1) Can you describe the trade life-cycle ?
R isk Assessment
E xecution (placing the trade)
C apture (skeleton details, minimum information required)
V alidation (especially for OTC derivatives)
E nrichment (adding additional essential information)
M atching (counterparties agreeing)
C learing (counterparty obligations)
C onfirmation (or affirmation - both parties?)
S ettlement (carried out by custodian)
R econciliation (with custodians and reporting)

2) What is a Failed Trade ?
A trade that does not settle on the contractual settlement date.
Normally caused by a disagreement between parties on whether the delivered item meets the agreed specifications.

3) What is a Custodian ?
A custodian is responsible for the safe keeping of the securities and other assets in electronic or physical form.
Most also offer services including: administration, transaction settlement, collecting dividends and interest.

4) What does STP stand for ?
STP - Straight Through Processing
This is achieved by allowing information that has been electronically entered to be transferred from one party to another in the settlement process without manually re-entering the same pieces of information repeatedly over the trade life-cycle.

5) What do the following abbreviations mean ?
BPV - Basis Point Value
CCP - Central Counterparties
CUSIP - Committee on Uniform Security Identification Procedures
DTD - Document Type Definition
ESMA - European Securities and Markets Authority
FINRA - Financial INdustry Regulatory Authority
FIXML - Financial Information eXchange Markup Language (standardised: equities, futures, options)
FpML - Financial Products Markup Language (customised: interest rate swaps and forwards)
ISDA - International Swaps and Derivatives Association
ISIN - International Securities Identification Number
MIFID - Markets in Financial Instruments Directive
MDDL - Market Data Definition Language (xml message format for exchanging information)
RIXML - Research Information eXchange Markup Language
SWIFT - Society for the Worldwide Interbank Financial Telecommunication

6) Can you describe Central Counterparty Clearing ?
In an attempt to reduce the systematic risk of the OTC market and to increase transparency standard OTC derivatives need to be cleared through a central counterparty.
The largest volume of OTC contracts is interest rate contracts, currency contracts and credit default swaps.

7) Can you give a description of the different Financial Markets ?
Money Market - This is short-term borrowing and lending of money and credit. Maturities are less than 1 year and in most countries this is OTC.
Capital Market - This is medium and long-term borrowing and includes equities and bonds
Cash Market - (spot market) This is for immediate settlement.
Foreign Exchange Market - This is for all global currencies

8) Can you describe the Money Market ?
They are all priced on the basis of the forward rate.
This market is mainly OTC and can be divided into two main categories:
Unsecured Cash - (Interbank Lending/Deposit Market) The interest rate is fixed for that period and the principal amount plus the interest is repaid at the maturity of the deposit.
The periods are typically O/N (overnight), T/N (tomorrow/next) and everything up to 12 months.
LIBOR, Euribor
Secured Cash - certificates of deposit, treasury bills, repurchase agreements

9) Can you give some examples of Money Market Instruments ?
Treasury Bills - (exchange and OTC)
Repurchase Agreement - (exchange and OTC)
Certificate of Deposit (CD) -
Interest Rate Forwards (FRA) -
Interest Rate Futures - (treasury bond futures)
Interest Rate Options - (options on interest rate futures)

10) Can you describe a Treasury Bill ?
These are zero coupon bonds issued by the US for terms of up to 12 months.
They are sold at a discount.

11) Can you describe a Repurchase Agreement ?
This is an agreement to sell and buy back at a fixed date at a fixed price.
The investments can be bonds or equities.

12) Can you describe a Certificate of Deposit ?
This is a savings certificate with a fixed interest rate and maturity date.
The amount cannot be accessed before the maturity date.
They are normally issued by commercial banks.

13) Can you describe the Futures Market ?
This is where the delivery of an instrument takes place at a future date.
Exchanges only

14) Can you give a list of the different Asset Classes ?
Interest Rates - Government Bonds, Forward Rate Agreements, Interest Rate Futures / Swaps / Options
Credit - Corporate Bonds, Loans, Asset Swaps, Total Return Swaps, Credit Default Swaps
Equities - Stocks, Stock Indices, Convertible Bonds
Foreign Exchange - FX Forwards, FX Swap, Cross Currency Swap, FX Future
Commodities - Base Metals, Precious Metals

15) Can you give the names of any derivatives that are traded Over The Counter ?
These are bespoke contracts (70% are interest rate derivatives).
Interest Rate Forwards (FRA)
Interest Rate Swaps (same currency, remove interest rate risk)
FX Swaps (different currencies, remove exchange rate risk)
Cross Currency Swaps (different currencies, remove interest rate risk and exchange rate risk)
Credit Default Swaps (single name)
Total Return Swaps
Interest Rate Options (options on Interest Rate Futures)

16) Can you give the names of any derivatives that are traded on an Exchange ?
These are standardised contracts
Exchange Traded Funds
Currency Options
Single Stock Futures
Equity Index Futures
Equity Index Options
Interest Rate Futures (government bond futures and STIR futures)
Interest Rate Options (options on interest rate futures)

17) What is a Tick ?
A tick is a price increment in which prices are quoted.
The exact meaning and size varies depending on the instrument.
Most European and Asian bonds are quoted in decimals so the tick size is 1/100 or 1%.

18) What is the Settlement Date ?
Also known as the contractual settlement date.
It may be different to the actual settlement date (if there is a problem or delay)
This is the date the agreed contract starts.

19) What does it mean to be 'Dovish' or 'Hawkish' ?
Dovish - an inflation dove is somone who favours lower interest rates.
Hawkish - an inflation hawk is someone who favours higher interest rates.

20) What is a Basis Point ?
A basis point is equal to 1/100th of 1%, or 0.01% (0.0001), and is used to denote the percentage change in a financial instrument.

21) What is a Payoff Diagram ?
A payoff diagram shows the profit and loss situation for a particular strategy at a number of different share prices.

22) What is a Relative Value trade ?
This is when you simultaneously buy and sell related instruments hoping to benefit from their change in relative value.

23) What is a Trade Blotter ?
A trade blotter is a record of trades made over a period of time.

24) What is the term EuroDollar ?
This term refers to US dollar deposits at foreign banks or foreign branches of American banks.
These are basically just regular dollars outside of the US banking system.
The US dollar is the global reserve currency which means this market is the largest (and probably the most important) in the world.
This market influences the price of every type of financial instrument globally.
The EuroDollar market can be thought of as a deposit and loan market for offshore dollars.
This market is practically cashless and is made up of balance sheets.
The reason for the name is because at the beginning most of the dollar denominated deposits were held in European banks.

25) What is the term EuroSterling ?
Also known as europound.
This term refers to UK pound deposits at foreign banks or foreign branches of UK banks.

26) What is the term EuroCurrency ?
This refers to any currency deposited in a bank that is not in the home country where the currency was issued.
For example Japanese yen deposited at a bank in China would be called eurocurrency.

27) Can you give some examples of popular hedge fund strategies ?
*) Long Only
*) Relative Value
*) Macro
*) Distressed
*) Event Driven

28) What is a Reset Date ?
The point in time when the initial fixed interest rate switches to a floating interest rate.

29) What is the Martingale System ?
This is one of the oldest and most well-known betting systems in existence.
The strategy is to double your bet after every loss so that the first win recovers all previous loses, plus win a profit equal to the original stake.

30) What is the Martingale Measure ?
Also known as risk neutral probabilities.
This is the fundamental concept in the no-arbitrage pricing of instruments which links prices to expectations.

31) Can you describe what a PnL Explain report is ?
Also known as a pnl attribution report.
This is a report commonly used by traders and product control that explains the daily fluctuation in the value of a portfolio and the reasons for those changes.
The report includes the following:
*) PnL due to change in time
*) PnL due to change in interest rates
*) PnL due to changes in volatility (?)
*) PnL due to changes in price of underlying (equity, commodities)
There are two methods for generating this report
*) Sensitivites method - calculating option sensitivies
*) Re-evaluation method - calculates based on yesterdays price compared to todays price.

32) What is a Spot Price ?
A spot price is the value of an asset at that particular moment in time.

33) What is the difference between Realised Profit and Unrealised Profit ?
Realised - this is the profit from completed trades that have actually been executed.
Unrealised - this is the profit that would have been made if the trades were executed.

34) When you trade on an exchange what is the difference between Maintenance Margin and Variation Margin ?
Maintenance Margin - the minimum level required to be held at the clearing house (set by the exchange).
Variation Margin - the additional amount required to cover any loses.

35) What is Alpha ?
This is a measure of the active return on an investment compared to a suitable market index.
An alpha of -1% means the investment underperformed the market.

36) What is the Hedge Ratio ?
When trying to hedge a position you need to know what the hedge ratio is.
hedge ratio = volatility of position / volatility of hedging instrument
When hedging bonds there are two different ways you can calculate the hedge ratio
Conversion Factor - (price factor) can be used for deliverable bonds
Modified Duration - (basis point value)

Other Questions

Interest Rates
Foreign Exchange

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