Forward Quotes

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

  What are Forward Quotes? Forward quotes are used to represent and identify the future rates of the currency. These rates are used for currency trade and quoted as points multiplied by 0.0001 and then added to or subtracted from the spot quote. Typically, bid and ask spreads in the currency market are quoted separately. This bid-ask spread usually widens as the term of the forward contract increases.
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Exotic Options

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What are Exotic Options? As the word represents, Exotic options are the options that are used rarely and are highly customized. Exotic options are the opposite of plain vanilla options generally traded on exchanges in fairly liquid markets. Exotic options are traded in the OTC market and meet typically a specific firm's need for Hedging that plain vanilla options cannot meet. The main objective behind building exotic options is to provide a unique and customized hedge for a firm's needs.
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Forward Rates

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What are Forward Rates? The future spot rates implied by today's spot rates are forward rates. Consider the following scenario: the offered one-year rate is 3%, and the offered two-year rate is 4%. (both with annual compounding). We can estimate that the rate provided for the second year is 5%. This is because averaging 3 per cent for the first year with 5 per cent for the second year results in a total of 4 per cent for the two years.
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Futures Contract

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is Futures Contract? Forward Contract and Future Contract forms are considered the two most essential products for Hedging. They are also called linear derivatives as they follow a zero-sum game, i.e. profit of party A is the loss of party B.
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European Options

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What are European Options? European options are the options that cannot be retired before maturity. The only difference between an American option and a European option is that the American Option can be exercised early; American options can always be used to replicate their corresponding European options simply by choosing not to exercise them until expiration.
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Gap Options

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What are Gap Options? The gap option is an example of Exotic options in which we purchase a European option with two strike prices, X1 and X2. X2 is also referred to as trigger price as it's the price that makes the profitable if X2 is greater than X1, and the stock price at maturity,  ST, is greater than the trigger price, X2, then the payoff for the call option will be equal to ST − X1. If the stock price is less than or equal to X2, the payoff will be zero.
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Mortgage-Backed Securities

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

  What are Mortgage-Backed Securities (MBS)? MBS is a specialised product of Asset-Backed Securities. By pooling mortgages, MBS sells them as packaged mortgages. The bank issues mortgages to its customers after receiving payments from institutional investors. In essence, investors who buy MBS ultimately lend the money to the mortgage owners.
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Covered Call and Protective Put

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is Covered Call and Protective Put? Covered Call and Protective Puts are considered one of the most straightforward hedging strategies. 
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Put Call Parity

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is Put Call Parity? Put-call parity is considered a critical aspect of option pricing. It allows investors and risk managers to calculate the price of either put or call if the value of anyone is already provided. The put-call parity is derived based on two options strategies: a fiduciary call and a protective put.
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Straddle and Strangle

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

  What are Straddle and Strangle? Straddle and strangle are two hedging strategies that expect the stock prices to move significantly away from their current prices.
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What is Hedging?

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is Hedging? Financial institutions use Hedging to increase financial stability and reduce the risk of financial distress. Broadly, there are several types of Hedging, including static Hedging and dynamic Hedging. Static hedging is a simple process that determines the initial risks of an investment position. An appropriate hedging vehicle is used to match that position as closely as possible (minimise basis risk). 
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Butterfly Spread

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is Butterfly Spread? A butterfly spread is another strategy used by the traders. We purchase or sell three different call options in the butterfly spread. To build a butterfly spread, the trade purchases one European call with a low exercise price, buys another European call with a high exercise price and sells two European calls with an exercise price in between (usually near the current stock price). One critical aspect is that expiration dates are the same for all options. The trader expects stock prices to remain new to the exercise prices. 
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Bull and Bear Spread

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is Bull and Bear Spread? Bull and Bear spread are two common hedging strategies. In the Bull spread, the buyer of the spread purchases a European call option with a low exercise price and subsidizes the purchase price of the call by selling a European call with a higher exercise price. It is ensured that the expiration dates are identical for both options. While doing this all, the bull call holder expects the stock price to rise and the purchased call to finish in the money.
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What is a Forward Contract?

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

Forward Contract and Future Contract forms are considered the two most essential products for Hedging. There are also linear derivatives as they follow a zero-sum game, i.e. profit of party A is the loss of party B.
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Basis Risk

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is Basis Risk? In Hedging, most of the financial positions are hedged using forwards and futures, in which the basic assumption is that the expected spot price in the future will become the actual spot price in the future. However, it doesn't happen all the time, and this risk of getting the difference between spot prices and futures prices is referred to as Basis Risk.
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American Options

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What are American Options? American options are the options that give the holder of the Option the right to retire before maturity. The issuance of the dividend makes American options more attractive than European options. If the dividend is large enough, the option holder may exercise the Option early. It will probably happen when the dividend amount exceeds the amount of interest forgone due to the early exercise. 
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Pass-Through Securities

ACCA, CIMA, CPD, FRM | by Owais Siddiqui

What are Pass-Through Securities? Pass-through securities are one of the widely used financial instruments. Several mortgages may form the pool for a mortgage pass-through security, and different types of mortgages can be used in this securities mortgage. These securitised are then passed through to another party willing to make payments against it. The pass-through security investors receive the monthly cash flows generated by the underlying pool of mortgages, less any servicing and guarantee/insurance fees.
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Prepayment Modeling

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is Prepayment Modeling? In all long term financings, there is always a risk that the borrowers pay the money early and pay lesser interest, hence taking the profitability down and causing cash flow management issues for the company. It may also result in new refinancing at lower rates. Therefore, institutions must do the prepayment modelling.
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Short Selling

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is Short Selling? Short selling is when an investor borrows a security and sells it on the open market, intending to repurchase it for a lower price later. Short-sellers bet on a security's price falling and profit from it. On the other hand, Long investors are hoping for a price increase.
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Swap In Finance

ACCA, CIMA, CPD, AAT, FRM | by Owais Siddiqui

What is a swap? A swap is a financial derivative in which two parties agree to exchange payments based on the movement of an underlying asset.
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