Chapter 9 - Derivatives Held For Risk Management Flashcards
What is the unit of trade for a FTSE 100 index future
What about the tick
Index value * £10
0.5 index points (value £5)
What is the unit of trade for a 3mo sterling future
How much is a tick
£500,000
0.01 (value £12.50)
What is the unit of trade of a UK gilt future
What is the tick
£100,000 nominal if a 4% gilt
0.01 (value £10)
What is the equation for the fair value of a future
Fair value of a future = cash price + cost of carry
Where cost of carry is cost of finance, storage, insurance etc
What is the equation for option premium
Premium = intrinsic value + time value
What is time decay
As the option approaches expiry, the time value falls as the risk falls
What 4 things affect option premiums
Intrinsic value
Time value
Volatility
Interest rates and dividend yields
What is delta
What is the formula
Delta is the rate of change of an options premium with respect to the underlying security
Delta = change in premium / change in underlying price
What is gamma
What is this mathematically
Rate of change of delta with respect to the underlying security
The second derivative
What is theta
What is the expression it Lehmans terms
Reflects the change of the option price with respect to time
The amount the premium will reduce by in one day
What is Vega/Kappa
Reflects the rate of change of the option price with respect to volatility
What is rho
Measures the rate of change of an option price with respect to interest rates
Which 3 things must be assessed when deciding if hedge accounting can be used under IFRS 9
Is there an economic relationship between the hedged item and the hedging item
Credit risk does not dominate the relationship above
Is the hedging ratio appropriate and effectively hedged
For which standards are you allowed to use part of a hedged item
Allowed under IFRS 9 but not under IAS 39
