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Flashcards

FINC306

Tom Weatherall English 41 cards

Cards in this deck (41)

  1. 1What is a derivative?A financial instrument that has a value determined by an underlying asset.
  2. 2Types of derivatives?forwards
    futures
    options
    swaps
  3. 3Uses of derivatives?risk management
    speculation
    reduce transaction costs
    regulatory arbitrage
  4. 4Derivative Marketsover-the-counter
    exchange market
  5. 5Market valuethe sum of the market value of all the claims that could be traded, without regard to whether that have traded
  6. 6notional valuemeasures the scale of a position, usually with reference to some underlying asset
  7. 7Trading Volumethis measure counts the number of financial claims that change hands
  8. 8Open interestmeasures the total number of contracts for which counterparties have a future obligation to perform
  9. 9What is a forward contract?a binding agreement to buy/sell an underlying asset in the future at a price set today
  10. 10Long Forward Payoff:Vt = St - Ft
  11. 11Short Forward Payoff:Vt = Ft - St
  12. 12What is a call optiona non-binding agreement to buy an asset in the future at a price set today
  13. 13Long Call Payoffc = max(St - K, 0)
  14. 14Short Call payoffc = -max(St - K, 0)
  15. 15What is a put option?A put option gives the owner the right but to sell the underlying asset at a predetermined price during a predetermined time period
  16. 16Long Put Payoffp = max(K - St, 0)
  17. 17Short Put Payoffp = -max(K - St, 0)
  18. 18What is a floor?A put option combined with a long position in the underlying asset
    To insure against a fall in the price of the underlying asset
  19. 19What is a cap?A call option is combined with a short position in the underlying asset
    To insure against an increase in the price of the underlying asset
  20. 20What is covered writingWriting an option when there is a corresponding long position in the underlying asset
  21. 21What is naked writing?writing an option when the writer does not have a position in the asset
  22. 22What is a synthetic forward?A synthetic forward contract uses call and put options with the same strike price and time to expiry to create an offsetting forward position.
  23. 23What is replication?Replication means creating a portfolio with the same payoff as a targeted derivative by using existing securities and/or other derivatives.
  24. 24Put-Call Parityc(K) - p(K) = St - K
  25. 25What is a straddle?Buying a call and a put with the same strike price and time to expiration.
    Payoff: c(K) = p(K)
  26. 26what is a strangleBuying an out-of-the-money (OTM) call and
    put with the same time to expiration.
  27. 27What is a bull spread?A bull spread is a position in which one buys a call and sells an otherwise identical call with a higher strike price.
  28. 28What is a bear spread?A bear spread is a position in which one sells a put and buys an otherwise identical put with a higher strike price.
  29. 29What is a butterfly spread?A butterfly spread is a position in which one sells multiple calls (puts) with different strike price.
  30. 30what is arbitrage?a situation in which one can
    generate profits without taking any risk
  31. 31What is a forward rate agreement?FRAs are OTC contracts that guarantee
    a borrowing or lending rate on a given
    notional principal amount.
  32. 32What is a swap?A swap is an agreement between two parties to exchange one or multiple payments, on one or more dates, determined by the difference between two prices
  33. 33What is the swap counterparty?The swap counterparty is a dealer, who is, in effect, a broker between buyer and seller
  34. 34Binomial Option PricingBinomial option pricing model enables us to determine the price of an option
  35. 35What is notional value of swap?311.47 trillion USD, 4.2 times world GDP and 57.25% of total OTC derivatives
  36. 36What is a back-to-back transaction?situation where the dealer matches the buyer and seller
  37. 37What is the market value of a swap?the difference in the PV of payments between original and new swap rates
  38. 38MonotonicityAs strike price increases, the option premium for a call must decrease, and increase for a put
  39. 39ConvexityFor calls as strike price increases gradient must become less negative.
    For puts the gradient must become more positive.
  40. 40What distribution does the binomial tree approximate?Lognormal, which is the probability distribution that arises from the assumption that continuously compounded returns on the stock are normally distributed.
  41. 41What is BS model?Binomial tree with infinite periods.

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Flashcards on FINC306, created by Tom Weatherall on 08/08/2019.
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Tom Weatherall
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