Cheat Sheet Derivatives

Question 1

Forward Commitment and Contingent Claim Features and Instruments

Options (calls and puts)

Answer 1

• European options can only be exercised at expiration.
• American options can be exercised anytime during the life of the option. Thus, American options are more valuable than equivalent European options because it can be exercised anytime up to expiration.
• American call option prices can differ from European call’s prices only if there are interim cashflows on the underlying asset, e.g. dividend or interest. These early cashflows are the only reason for an early exercise of a call.
• American put option prices can differ from European put’s prices because the right to exercise early is valuable for puts. If the underlying stock pays a dividend, the put option holder should wait until expiration to exercise the option to ensure receipt of stock dividends as well.

Question 2

Issuers use derivatives to perform:

Answer 2

Cash Flow Hedge:
Fokus auf zukünftige Zahlungen.

Fair Value Hedge:
Fokus auf aktuellen Buchwert.

Net Investment Hedge:
Fokus auf Währungsrisiko von Auslandsinvestitionen.

Question 3

forward contract

Answer 3

A forward contract is an OTC derivative contract where 2 parties agree to exchange a specific quantity of asset for a fixed price at a future date.

Question 4

Interest rate forwards

Answer 4

Forward contracts which have an interest rate (not an asset) as an underlying are called Forward Rate Agreements (FRAs).

FRAs allow us to lock in an interest rate today for a loan in the future to hedge against interest rate risk.

If reference rate > FRA rate at expiration, the long benefits.

If reference rate < FRA rate at expiration, the short benefits.

Question 5

Futures

Answer 5

Futures is similar to forward contract except it is standardized, exchange-traded, regulated, marked-to-market and settled daily, with a clearinghouse guarantee.

Question 6

Forwards vs. futures prices

Answer 6

If futures price positively (negatively) correlates with interest rates, futures price would be higher (lower) than forward’s price because there are intermediate cash flows on which interest can be earned on.

If interest rates are constant or have no correlation with futures prices, then futures and forward prices would be the same.

Question 7

Interest rate swaps

Answer 7

• The value of a swap at initiation is usually 0.
• If interest rate increases (decreases) after swap initiation, the swap would have a positive value for fixed-rate payer (floating-rate payer).
• An interest rate swap can be viewed as a series of combined FRAs.

Question 8

Fiduciary call

Answer 8

Kombination aus einer Call-Option und einer risikofreien Anlage in Höhe des Strike-Preises.

Question 9

Protective Put

Answer 9

Kombination aus dem Kauf einer Aktie und einer Put-Option auf dieselbe Aktie.

Question 10

Hier ist eine kurze Übersicht der unterschiedlichen Diskontierungen für Aufzinsung und Abzinsung, sowohl für diskrete als auch kontinuierliche Verzinsung.

Answer 10

Diskontierung bringt zukünftige Werte in die Gegenwart (PV) → Division durch (1+r)T
Aufzinsung bringt heutige Werte in die Zukunft (FV) → Multiplikation mit (1+r)