Flashcards
Derivatives 1
Cards in this deck (26)
- 1What does a synthetic European put option consist of?A long position in a European call option, a long position in a risk-free bond that pays the exercise price on the expiration date, and a short position in the underlying asset.
- 2What is open interest in the a futures market?Open interest is the total number of contracts (long/short position pairs) outstanding. The number of contracts that change hands in a given period is volume, not open interest.
- 3Define a cash settlementIn a cash settlement forward contract there is a cash payment at settlement by either the long or the short depending on whether the market price of the asset is below or above the contract price at expiration. The underlying asset is not purchased or sold at settlement.
- 4What is a plain vanilla interest rate swap?one party pays a floating rate and the other pays a fixed rate, both based on the notional amount.
- 5Why are binomial models used to value otpions?Binomial models are used to value options because they can account for contingent payoffs (i.e., the exercise value after an up-move or down-move in the underlying asset price). The size of an up-move in a binomial model represents an assumption about the volatility of the underlying asset price. Binomial models can use risk-neutral pseudo-probabilities and thereby use the risk-free rate to discount the expected future payoff.
- 6What does a synthetic European call option consist of?A synthetic European call option consists of a long position in the underlying asset, a long position in a European put option, and a short position in a risk-free bond (i.e., borrowing at the risk-free rate).
- 7What effect does volatility have on the value of call and put options?Greater volatility in the price of the underlying asset increases the values of both puts and calls because options are "one-sided." Since an option's value can fall no lower than zero (it expires out of the money), increased volatility increases an option's upside potential but does not increase its downside exposure.
- 8What effect does an increase in the risk free rate have on call and put options on equities?An increase in the risk free rate increases the values of call options on equities and decreases the values of put options on equities.
- 9If futures prices are positively correlated with interest rates, how will this affect futures prices in relation to forward prices.Futures prices will be greater than forward prices if interest rates are positively correlated with futures prices, because daily settlement of long futures positions will produce excess margin when interest rates are high and require margin deposits when interest rates are low.
- 10A derivative is best described as a financial instrument that derives its performance by:Transforming the performance of the underlying.
The transformation of performance function of derivatives is what distinguishes it from mutual funds and exchange traded funds that pass through the returns of the underlying. - 11Convenience yield is described as the non-monetary benefit of holding a what?an asset
- 12What makes up a protective put with a forward contract?A long position on a bond that has the face value equal to the forward contract
A forward contract
A long position in a put - 13Describe the process of replicationReplication is the process of creating an asset or portfolio from another asset, portfolio and/or derivative. It is used to exploit pricing differentials.
- 14During its life, the value of a forward contract is most likely equal to the price of the underlying minus the price of the:forward, discounted over the remaining life of the contract.
- 15What effect does the time to maturity have on call and put option values?As the time to expiration increases, both put and call option values increase.
- 16What is the difference between contingent claims and forward contracts with regard to default?In a forward contract, either party could default, whereas in a contingent claim, default is possible only from the short to the long.
- 17What does the investor pay and return on an equity swap?Also called an index swap, the investor pays the return on a stock index and receives a fixed rate.
- 18In a currency swap, when is the underlying principal amount exchanged?Both at the start and the end of the swap
- 19For a forward contract with a value of zero, a situation where the spot price is above the forward price is best explained by high:Convenience yield
If the convenience yield is high, holding the underlying confers large benefits, thus the spot price can exceed the forward price for a forward contract with a value of zero - 20If dividends paid by the underlying increase, the value of a European call option will most likely:decrease
- 21Define a fiduciary call and what is its payoff?Long position on a call and in a risk-free bond.
Generates a payoff that is equal to the market value of the asset if it expires in the money. - 22the value of a swap is equal to what?the present value of net cash flow payments from the swap
- 23A European put option on a dividend-paying stock is most likely to increase if there is an increase in:dividend payments
- 24If a call option is priced higher than the binomial model predicts, investors can earn a return in excess of the risk-free rate by:borrowing at the risk-free rate, selling a call, and buying the underlying.
- 25What does delta and gamma measure?Delta measures the sensitivity of a derivatives value to the price of its underlying asset.
Gamma measures the sensitivity of delta to the price of the underlying asset. - 26—
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- Business Analyst CFA Flashcards on Derivatives 1, created by Henry Lynch (NZ) on 22/10/2021.
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- Henry Lynch (NZ)
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