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Wiley Level 2 > Derivatives > Flashcards

Derivatives Flashcards

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1
Q

Describe how the value of a European option can be analyzed as the present value of the option’s expected payoff at expiration.

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2
Q

Describe how a delta hedge is executed.

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3
Q

Calculate and interpret the no-arbitrage value of interest rate for equity swaps.

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4
Q

Describe swaptions.

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5
Q

Calculate the no-arbitrage value of a European option at a node.

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6
Q

Interpret components of the BSM model as applied to call options in terms of the stock price and strike price at expiration (most common).

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7
Q

Describe the value of a call and a put.

A

The value of a call includes the intrinsic value and a time value. The intrinsic value is:

cT = Max[0,(ST−X)]

pT = Max[0,X−ST]

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8
Q

Describe the value of a call and a put. Identify put call parity equations.

A

The put-call parity equations are:

c + PV(X) = p + S

∴

p = c + PV(X) − S

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9
Q

Describe and interpret the binomial option valuation model.

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The model is a lattice-based (discrete time) process for finding the probabilistic option value from each previous step given up or down values. Calculations assume a no-arbitrage approach between the option value and h shares of stock plus financing.

At each node, option value can increase by some factor u or down by some factor d equal to (1 + %Δ).

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10
Q

Describe floating-for-floating currency swaps.

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11
Q

Describe the BSM model is used to value European options on equities and currencies.

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12
Q

Identify the statistical process assumptions of the Black-Scholes-Merton option valuation model.

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13
Q

Describe the hedge ratio used to calculate the value of a European option using the binomial valuation model.

A

The hedge ratio h identifies the percentage of a call with price c required to offset movements in the underlying share of stock with price S. Call prices are related to movements in the underlying, so h must be non-negative. Put ratios may be negative.

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14
Q

Define implied volatility and explain how it is used in options trading.

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15
Q

Describe and compare how interest rate and equity swaps are priced and valued.

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16
Q

Calculate the risk neutral probability of an up or down move.

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17
Q

Describe how the Black model is used to value European swaptions.

A

The Black model determines the present value of the swaps, and then discounts them for the period until option expiry.

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18
Q

Interpret components of the BSM model as applied to call options in terms of a leveraged position in the underlying (alternative).

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19
Q

Interpret option measure theta.

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20
Q

Calculate and interpret the no-arbitrage value of equity, interest rate, fixed income, and currency forward and futures contracts.

(Short version)

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21
Q

Describe how a delta hedge is executed.

(Math version)

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22
Q

Describe the arbitrage possibilities if the no-arbitrage pricing framework is violated.

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23
Q

Explain the components of the Black model in terms of a leveraged position in the underlying.

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24
Q

Calculate the no-arbitrage value of a European option using a two-period binomial model.

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25
Q

Calculate the value of a European option at successive nodes using the binomial option valuation model.

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26
Q

Describe and compare how equity, interest rate, fixed income, and currency forward and futures contracts are priced and valued.

(Nonmath version)

A
27
Q

Describe how the Black model is used to value European interest rate options and European Swaptions.

(Math version)

A
28
Q

Calculate the hedge ratio in the binomial options model.

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29
Q

Describe how the black model is used to value European interest rate options and European Swaptions.

A
30
Q

Describe an arbitrage related to option values determined using the binomial model.

A

From a market perspective, if the market price of the option is less (more) expensive than the synthetic price, buy (sell) the market call and sell (buy) the synthetic.

31
Q

Describe forward commitments.

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32
Q

Describe how the Black model is used to value options of forward contracts and futures.

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33
Q

Mathematically state put-call parity using the Black model for forward contracts and futures.

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34
Q

Describe how the Black model is used to value European Swaptions.

(Math version)

A
35
Q

Interpret option measure vega

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36
Q

Describe how equity and fixed-income forward and futures contracts are priced.

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37
Q

Interpret option measure delta.

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38
Q

Calculate and interpret the values of an interest rate option using a two-period binomial model.

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39
Q

Describe an interest rate forward agreement (FRA).

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40
Q

Describe how interest rate forward and futures contracts are priced.

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41
Q

Explain the self-financing concept of binomial model option valuation.

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42
Q

Calculate and interpret the no-arbitrage value of interest rate forward and futures contracts a certain number of days after initiation.

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43
Q

Explain the discount required in an FRA with advanced set, advanced settled features.

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44
Q

Give the equation used to calculate the value of a pay-return-on-one-equity-instrument, receive-return-on-another-equity-instrument swap.

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45
Q

Describe rho.

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46
Q

Calculate the value of an up or down move.

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47
Q

Identify other assumptions of the Black-Scholes-Merton option valuation model that are different from those for the binomial model.

A
48
Q

Interpret option measure gamma. Describe the role of gamma risk in options trading.

A

Option gamma measures the curvature in the option price–stock price relationship; that is, percentage delta change given a small change in the value of the underlying stock.

Stock prices frequently change prices radically rather than smoothly as required for the BSM model; that is, they “jump.” Gamma risk describes the potential risk of being improperly hedged against large jumps.

49
Q

Explain how American option valuation is different.

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50
Q

Describe an equity swap.

A
51
Q

Describe and compare how equity, interest rate, fixed income, and currency forward and futures contracts are priced and valued.

(Math version)

A
52
Q

Identify how equity swaps are different from other swaps.

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53
Q

Describe a contingent claim

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54
Q

Identify assumptions of the Black-Scholes-Merton option valuation model that are similar to those for the binomial model.

A

European-style options on liquid underlying instruments (with known, underlying yield where applicable); no short-selling constraint; no market frictions, such as transactions costs, taxes, or regulation; no arbitrage opportunities exist; known, constant risk-free rates; and volatility is known and constant, although different.

55
Q

Explain calculations for an option using a two-period binomial model.

A

Wiley Level 2 (11 decks)

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