Reference no: EM133495817

Trinity Financials

Trinity Financials is a mid-size firm that specialises in investment management services to institutional investors in the pension fund industry. You have been recently recruited as a Junior Analyst on the derivatives trading desk and have been assigned to look after Midland Pensions, one of Trinity's prime clients. Midland's portfolio consists of investments in UK equities as well as US equities. Historically, Midland has mandated Trinity to rely on portfolio diversification to manage the risk of its equity investments. However, recently it has realised that both the UK and US equity markets are highly co-integrated and increasingly move in tandem leaving its portfolio investments at higher risk. Midland is now considering the use of derivatives contracts to manage the risk of portfolio investments. As a starting point, it has requested your line manager at Trinity to make a presentation before the investment committee of Midland Pensions. To help prepare for this presentation, your line manager has tasked you to write a report.

Question 1

You have identified that exchange traded derivatives contracts are available for UK equities on Both the Intercontinental Exchange (ICE) and Eurex Exchange. One of the important consideration with respect to trading exchange traded derivatives is margin requirements. In addition, it is also important to evaluate clearing risk management strategies and procedures for trading on any exchange.

1. Explain the mark-to-market and margin requirement mechanics for both ICE and Eurex Exchange.

2. Explain the clearing risk management strategies and practices at both ICE and Eurex.