410 Midterm 1

Question 1

American option

Answer 1

An options that can be exercise at any time during it’s life.

Question 2

arbitrage

Answer 2

a trading strategy that takes advantage of two or more securities being mis-priced relative to each other

Question 3

asian option

Answer 3

an option with a payoff dependent on the average price of the underlying asset during a specified period.

Question 4

asset-backed security

Answer 4

security created from a portfolio of loans, bonds, credit card receivables, or other assets.

Question 5

asset swap

Answer 5

exchange the coupon on a bond for LIBOR plus a spread

Question 6

bermudan option

Answer 6

an option that can be exercised on specified dates during it’s life

Question 7

call option

Answer 7

an option to buy an asset at a certain price by a certain date.

Question 8

cash settlement

Answer 8

procedure for setting a futures contract in cash rather than by delivering the underlying asset.

Question 9

CDD

Answer 9

cooling degree days

Question 10

coupon

Answer 10

interest payment made on a bond

Question 11

credit default swap

Answer 11

an instrument that gives the holder the right to sell a bond for its face value in the event of a default by the issuer.

Question 12

credit risk

Answer 12

the risk that a loss will be experienced because of a default by counter party in a derivatives transaction.

Question 13

currency swap

Answer 13

a swap where interest and principal in one currency are exchanged for interest and principal in another currency.

Question 14

european option

Answer 14

an option that can be exercised only at the end of its life.

Question 15

exercise price

Answer 15

the price at which the underlying asset may be bought or sold in an option contract (also called the strike price).

Question 16

forward contract

Answer 16

a contract that obligates the holder to buy or sell and asset for a predetermined delivery price at a predetermined future time.

Question 17

forward interest rate

Answer 17

the interest rate for a future period of time implied by the rates prevailing in the market today.

Question 18

future contract

Answer 18

a contract that obligate the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. the contract is settled daily.

Question 19

haircut

Answer 19

discount applied to the value of an asset for collateral purpose.

Question 20

HDD

Answer 20

heating degree days.

Question 21

hedge fund

Answer 21

decrease risk and decrease volatility. 1. funds that are subject to less regulation and fewer restrictions than mutual funds. 2. they can take short position and use derivatives. 3. but they cannot publicly offer their securities.

Question 22

interest rate swap

Answer 22

an exchange of a fixed rate of interest on a certain notional principal for a floating rate of interest on the same notional principal.

Question 23

LIBOR

Answer 23

LODON INTERBANK OFFERED RATE

Question 24

Liquidity risk

Answer 24

1. risk that it will not be possible to sell a holding of a particular instrument at it;s theoretical price. 2. the risk that a company will not be able to borrow money to fund its assets.

Question 25

maturity date

Answer 25

the end of the life of a contract

Question 26

put-call parity

Answer 26

the relationship between the price of a european call option and the price of a european put option when they have the same strike price and maturity date.

Question 27

REPO

Answer 27

repurchase agreement. a procedure for borrowing money by selling securities to a counter party and agreeing to buy them back later at a slightly higher price.

Question 28

repo rate

Answer 28

the rate of interest in a repo transaction

Question 29

spot price

Answer 29

the price for immediate delivery

Question 30

static hedge

Answer 30

a hedge that does not have to be changed once it is initiated.

Question 31

tranche

Answer 31

one of several securities that have different risk attributes.

Question 32

treasury bill

Answer 32

a short term non-coupon bearing instrument issued by the government to finance its debt.

Question 33

treasury bond

Answer 33

a long term coupon bearing instrument issued by the government to finance its debt

Question 34

volatility

Answer 34

a measure of the uncertainty of the return realized on an asset

Question 35

yield

Answer 35

a return provided by an instrument

Question 36

deversification

Answer 36

decrease risk by dividing a port folio between many different asset