7

&>( Lon) F%oor 6 e0ui!%ent to ! "ort$o%io o$ c!%% o"tion on ;3ed-incoe ecurit.( /i$ "rice o$ +ond )oeu", .ou *i%% e3ercie !t +ond "rice, *2ic2 e!n r!te *ent do*n, +ut .ou *i%% receie !t %e!t F%oorr!te *2en .ou e3ecute t2e c!%% o"tion to +u. t2e i3ed incoe ecurit.7

&?( O"tion on R!te ( O"tion on 9rice 6 "rett. tr!i)2t $or*!rd(



&( Interet R!te Co%%!r - iu%t!neou "oition in ! orr !nd ! c!" on t2e !e +enc2!r# r!te oert2e !e "eriod *it2 t2e !e ett%eent d!te(

!( Firt tr!te). i to "urc2!e ! c!" !nd e%% ! oor(+( Second tr!te). i to "urc2!e ! oor !nd e%% ! c!"

CH & E3otic O"tion - Hu%% O"tion Future !nd Ot2er Deri!tie Ed(1( De;ne !nd E3otic Deri!tie !nd dierence $ro "%!in !ni%%!

&( F!ctor t2!t c!ue t2eir dee%o"ent o$ e3otic "roduct

<( E3"%!in 2o* deri!tie c!n +e conerted into ero-cot "roduct

>( Tr!n$orin) St!nd!rd Aeric!n O"tion into non- t!nd!rd Aeric!n O"tion

?( T."e o$ E3otic O"tion

( =!" O"tion

( =!" C!%% o"tion 6

( =!" "ut o"tion 6

( For*!rd St!rt O"tion 6



1'( Co"ound O"tion

!( C!%% on C!%% -

+( C!%% on "ut -

c( 9ut on ! c!%% -

d( 9ut on ! "ut -

11( C2ooer O"tion

1&( B!rrier O"tion

!( Do*n-!nd-out c!%% /"ut7 -

+( Do*n-!nd-in c!%% /"ut7 -

c( U"-!nd-out c!%% /"ut7 -

d( U"-!nd-in C!%% /"ut7 6

1<( Bin!r. O"tion -



!( C!2-or-not2in) c!%% 6

+( Aet-or-not2in) c!%% 6

1>( Loo#+!c# O"tion -

!( F%o!tin) Loo#+!c# c!%% 6

+( F%o!tin) %oo#+!c# "ut -

c( Fi3ed %oo#+!c# c!%% 6

d( Fi3ed %oo#+!c# "ut 6

1?( S2out O"tion -

1( Ai!n O"tion 6

!( Aer!)e "rice c!%% !nd "ut 6



+( Aer!)e tri#e c!%% 6

1( E3c2!n)e O"tion 6

!( O"tion to e3c2!n)e 6

1( B!#et O"tion 6

!( R!in+o* o"tion 6

1( o%!ti%it. *!" -

&'( !ri!nce *!" -

&1( 9reie o$ t!tic o"tion re"%ic!tion 2o* c!n it +e !""%ied to 2ed)in) e3otic o"tion(

!( D.n!ic o"tion re"%ic!tion 6

+( St!tic o"tion re"%ic!tion -



CH Coodit. For*!rd !nd Future 6 McDon!%d 6 Deri!tie < rd Ed1( Coodit. !r+itr!)e

&( Reere c!2 !nd c!rr. !r+itr!)e

<( Le!e r!te !nd no !r+itr!)e $or coodit. $or*!rd !nd $uture

>( Cont!n)o !nd B!#*!rd!tion

?( C!rr. M!r#et !nd i"!ct o$ tor!)e, conenience on coodit. $or*!rd !nd $uture



( For*!rd "rice o$ ! coodit. *it2 tor!)e cot

( F*d 9rice *it2 conenience .ie%d

( Co"!re %e!e r!te *it2 conenience .ie%d

( Dierent t."e o$ coodit. c2!r!cteritic

1'( B!i Ri# 6 2o* c!n it occur *2en 2ed)in) coodit. "rice e3"oure



11( Stri" Hed)e

1&( St!c# Hed)e

1<( Cro Hed)in)

CH 1< Forei)n E3c2!n)e Ri#1( Fin!nci!% intitution oer!%% $orei)n e3c2!n)e e3"oure



!( Net "oition e3"oure 6 ! +!n# !ctu!% e3"oure to ! )ien currenc.(+( 9oitie net e3"oure /net %on)7 6 2o%d ore !et t2!n %i!+i%itie in ! )ien currenc.(

Intitution $!ce ri# t2!t t2e $orei)n currenc. *i%% $!%% in !%ue !)!int t2e doetic currenc.(/Forei)n Aet *i%% $!%% in !%ue7

c( Ne)!tie net e3"oure /net 2ort7 6 2o%d ore %i!+i%itie t2!n !et in ! $orei)n currenc.(Intitution $!ce t2e i# t2!t $orei)n currenc. *i%% rie in !%ue !)!int doetic currenc.(/ore e3"enie to "!. %i!+i%itie *2en conertin) doetic to Forei)n7

.+ &et 6xposure=( 63 Rassets− 63 R Lia2iities)+( 63 R2ou./t − 63 RSol* )

&( Ho* ;n!nci!% intitution cou%d !%ter it net "oition e3"oure to reduce $orei)n e3c2!n)e ri# 6!( It i i"ort!nt $or Fin!nci!% intitution to +!%!nce t2eir "oition n ! currenc. *2ere!et/"urc2!e7 !re e3!ct%. oet +. %i!+i%itie /!%e7 , t2e intitution *i%% +e e3"oed to!ri!tion in t2e $orei)n e3c2!n)e r!te o$ t2!t currenc. !)!int t2e doetic currenc.(

+( T2e ore o%!ti%e t2e F r!te, t2e ore "otenti!% i"!ct ! net e3"oure /eit2er Lon) or2ort7 *i%% 2!e on t2e !%ue o$ ! +!n# $orei)n currenc. "ort$o%io(

<( 9otenti!% do%%!r )!in or %o e3"oure to "!rticu%!r currenc.>( T."e o$ Forei)n e3c2!n)e Tr!din)

!( Cutoer to "!rtici"!te in intern!tion!% coerci!% +uine tr!n!ction+( Cutoer t!#e "oition in re!% or ;n!nci!% $orei)n inetent( Fin!nci!% intitution !.

!%o do o $or ite%$ !nd it "ort$o%io(c( Oettin) e3"oure in ! )ien currenc. $or 2ed)in) "ur"oe( He%" to reduce F e3"oure(d( S"ecu%!tin) on $orei)n currencie in e!rc2 o$ "r;t +. $orec!tin) !ndor !ntici"!tin) $uture

F r!te oeent( Re%!te to o"en "oition t2!t !re t!#en $or "ecu%!tie "ur"oe !ndre"reent !n un2ed)ed "oition in ! )ien currenc.( Uu!%%. tr!de !de direct%. *it2 ot2er;n!nci!% intitution or !rr!n)ed *it2 !n F "eci!%it +ro#er( Currenc. "ot tr!de ot$re0uent "ecu%!tie tr!de(

e( J2en +!n# tr!de, +u. !nd e%% F $or it cutoer /receie ! $ee7 it !%o doe not!ue F ri# ite%$(

?( Source o$ )!in !nd %oe on Forei)n e3c2!n)e tr!din)(!( Mi!tc2ed $orei)n !et !nd %i!+i%it. "oition+( Return $ro +!n# "ort$o%io !re deried $ro dierence +et*een incoe !nd cot( 6

2o*eer, $orei)n inetent "roide !ddition!% d.n!ic o$ 2!in) "ro;t !nd %oe!ected +. c2!n)e in $orei)n e3c2!n)e r!te(

c( TJO METHODS to contro% t2e c!%e o$ F e3"oure-i( On-+!%!nce-2eet Hed)in) - !c2ieed *2en co"!n. 2! ! !tc2ed !turit. !nd

currenc. $orei)n !et-%i!+i%it. +oo#(ii( B. direct%. !tc2in) $orei)n !et !nd %i!+i%itie, *e c!n %oc# in ! "oitie return or

"ro;t "re!d i$ e3c2!n)e r!te oe in eit2er direction oer t2e inetent "eriod(iii( O-+!%!nce S2eet Hed)in) 6 r!t2er t2!n !tc2in) $orei)n !et !nd %i!+i%itie, *e

c!n %oc# in ! "oitie return or "ro;t "re!d i$ e3c2!n)e r!te oe in eit2erdirection oer t2e inetent "eriod(

1( Uin) ! $or*!rd $orei)n e3c2!n)e !)reeent( 6 *2ic2 ino%e !n e3c2!n)eo$ $orei)n currenc. !t oe "oint in t2e $uture t2!t i deterined tod!.(

&( E()( i$ .ou 2!e CHF !nd *!nt USD( @ou c!n e%% $or*!rd t2e e3"ected"rinci"!% !nd interet o$ CHF on t2e %o!n !t t2e current #no*n r!te USDCHF,*it2 de%ier. o$ S*i Fr!nc /CHF7 to t2e +u.er o$ t2e $or*!rd contr!ct t!#in)"%!ce !t t2e end o$ t2e inetent 2orion(

<( Eectie%. reoin) $orei)n e3c2!n)e r!te uncert!int.(( No !r+itr!)e !u"tion in $orei)n e3c2!n)e !r#et %e!d to interet r!te "!rit. t2eore(

!( Interest Rate "arit 6 t2e dicounted "re!d "re!d +et*een doetic !nd $orei)ninteret r!te e0u!% t2e "ercent!)e "re!d +et*een $or*!rd !nd "ot e3c2!n)e r!te(

i( In other @or.s3 t2e 2ed)ed do%%!r return on $orei)n inetent 2ou%d +e e0u!% tot2e return on doetic inetent(

ii( IR9 i"%ie t2!t in ! co"etitie !r#et, ! ;r 2ou%d not +e !+%e to !#e e3ce"ro;t $ro $orei)n inetent( /i(e( ! 2i)2er doetic currenc. return $ro %endin)in ! $orei)n currenc. !nd %oc#in) in t2e $or*!rd r!te o$ e3c2!n)e7

iii( for)ar* F9 price=spot F9 price×[1+r +C

1+r FC ]

T

r +C =*omestic currenc rate



1( r FC =forei.n currencrate

i( Continuou%. co"ounded For)ar*=Spot× e(r +C −r FC )T

( Ue t2eore to c!%cu%!te $or*!rd $orei)n e3c2!n)e r!te

!( T!#e 1''' "ound inet it !t $orei)n currenc. !nd e%% it $or*!rd, F 0 ,

+( Inet 1''' "ound !nd e3c2!n)e i !t "ot r!te to USD !t r +C ( !t tie T , *e ut

2!e:

c( 1''' L×erf T

× F 0=1000×S

0×e

r*c T

d( F 0=S

0e

( r*c−rf ) T

F 0= / L S

0=

L

( Dieri;c!tion in u%ti-currenc. !et %i!+i%it. "oition c!n reduce "ort$o%io ri#(!(

( Re%!tion2i" +et*een noin!% !nd re!% interet r!te!( E!c2 doetic !nd $orei)n interet r!te conit o$ t*o co"onent- Firt co"onent i:+( Re!% interet r!te 6 reect ! )ien currenc. re!% de!nd !nd u""%. $or it $und(

Dierence in re!% interet r!te *i%% c!ue c!"it!% to o* into countrie *it2 t2e 2i)2et

!!i%!+%e re!% r!te o$ interet( T2ere$ore, t2ere *i%% +e !n incre!ed de!nd $or t2oecurrenciec( E3"ected in!tion r!te 6 !ount o$ co"en!tion re0uired +. inetor to oet t2e

e3"ected eroion o$ re!% !%ue oer tie due to in!tion(i( Dierence in in!tion r!te *i%% c!ue reident o$ t2e countr. *it2 t2e 2i)2et

in!tion r!te to de!nd ore i"orted /c2e!"er7 )ood( For e()(, i$ "rice in US !reriin) t*ice ! $!t ! Autr!%i!, citien *i%% incre!e t2eir de!nd $or Autr!%i!n)ood /!uie )ood !re no* c2e!"er re%!tie to doetic )ood7

d( Noin!% interet r!te ,r, t2e co"ounded u o$ re!% interet r!te, re!% r, !nd t2e e3"ectedr!te o$ in!tion, E/i7, oer !n eti!tion 2orion(

i( E3!ct et2odo%o).: (1+rnominal )=(1+rreal ) (1+ 6 (i ) )

ii( 1(1+rreal)=

1+r nominal

1+ 6 (i )

CH 1& Cor"or!te Bond F!+oi 6 H!nd+oo# o$ Fi3ed Incoe Securitie &'1&1( Bond indenture 6 ! docuent t2!t et $ort2 t2e o+%i)!tion o$ t2e iuer /"!.er7 !nd t2e ri)2t o$

t2e inetor in t2e +ond /i(e( t2e +ond2o%der7 Det!i%ed docuent ;%%ed *it2 %e)!% %!n)u!)e(&( Cor"or!te trutee 6 i to inter"ret t2i %!n)u!)e !nd re"reent t2e interet o$ t2e +ond2o%der(

B!n# or trut co"!nie ot o$ten ere ! cor"or!te trutee( 9oition re0uire t2e. !ct in !;duci!r. c!"!cit. on +e2!%$ t2e +on2o%der(

!( Aut2entic!te t2e iue, *2ic2 inc%ude #ee"in) tr!c# o$ t2e !ount o$ +ond iued !nd!#in) ure t2e nu+er doe not e3ceed t2e %iit "eci;ed in t2e indenture(

+( Monitor cor"or!tion to enure t2e. !+id +. t2e indenture coen!nt !nd #ee" #e. r!tio+e%o* ! )ien %ee%( Etc(

<( Trut Indenture Act 6 "eci;e t2!t !%% +ond oerin) oer P? i%%ion !nd o%d in intert!tecoerce ut 2!e ! cor"or!te trutee( T2e cor"or!te trutee ut +e co"etent !nd;n!nci!%%. re"oni+%e !nd 2ou%d !%o not 2!e !n. conict o$ interet /+ein) ! creditor o$ t2eiuer7( T2e indenture *ou%d !%o "eci$. 2o* t2e trutee *ou%d !#e re"ort to +ond2o%der !nd*2!t to do i$ t2e iuer $!i% to "!. interet !nd "rinci"!%( 6 ro%e i to "rotect t2e ri)2t o$+ond2o%der(

>( Bond !turit. !nd i"!ct on +ond retireent 6!( M!turit. 6 *2en t2e +ond iuer o+%i)!tion !re $u%;%%ed( 6 At !turit., t2e iuer "!. t2e

"rinci"!% !nd !n. !ccrued interet or "reiu(i( T2e +ond iuer !. retire +ond e!r%. i$ et $ort2 in t2e +ond indenture(ii( Lon)er t2e !turit. t2e ore tie ! co"!n. 2! t retire t2e +ond iue(

?( Interet 9!.ent C%!i;c!tion 6 interet r!te on ! +ond o$ten c!%%ed t2e Cou"on(



!( Str!i)2t-cou"on +ond 6 c!%%ed ;3ed r!te +ond, 2!e ;3ed interet r!te et $or t2e entire %i$eo$ t2e iue(

i( In US, t2e. t."ic!%%. "!. ei!nnu!% interet(ii( In Euro"e !nd ot2er countrie, t2e. "!. !nnu!% interet r!te "!.ent(

+( 9!rtici"!tin) Bond 6 "!. !t %e!t t2e "eci;ed interet r!te +ut !. "!. ore i$ t2eco"!n. "ro;t incre!e(

c( Incoe +ond 6 "!. !t ot t2e "eci;ed interet, +ut t2e. !. "!. %e i$ t2e co"!n.incoe i not u8cient(In c!e o$ 9!rtici"!tin) !nd Incoe Bond, t2e "eci;c!tion $or "!.in) ore or %e i etout in t2e indenture(

d( Zero-cou"on +ond 6 "!. t2e F!ce !%ue or 9rinci"!% !t M!turit.( T2ere i not ! c!2 Interet"!.ent inte!d t2e +ond 2o%der e!r ! return +. "urc2!in) t2e +ond !t ! dicount to$!ce!%ue !nd receiin) 2e $u%% F!ce !%ue !t M!turit.(

i( De$erred-interet +ond 6 !ri!tion o$ ZCB, *i%% not "!. c!2 interet $or oe nu+ero$ .e!r e!r%. in t2e %i$e o$ t2e +ond( T2!t "eriod i t2e de$erred-interet "eriod, c!2interet !ccrue !nd i t2en "!id ei!nnu!%%. unti% !turit. or *2en redeeed(

ii( 9!.ent-in-#ind +ond /9IK7 6 ! !ri!tion o$ ZCB, "!. interet *it2 !ddition!% +ond $ot2e initi!% "eriod, !nd t2en c!2 interet !$ter t2!t "eriod end(

iii( Mot ero cou"on iued tod!. 2!re ! 2ot o$ ot2er $e!ture uc2 ! +ein)conerti+%e, c!%%!+%e, !nd "ut!+%e( A Zero-cou"on +ond interet r!te i deterined +.t2e ori)in!%-iue dicount/OID7:

1( Ori)in!%-iue dicount$!ce !%ue-Oerin) 9rice&( !%ue o$ +ond )ro* er. .e!r, !nd t2u "!. i"%icit interet, *2ic2 i !

$unction o$ t2e OID !nd t2e ter to !turit.(<( Zero-cou"on +ond 2!e ero reinetent ri#( T2e +ond2o%der doe not

2!e to !#e !n eort to reinet c!2 interet "!.ent or *orr. !+out t2e!!i%!+%e r!te !t *2ic2 to reinet t2e(

>( Di!d!nt!)e i t2!t t2e +ond2o%der ut "!. t!3e e!c2 .e!r on t2e !ccruedinteret een t2ou)2 no c!2 i receied $ro t2e +ond iuer(

e( F%o!tin)-r!te +ond 6 #no*n ! !ri!+%e +ond- interet "!id i )ener!%%. %in#ed to oe*ide%. ued re$erence r!te uc2 ! LIBOR or t2e Feder!% Fund R!te(

Cor"or!te Bond c!n 2!e ! ecurit., uc2 ! re!% "ro"ert., under%.in) t2e iue( T2oe *2o o*nort)!)e +ond 2!e ! ;rt ort)!)e %ien on t2e "ro"ertie o$ t2e iuer(

De+enture !re unecured +ond(( Bond T."e 6

!( Mort)!)e Bond 6 c!n +e iued in ! erie in ! +%!n#et !rr!n)eent( In t2i c!e, one )rou"o$ +ond i iued under t2e ort)!)e(

+( Co%%!ter!% Trut Bond 6 !re +!c#ed +. toc#, note, +ond or ot2er ii%!r o+%i)!tion t2!tt2e co"!n. o*n( Under%.in) !et !re c!%%ed co%%!ter!% or "eron!% "ro"ert.(

i( Trutee 2o%d t2e co%%!ter!% $or +ene;t o$ t2e +ond 2o%der( T2e iuer ret!in otin)ri)2t $or toc# ued ! co%%!ter!%, o t2e. ret!in contro% oer t2eir u+idi!rie(

ii( 9roiion !re !%o et in "%!ce i$ !%ue o$ co%%!ter!% $!%% +e%o* t2e !%ue o$ t2e %o!n(Iuer !. 2!e to contri+ute !ddition!% ecuritie to +!c# t2e +ond(

iii( Iuer c!n !%o *it2dr!* co%%!ter!% i$ !%ue rie in order to e3ceed %o!n !%ue(c( E0ui"ent Trut Certi;c!te 6 !re !ri!tion o$ ! ort)!)e +ond *2ere "!rticu%!r e0ui"ent

under%ie t2e +ond( T2e uu!% !rr!n)eent i t2!t t2e +orro*er doe not !ctu!%%. "urc2!et2e e0ui"ent( Inte!d t2e trutee "urc2!e t2e e0ui"ent !nd %e!e it to t2e eectie+orro*er *2o "!. rent( Rent i t2en "!ed on to t2e 2o%der o$ t2e ETC(

i( More ecurit. t2!n ! ort)!)e +ond( E" !ttr!ctie i$ e0ui"ent i t!nd!rdied( E()r!i%ro!d c!r, *2ic2 "roide $or e!. !%e or %e!e o$ te e0ui"ent in t2e c!e o$ t2euer e0ui"ent de$!u%t(

d( De+enture 6 undecured +ond t2!t do not 2!e !et under%.in) t2e iue( Mot Cor"or!teBond !re De+enture !nd uu!%%. "!. 2i)2er interet r!te $or t2!t re!on( I$ co"!n. i2i)2%. r!ted !nd 2! not iued !n. ecured +ond, t2en de+enture !re !%ot e0ui!%entto ort)!)e +ond in t2!t t2e. 2!e ! c%!i on !%% t2e !et o$ t2e iuer !%on) *it2 t2e)ener!% creditor(

i( I$ t2e iuer 2! iued ecured de+t !%on) *it2 de+enture, t2e de+enture 2o%der2!e ! c%!i on t2e !et t2!t !re not +!c#in) t2e ecured de+t(

ii( T."ic!%%. Iuer i retricted to one iue o$ de+enture i$ t2ere i !%re!d. ecuredde+t(



iii( Su+ordin!ted De+enture Bond 6 2!e ! c%!i t2!t i !t t2e +otto o$ t2e %it o$creditor i$ t2e iuer )oe into de$!u%t( T2e. !re +ond t2!t !re unecured !nd 2!e!not2er unecured +ond *it2 ! 2i)2er c%!i !+oe t2e(

i( Conerti+%e De+enture 6 *2ic2 )ie t2e +ond2o%der t2e ri)2t to conert t2e +ondinto coon toc#( T2i $e!ture *i%% %o*er t2e interet r!te "!id(

1( T2e cot to t2e iuer, 2o*eer, i t2e "oi+i%it. o$ incre!ed di%ution o$ t2etoc#(

( E3c2!n)e!+%e de+enture 6 conert into coon toc# o$ ! cor"or!tion ot2er t2!nt2!t o$ t2e iuer(

i( =u!r!nteed +ond 6 Bond iued +. one co"!n. !. !%o +e )u!r!nteed +. ot2erco"!nie( =SE, etc( "ri!te %!+e% ecuriti!tion t."e co"!nie( =u!r!ntee doenot enure t2e iue *i%% +e $ree o$ de$!u%t ri# ince t2e ri# *i%% de"end on t2e !+i%it.o$ t2e )u!r!ntor/7 to !ti$. !%% o+%i)!tion(

( Met2od $or Retirin) Bond 6 !riet. o$ et2od, !nd ot inc%uded in +ond indenture *2i%eot2er !re not inc%uded(

( Indenture inc%ude 6 c!%% "roiion, re$undin) "roiion, in#in) $und "roiion, !inten!nce !ndre"%!ceent $und, !nd rede"tion t2rou)2 !%e o$ !et( Indenture *ou%d not inc%ude ;3ed-"re!d tender oer(

!( C!%% "roiion 6 eenti!%%. c!%% o"tion on t2e +ond t2!t t2e iuer o*n !nd )ie t2e uet2e ri)2t to "urc2!e !t ! ;3ed "rice eit2er in *2o%e or in "!rt "rior to !turit.(

i( Fi3ed-9rice c!%% 6 t2e ;r c!n c!%% +!c# t2e +ond !t "eci;c "rice t2!t c!n !r. oert2e %i$e o$ t2e +ond ! "eci;ed in t2e indenture( T2e. )ener!%%. t!rt out 2i)2 !nddec%ine to*!rd "!r( A $or ot +ond, t2e. !re not c!%%!+%e durin) t2e ;rt $e* .e!ro$ t2e iue %i$e(

ii( M!#e-*2o%e C!%%- In t2i c!e, !r#et r!te deterine t2e c!%% "rice, *2ic2 i t2e"reent !%ue o$ t2e +ond re!inin) c!2 o* u+4ect to ! oor "rice e0u!% to "!r!%ue(

1( A dicount r!te +!ed on t2e .ie%d o$ co"!r!+%e-!turit. Tre!ur.ecuritie/uu!%%. t2e r!te "%u ! "reiu7

&( T2e rede"tion "rice i t2e )re!ter o$ t2!t "reent !%ue or t2e "!r !%ue "%u!ccrued interet(

+( Sin#in) $und "roiion 6 t2e iuin) ;r retire ! "eci;ed "ortion o$ t2e de+t e!c2 .e!r !out%ine in t2e indenture( A %otter. c!n +e ued *2ere t2e o*ner o$ t2e e%ected +ond utredee t2e, or t2e +ond !re "urc2!ed in t2e o"en !r#et(

i( 9urc2!e o$ e0ui"ent in e3ce !%ue o$ t2e !ount o$ t2e +ond to +e retired i!not2er !ction t2!t !. !ti$. ! in#in) $und "roiion(

ii( Firt, retireent o$ +ond i"roe t2e ;n!nci!% 2e!%t2 o$ t2e ;r( Second, t2erede"tion "rice !. e3ceed t2e !r#et "rice, 2o*eer t2e indenture !. )ie t2eiuer e3i+i%it. ! to 2o* uc2 o$ t2e +ond to c!%% +!c# e!c2 "eriod(

iii( Acce%er!ted Sin#in) $und 9roiion 6 *2ic2 !%%o* t2e ;r to c!%% +!c# ore +ondin e!r%. .e!r, *2ic2 t2e ;r *ou%d do i$ interet r!te $!%% in t2oe e!r%. .e!r(

c( M!inten!nce !nd re"%!ceent $und 6 !e )o!% ! ! in#in) $und "roiion, *2ic2 i to!int!in t2e credi+i%it. o$ t2e "ro"ert. +!c#in) t2e +ond( RE5UIRES !%u!tion $oru%! $ort2e under%.in) !et( 9roiion "eci;e t2!t t2e $und ut #ee" u" t2e !%ue o$ t2eunder%.in) !et uc2 %i#e ! 2oe ort)!)e "eci;e t2e 2oe +u.er ut #ee" u" t2e!%ue o$ t2e 2oe(

i( One *!. i to !c0uire u8cient c!2 to !int!in t2e 2e!%t2 o$ t2e ;re0ui"entetc( under%.in) t2e !et( T2!t c!2 c!n !%o +e ued to 2e%" retire t2e $und(

d( Tender Oer - e!n $or retrin) de+t $or ot ;r(

i( Fir o"en%. indic!te !n intret in +u.in) +!c# ! cert!in do%%!r !ount o$ +ond, or ,ore o$ten, !%% o$ t2e +ond !t ! et "rice(

ii( =o!% i to e%iin!te retrictie coen!nt or to ue e3ce c!2(iii( I$ ;rt tender oer doe not )et u8cient interet, t2e ;r c!n incre!e it oer

"rice(i( Fir c!n !%o !nnounce it *i%% +u. +!c# +ond deterined +. ! cert!in !r#et

interet r!te( /t2i %o*er interet r!te ri# $or +ot2 t2e +ond2o%der !nd t2e +ondiuer(

( Credit Ri# 6 inc%ude credit de$!u%t ri# !nd credit "re!d ri#!( Credit de$!u%t ri# - i t2e uncert!int. t2e iuer !#in) tie%. "!.ent o$ interet !nd

"rinci"!% ! "recri+ed +. t2e +ond indenture(



i( Mot *ide%. ued indic!tor !re +ond r!tin) t2!t !4or !)encie "er$or credit!n!%.i( T2e r!tin) c!n +e inter"reted ! ! "ro+!+i%it. o$ de$!u%t *it2in oe tie"eriod(

+( Credit "re!d ri# 6 $ocue on t2e dierene +et*een ! cor"or!te +ond .ie%d !nd t2e .ie%don ! co"!r!+%e-!turit. +enc2!r# Tre!ur. ecurit.( Dierence i #no*n ! t2e credit"re!d( E+edded o"tion !nd %i0uidit. $!ctor c!n !ect t2e "re!d(

i( Ot2er $!ctor !ectin) credit "re!d !re: !croeconoic $!ctor, tre!ur. .ie%dcure, +uine c.c%e, iue "eci;c $!ctor /cor"or!tion ;n!nci!% "oition7 $uture"ro"ect o$ t2e ;r(

1'( Eent Ri# 6 !ddree t2e !dere cone0uence $ro "oi+%e eent uc2 ! er)er,rec!"it!%i!tion, retructurin), !c0uiition, %eer!)ed +u.out, !nd 2!re re"urc2!e, *2ic2!. ec!"e +ein) inc%uded in t2e indenture(

!( Suc2 eent c!n dr!tic!%%. !ect ;r c!"it!% tructure !nd reduced t2e credit*ort2ineo$ t2e +ond !nd t2eir !%ue(

+( A co"!n. !. inc%ude in t2e indenture ! )oison )ut, *2ic2 c!n re0uire t2e co"!n. tore"urc2!e de+t !t or !+oe "!r !%ue(

c( T2e "ru"oe o$ t2i $e!ture i to "rotect +ond2o%der, +ut it eectiene to*!rd t2i )o!%c!n +e i%e!din) in t2!t t2e !c0uirin) ;r !. oer ! 2i)2er "rice $or t2e toc# *2ic2 *i%%t2en turn it into ! $riend%. turnoer(

11( Dicu t."e o$ Hi)2 @ie%d Bond, "!.ent $e!ture, iuer -!( Hi)2 @ie%d Bond 6 !re t2oe +ond cre!ted +e%o* inetent )r!de +. r!tin) !)encie(+( Buine!n ri# 6 re$er to +ond *it2 ! r!tin) !t t2e +otto run) o$ t2e inetent-

)r!de c!te)or. /BBB, B!!7 or !t t2e to" end o$ t2e "ecu%!tie )r!de c!te)or. /B! or BB7c( Soe co"!nie *2o iue +ond *it2 ! non-inetent )r!de r!tin)( Uu!%%. .oun) !nd

)ro*in) co"!nie(d( Fir c!n iue +ond to r!ie enture c!"it!% !nd t2eir "ro"ectu !re tied to ! "!rticu%!r

"ro4ect- o t2e. c!%% t2e Stor 'on.s+ e( F!%%en An)e% 6 !not2er t."e o$ 2i)2 .ie%d +ond( T2e. !re +ond t2!t *ere iued *it2 !n

inetent-)r!de r!tin), +ut t2en eent %ed to t2e r!tin) !)encie %o*erin) t2e r!tin) to+e%o* inetent )r!de(

i( I$ iue !re or ne!r +!n#ru"tc., t2e. !re o$ten c!%%ed "eci!% itu!tion, *2ic2 cou%d"!.o i$ t2e co"!n. recoer or %e!d to +i) %oe(

$( Retructurin) !nd Leer!)ed Bu.out 6 !. incre!e t2e credit ri# o$ ! co"!n. to t2e"oint *2ere t2e +ond +ecoe non-inetent )r!de(

i( T2e ne* !n!)eent !. "!. 2i)2 diidend, de"%ete t2e !c0uired ;r c!2, !nd%o*er t2e r!tin) o$ t2 e3itin) +ond(

)( Hi)2 .ie%d +ond 2!e eer!% t."e o$ cou"on tructure 6i( Reet +ond- *2ere dei)n!ted inetent +!n# "eriodic!%%. reet cou"on to reect

!r#et r!te !nd t2e credit*ort2ine o$ t2e iuer(ii( De$erred-cou"on tructure- t2ree t."e

1( De$erred-interet +ond 6 e%% !t ! dee" dicount !nd do not "!. interet int2e e!r%. .e!r o$ t2e iue(

&( Ste"-u" +ond 6 "!. ! %o* cou"on in e!r%. .e!r !nd t2en ! 2i)2er cou"on in%!ter .e!r(

<( 9!.ent-in-#ind +ond 6 !%%o* iuer to "!. interet in $or o$ !ddition!%+ond oer t2e initi!% "eriod(

1&( De$!u%t 6 A De$!u%t occur i$ t2ere !re !n. ied or de%!.ed di+ureent o$ interet !nd or"rinci"!%(

!( 9roen t2!t %o*er credit r!tin) indic!te ! 2i)2er "ro+!+i%it. o$ de$!u%t, +ut t2ere !re t*o

*!. to e!ure de$!u%t: +. t2e r!* nu+er o$ iuer t2!t de$!u%ted r t2e do%%!r !ount o$iue t2!t de$!u%ted(

1<( De$!u%t r!te !nd do%%!r de$!u%t r!te 6!( Iuer De$!u%t R!te 6 nu+er o$ iuer t2!t de$!u%ted oer ! .e!r diided +. t2e tot!%

nu+er o$ iuer !t t2e +e)innin) o$ t2e .e!r(+( Do%%!r De$!u%t R!te 6 t2e "!r !%ue o$ !%% +ond t2!t de$!u%ted in ! )ien c!%end!r .e!r

diided +. t2e tot!% "!r !%ue o$ !%% +ond outt!ndin) durin) t2e .e!r(1>( Recoer. R!te 6 t2e !ount receied ! ! "ro"ortion o$ t2e tot!% o+%i)!tion !$ter ! +ond de$!u%t(

Me!urin) c!n +e co"%ic!ted +ec!ue t2e !%ue o$ t2e tot!% o+%i)!tion re0uire co"utin) t2e"reent !%ue o$ t2e re!inin) c!2o* !t t2e tie o$ t2e de$!u%t(

!( Soe o$ t2e !ount t2!t t2e inetor recoer !. +e in t2e $or o$ ecuritie(+( Bond *it2 2i)2er eniorit. *i%% 2!e 2i)2er recoer. r!te(



CH &' Mort)!)e !nd Mort)!)e-B!c#ed Securitie , H!nd+oo# o$ Fi3ed Incoe

Securitie &'1&1( Mort)!)e 6 ! %o!n t2!t co%%!teried *it2 ! "eci;c "iece o$ re!% "ro"ert.(

!( 9ri!r. M!r#et 6 ;rt !r#et *2ere +!n# iue %o!n !nd co%%ected "t $ro +orro*er(+( Secnd!r. M!r#et 6 Mort)!)e %ender o%d to t2i !r#et t2rou)2 ecuriti!tion(

&( Mort)!)e +!c#ed ecurit. /MBS7- *2en ort)!)e !re "oo%ed to)et2er !nd "!c#!)ed to inetorin t2i $or(

<( Securiti!tion - *2en ort)!)e !re "!c#!)ed !nd o%d on econd!r. !r#et( Uu!%%. ut +eecuritied +. ! =SE or "ri!te %!+e% ecuriti!tion(

>( 9!-t2rou)2 tructure- "t o$ t2e MBS !re "!ed $ro t2e +orro*er to t2e +!n# !nd end u"*it2 t2e MBS inetor( T2i inc%ude interet !nd "rinci"!%(

?( Lien St!tu - re$er to t2e !+i%it. o$ t2e "eron to recoer t2e +!%!nce o*ed in t2e eent o$ !de$!u%t( T2ere !re Firt Lien, Second Lien, Su+e0uent Lien( Firt Lien *ou%d )ie t2e %ender t2e ;rtri)2t to recoer "roceed on %i0uid!tion(

( Ori)in!% Lo!n Ter 6 uu!%%. ort)!)e iued $or 1' to <' .e!r( Ho*eer ediu ter in t2e 1'-&' .e!r !re t!rtin) to +ecoe ore coon(

( Credit C%!i;c!tion 6 9rie !nd u+"rie!( 9rie /A)r!de7- contitute ot o$ t2e outt!ndin) %o!n(

i( Lo* r!te o de%in0uenc. !nd de$!u%t ! ! reu%t o$ %o* loan6to6value r!tio /$!r %et2!n ?Q7

ii( Loan6to6value 6 r!tio o$ ! %o!n to t2e !%ue o$ t2e !et "urc2!ed(iii( Borro*er *it2 t!+%e !nd u8cient incoe/front inco(e ratio 6 o$ no ore t2!n

&Q o$ ont2%. incoe to erice "t re%!in) to 2oe !nd +!c# incoe r!tio o$<Q $or t2oe "t "%u ot2er de+t "t7

+( Su+"rie /B-)r!de7 Lo!n 6 2!e 2i)2er r!e o$ de%in0uenc. !nd de$!u%t co"!red to "rie%o!n( T2e. cou%d +e !oci!ted *it2 2i)2 LT r!tio(

i( Borro*er *it2 %o*er incoe %ee%, !nd +orro*er *it2 !r)in!% or "oor credit2itorie/FICO core +e%o* '7

c( A%tern!tie-A %o!n 6 %e in +et*een 9rie !nd Su+9rie( Eenti!%%. "rie %o!n, t2e. !re !%itt%e ri#ier t2!n A(

i( Lo!n !%ue !. +e unuu!%%. 2i)2 or LT r!tion !. +e2i)2 or %e docuent!tion $orincoe eri;c!tion or do*n "!.ent ource(

( Front end De+t-to-incoe r!tio 6 c!%cu%!te 2o* uc2 o$ ! "eron )ro incoe i )oin) to*!rd2ouin) cot /ort)!e, ort)!)e inur!nce7 diided +. )ro incoe(

( B!c# end de+t-to-incoe r!tio 6"ercent!)e o$ )ro incoe to*!rd ot2er t."e o$ de+t %i#e creditc!rd or c!r %o!n( Inc%ude ort)!)e cot(

1'( Interet R!te T."e 6 ;3ed r!te , Ad4ut!+%e r!te!( Fi3ed r!te 6 re!in cont!nt t2rou)2out ter o$ ort)!)e+( Ad4ut!+%e R!te 6 r!te c2!n)e t2rou)2out t2e ter(

i( B!ed on ! +!e r!te /"rie r!te, LIBOR7 ] ! "re!d(ii( De"endin) on !)reeent, it c!n +e ont2%., 0u!rter%., ei!nnu!% or !nnu!%(

11( 9re"!.ent !nd 9re"!.ent "en!%tie 6 re!on inc%ude:!( Hoe i o%d, *2ic2 re0uire +!%!nce to +e "!id o(+( Re;n!nciin) due to %o*er r!te or ore !ttr!ctie %o!n $e!ture e%e*2ere(c( 9!rti!% "re"!.ent +. t2e +orro*er durin) t2e ter(

d( Contr!ct uu!%%. cont!in "re"!.ent "en!%itie ! ! reu%t( T2ere !re SOFT "en!%tie t2!t

!. +e *!ied on !%e or HARD "en!%tie t2!t !. not +e *!ied(1&( Credit =u!r!ntee $or:

!( =oernent %o!n 6 +!c#ed +. $eder!% )oernent !)encie/=o N!tion!% Mort)!eAoci!tion or =NMA7

+( Conention!% Lo!n 6 cou%d +e ecuritied +. =oernent S"onored Enter"rie/=SE7i( FHLMC-Fedr!% Hoe Lo!n Mort)!)e Cor"or!tionii( FNMA 6 Feder!% N!tion!% Mort)!)e Aoci!tioniii( T2e. "%!ce ! )u!r!ntee on %o!n *it2 ! )u!r!nt. $ee *2ic2 e!n t2e. *i%% "!. t2e

outt!ndin) +!%!nce to t2e inetor in t2e eent o$ de$!u%t(c( 9ri!te %!+e% ecuriti!tion 6 non-!)enc. /or non-con$orin)7 MBS ecuritied +. "ri!te

%!+e% !r#et *i%%in) to t!#e on ri# in nonconention!% %o!n 6 u(#o loans/"rinci"!% oert2e %iit !ndor %o!n *it2 2i)2 LT7



1<( Conention!% ort)!)e 6 ot coon reidenti!% ort)!)e( Lo!n +!ed on credit*ort2ine o$+orro*er !nd co%%!ter!%ied +. reidenti!% re!% et!te t2!t i ued to "urc2!e(

1>( Aortied ort)!)e %o!n /;3ed r!te, %ee% "t7 6 ort)!)e t2!t re0uire e0u!% "!.ent/uuont2%.7 oer t2e %i$e o$ t2e ort)!)e( E!c2 "t conit o$ !n interet co"onent !nd ! "rinci"!%co"onent(

!( Fe!ture inc%ude- !t o$ "rinci"!% incre!e ! tie "!e( Intret decre!e ! tie"!e( Sericin) $ee !%o dec%ine ! tie "!e(

+( A+i%it. o$ +orro* to re"!. reu%t in "re"!.ent ri#(1?( 9re"!.ent ri# - "re"!.ent curt!i% !ount o$ interet t2e %ender receie oer t2e %i$e o$ t2e

ort)!)e !nd c!ue t2e "rinci"!% to +e re"!id ooner(1( Aorti!tion c2edu%e -1( Mort)!)e "re"!.ent o"tion !nd $!ctor t2!t inuence "re"!.ent

!( Se!on!%it. 6 uer tie 9o"u%!r tie $or indiidu!% to oe/!nd ort)!)e ut +e"!id out "rior to !%e o$ 2oe(

+( A)e o$ Mort)!)e "oo% 6 %o*er !)e o$ "oo%, %e %i#e%.( 9re"!.ent uu!%%. coe eer!%.e!r into t2e ort)!)e(

c( 9eron!% 6 !rit!% +re!#do*n, %o o$ e"%o.ent, $!i%. eer)encie, !nd detruction o"ro"ert.( Di8cu%t to !e t2i t."e o$ "re"!.ent ri#(

d( Houin) 9rice 6 "ro"ert. !%ue incre!e !. "ur "re"!.ent ! +orro*er *!ntin) tot!#e !d!nt!)e o$ incre!ed e0uit. $or "eron!% ue( 9ro"ert. !%ue decre!e reduce t2e!%ue o$ co%%!ter!%, reduce t2e !+i%it. to re;n!nce, !nd t2ere$ore, decre!e t2e ri# "$"re"!.ent(

e( Re;n!ncin) +urnout 6 i$ t2ere i i)ni;c!nt "re"!.ent or re;n!nce !ctiit. in t2e ort)!)e"oo% in t2e "!t, t2e ri# o$ "re"!.ent in t2e $uture decre!e(

1( Securiti!tion 6 to reduce ri# o$ "otenti!%%. undieri;ed "ort$o%io o$ ort)!)e %o!n, ! nu+er o$;n!nci!% initutition *i% *or# to)et2er to "o% reidenti!% ort)!)e %o!n *it2 ii%!r c2!r!cteriticinto ! ore dieri;ed "ort$o%io(

!( T2e. *i% t2en e%% t2e %o!n to ! e"!r!te entitit., c!%%ed ! S)ecial "ur)ose Behicle+, ine3c2!n)e $or c!2(

+( An iuer *i%% "urc2!e t2oe ort)!)e !et in t2e "eci!% "ur"oe e2ic%e, !nd t2en uet2e S9 to iue MBS o inetor(

c( T2e %!c# o$ ecuriti!tion !r#et $or ort)!)e *ou%d %e!d to t2e do*n$!%% o$ ort)!)e%endin) +ec!ue o$ ;n!nci!% intitution *ou%d not *!nt to ret!in t2e ri#(

1( Mort)!)e "!-t2rou)2 ecurit. 6 re"reent ! c%!i !)!int ! "oo% o$ "ort)!)e( An. nu+er o$ort)!)e !. +e ued to $or t2e "oo% !nd !n. ort)!)!)e inc%uded in t2e "oo% i re$erred to !! ecuritied ort)!)e(

&'( Securitied ort)!)e 6 ! ort)!)e in ! "oo% o$ ort!)e under ! ort)!)e "!-t2rou)2 ecurit.(&1( Jei)2ted !er!)e ort)!)e !turit. 6t2e *ei)2ted !er!)e o$ !%% t2e ort)!)e !)e in t2e"oo%,

e!c2 *ei)2ted +. t2e re%!tie outt!ndin) +!%!nce to t2e !%ue o$ t2e entire "oo%(&&( Jei)2ted !er!)e ort)!)e cou"on 6 t2e *ei)2ted !er!)e o$ t2e ort)!)e r!te in t2e "oo%(&<( 9!-t2rou)2 r!te 6 /t2e cou"on r!te on t2e "!-t2rou)27 %e ericin) !nd )u!rr!nt.inur!nce

$ee(!( Note: More t2!n one #ind o$ "!-t2rou)2 ecuritie !. +e iued !)!int ! "oo%(

&>( Me!urin) "re"!.ent "eed 6 it i nece!r. to !#e "eci;c !u"tion !+out t2e r!te !t*2ic2 "re"!.ent o$ t2e "oo%ed ort)!)e occur *2en !%uin) "!-t2rou)2 ecuritie(

!( T*o conention ued: ee +e%o*:&?( Condition!% "re"!.ent r!te /C9R7 - i t2e !nnu!% r!te !t *2ic2 ! ort)!)e "oo% +!%!nce i

!ued to +e "re"!id durin) t2e %i$e o$ t2e "oo%( For e() ! "oo% o$ ort)!)e *it2 C9R o$ Q *ou%dindic!te t2!t $or e!c2 "eriod,/!nnu!%7, Q o$ t2e "oo% re!inin) "rinci"!% outt!ndin) *i%% +e "!id

o(

a+ CPR=1−(1−S## )12

&( 9u+%ic Securitie Aoci!tion /9SA7&( Sin)%e ont2%. ort!%it. r!te /SMM7 6 cont!nt !turit. ort!%it.

!(

Prepament t

Principal Pm t t −Sc/e*ule pmt t S## =1−(1−CPR)

1

12

+( SMM o$ 1'Q i"ie 1'Q o$ "oo% +e)innin) 6o$ ont2 outt!ndin) +!%!nce, %e c2edu%e"!.ent, *i%% +e "re"!id durin) t2e ont2(

c( No* t2!t Bo+ "!id o$ t2i ort)!)e, 2e *ont +e !#in) !n. re "!.ent, t2e c2edu%eont2%. "!.ent on t2e MBS *i%% dec%ine +., .ou )ueed it, 1'Q(



d( C!%%ed ort!%it. +ec!ue !n!%.t *ere !ctu!rie !nd c!%%ed it t2e %o* de!t2 o$ t2eort)!)e "oo%(

&( S"eci;ed "oo% !r#et 6 identi;e t2e nu+er !nd +!%!nce o$ t2e "oo% "rior to ! tr!de&( TBA M!r#et 6 To Be !nnounced M!r#et 6 *2ere .ou c!n tr!de MBS in t2e $or*!rd !r#et( More

%i0uid t2!n "eci;ed "oo%( Ino%e et!+%i2in) t2e "rice in ! $or*!rd !r#et( 9oo% A%%oc!tion,2o*eer, i not ree!%ed to e%%er unti% iedi!te%. +e$ore ett%eent(

<'( Do%%!r ro%% tr!n!ction 6 occur *2en !n MBS !r#et !#er +u. "oition $or one ett%eentont2, !nd !t t2e !e, tie, e%% t2oe !e "oition $or !not2er ont2( /eenti!%%. to +u. it+!c# c2e!"er in ne3t ont2- !ccountin) $or cou"on "!.ent, "rinci"!% "t, reineted interet7,+ut 2e c!n reinet t2e c!2 !nd 2!e it )ro*( T2i i)2t +e ue$u% $or dur!tion !tc2in), ri#reduction in ! )ien ont2, T2e $!%% in "rice i #no*n ! Gt2e Dro"(

<1( !%uin) ! do%%!r ro%% tr!n!ction -!( Securit. cou"on, !)e, JAC -+( Ho%din) "eriod/"eriod +t* ett%eent d!te7 -c( Aued "re"!.ent "eedd( Fundin) cot in t2e re"o !r#et

<&( F!ctor c!uin) ! do%%!r ro%% to tr!de S"eci!% 6!( J2en t2e "rice dierencedro" i %!r)e enou)2 to reu%t in ;n!ncin) !t %e t2!n t2e

i"%ied cot o$ t2e $und, t2en t2e do%%!r ro%% i tr!din) "eci!%(+( C!ued +.: ! decre!e in +!c#ont2 "rice / incr !%eette%eent tr!n!ction on +!c#

ont2-incr de!nd, incr u""%., "rice dro"7c( Incr in $ront ont2 "rice/dur to incr de!nd in $ront ont2 $or de!% co%%!ter!%7d( S2ort!)e o$ cert!in ecuritie in !r#et t2!t c!ue de!%er to

<<( Co%%!ter!%ied Mort)!)e O+%i)!tion

<>( 9%!nned Aorti!tion C%! Tr!nc2e

<?( Stri"

<( 9re"!.ent Mode%in)

<( Re;n!ncin) ! ort)!)e



<( D.n!ic !%u!tion Mode%

<( O"tion Ad4uted S"re!d

CH T2e R!tin) A)encie - M!n!)in) Credit Ri# &nd

Ed1( Ro%e o$ credit r!tin) !)encie 6 SEE THE BOOK 6 ER@ 5UICK

&( Inter"retin) Credit R!tin)

<( R!tin) c!%e



>( Uno%icited r!tin)

?( Inetent )r!de

( S"ecu%!tie )r!de

( R!tin) 9roce

( R!tin) !nd Re)u%!tion

book iii -defnitions

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