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CISI Capital Markets Programme: Derivatives > Chapter 8: Trading, Hedging and Investment Strategies > Flashcards

Chapter 8: Trading, Hedging and Investment Strategies Flashcards

1
Q

**

What is an Intra Market Spread?

A

The spread between two contracts, with the same underlying asset, but different maturities.

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2
Q

How Would the Spread Between Two Contracts Narrow if Prices are Rising?

i.e for a 3 month and a 6 month future.

A

The price of the 3 month future is going to increase faster than the price of the 6 month future.

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3
Q

How Would the Spread Between Two Contracts Narrow if Prices are Falling?

i.e for a 3 month and a 6 month future.

A

The price of the 6 month contract falls faster than the price of the 3 month contract.

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4
Q

What Would an Investor do When Spreads are Narrowing?

i.e for a 3 month and a 6 month future.

A

Buy the 3 month and sell the 6 month, then once the prices have risen, sell your 3 month and buy the 6 month.

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5
Q

What Would an Investor do if the Intra Market Spread is Widening in a Contango Market?

What action and what trade?

A

Trade: Sell the spread

Action: Sell the near dated and buy the far dated.

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6
Q

What is an Inter-Market Spread?

Definition and example pair

A

Buying and selling futures on different but connected assets.

E.g. Long Gilt Future vs Short Sterling Future.

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7
Q

What is the Crack Spread?

Which commodities are involved?

A

The relationship between; Crude Oil, Heating Oil and Gasoline.

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8
Q

What is a Covered Short Call?

Why is it used?

A

If an investor is long on a unvolatile asset, they can sell a call, so they have profited off the premium and have boosted the asset.

This can also help soften losses if price falls.

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9
Q

What does a Covered Short Call Essentially Create?

A

A short put position.

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10
Q

What is a Sythetic Long Future = To ?

NOTE: This can be rearranged.

Which Forumla of Options

A

Long Future = Long Call and Short Put

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11
Q

What is a Bull Call Spread?

Which trades does this involve?

A

By Buying a Call and Selling a Call

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12
Q

For a Bull Call Spread, What is the Maximum Loss an Investor Can Incur?

A

The difference between the two premiums.

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13
Q

What is the Maximum Profit for a Bull Call Spread?

In absolute terms.

A

The difference between the two strike prices - the initial debt (premium paid)

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14
Q

If Strikes are 100 and 110, Which One Would you Buy for a Bull Call Spread?

A

100, because with BuLl you buy LOW.

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15
Q

For a Bear Call Spread, How is the Maximum Profit Calculated?

A

The difference between the two premiums.

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16
Q

What is the Maximum Loss a Bear Call Spread Can Incur?

A

The difference in premiums minus the difference in strikes.

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17
Q

What is the Rule for a Bull Put Spread?

Buy the ……., Short the ……..?

A

Buy the near and short the far.

18
Q

What is the Maxium Profit for a Bull Put Spread?

A

It is the Net Initial Credit.

19
Q

How does one Calculate the Break Even Point of a Bull Put Spread?

A

Higher strike price - net initial credit.

20
Q

What is a Horizontal / Calendar Spread?

A

An option with the same strike but different maturities.

21
Q

What is a Vertical Spread (Bull/Bear)?

Options with the same but different what?

A

The spread between options with the same maturities and the same strike price.

22
Q

What is a Diagonal Spread?

A

Different options, with both different maturities and different strikes.

23
Q

What is a Long Straddle?

What does one buy, with the same……..

A

Where one goes both long a call and long a put with the same strike.

24
Q

What is the Cost of a Long Straddle?

A

The total of both premiums.

25
Q

What is the Shape of a Long Straddle Curve?

V for……

A

V for volatility.

26
Q

What is the Max Profit for a Long Straddle?

For both upside and downside.

A

Infinite on the upside.

But limited to the market price - the premiums paid.

27
Q

Why Would an Investor Chose a Short Straddle?

A

They dont expect any volatility, therefore they just collect both premium from selling calls and puts.

28
Q

What is a Short Straddle?

A

Where an investor sells a call and sells a put.

29
Q

What Shape is a Short Straddle Curve?

N for?……

A

N for NO VOLATILITY.

30
Q

What Curve is a STRANGLE Curve?

Bart Simpson?

A

A _/ Shape, the same shape Homers hands make when he strangles bart

31
Q

What is a OTM Long Strangle?

What trades does this consist of?

A

It is a long call and long put with different strike prices.

32
Q

What is a OTM Short Strangle?

A

It is a short call and short put, with different strike prices.

33
Q

What is the Max Loss for a Long Strangle?

A

It is the Premiums paid.

34
Q

What is the Max Profit for a Short Strangle?

A

It is the premiums paid.

35
Q

What is the Max Risk and Max Reward for a Bull Call?

A

Risk - Net Premium paid

Reward - Difference in strikes minus net premium paid

36
Q

What is the Max Risk and Max Reward for a Bear Call?

A

Risk - Difference in strike price less the net premium recieved.

Reward - Net premium received.

37
Q

What is the Max Risk and Max Reward for a Bull Put?

A

Risk - Difference in strikes less the net premium recieved.

Reward - Net premium recieved.

38
Q

What is the Max Risk and Max Reward for Short Straddle?

A

Risk - Unlimited
Reward - Sum of the premiums received.

38
Q

What is the Max Risk and Max Reward for a Long Straddle?

A

Risk - Sum of premiums
Reward - Unlimited

39
Q

What is the Max Risk and Max Reward for a Bear Put?

A

Risk - Net premium paid
Reward - Difference in strikes less the net premium paid.

40
Q

What is the Max Risk and Max Reward for a Long Strangle?

A

Risk - Premiums paid
Reward - Unlimited

41
Q

What is the Max Risk and Max Reward for a Short Strangle?

A

Risk - Unlimited
Reward - Total premium recieved

CISI Capital Markets Programme: Derivatives (11 decks)

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