Derivatives Flashcards
What is a derivative?
Derivatives being a contingency or commitment means what and how do derivatives expand market opportunities?
What are the types of underlying assets?
Credit - CDS ➞ Credit Default Swap
long CDS = short credit quality i.e. long the spread, benefit if spread ↑
short CDS = long credit quality i.e. short the spread, benefit if spread ↓
Other - weather, cryptocurrencies
Derivatives asset class and examples
Types of derivative markets: OTC, exchange-traded and central clearing
What are the four features of a commitment and what is a forward contract
What is a futures contract?
Explain what a swap contract is?
What is a contingent claim?
What are the payoff diagrams for being long/short a put/call
What are credit derivatives?
What happens in a credit default swap?
Benefits of derivatives: risk allocation, transfer , managment
Benefits of derivatives: information discovery and operational advantages and market efficiency
4/ Market efficiency - less costly for arbitrage
Risks of derivatives: Greater speculation potential, lack of transparency, basis risk, liquidity risk
Risks of derivatives: Counterparty credit risk and destabilisation and systematic risk
4/ Counterparty credit risk - lower with ETD (esp. with price limits)
OTC - commitments - both sides have this risk
- contingencies - only the long side has this risk
5/ Destabilization and systemic risk - excessive risk taking and leverage
can create market stress when equity depletes and
credit for margin calls dries up
What do issuers primarily hedge and is a cash flow and fair value hedge
What is the net investment hedge and what are the uses of derivatives for issuers and investors
What is the concept of arbitrage?
What is the concept of replication?
What is the cost of carry?
What is a forex foward
What is a commodity derivative and convenience yield?
What is the value of a foward contract at T=0, t and T
Payoff for a forex foward
The payoff for a interest rate forward contract
Compare and contrast forwards and futures
What causes the differences in valuation between forwards and futures, and when would they be identical
Explain the long/short positions for interest rate futures
Interest forwards vs futures strategy for hedging
Explain the difference in central clearing method of futures vs forwards
Explain the difference between FRA’s and swaps
Formula for the fixed rate in an interest rate swap
Where DF are the dsicount factors of the n-year spot rates
What is the periodic settlement value
Where NA is notional amount and
𝐫𝐟𝐱 is called a par swap rate ➞ is a multi-period breakeven rate
an investor would be indifferent to:
paying 𝐫𝐟𝐱 or paying the forward rates
receiving 𝐫𝐟𝐱 or receiving the forward rates
Explain the moneyness of an option
How does TVM affect the value of an option?
Explain the concept of replication with what delta represents
How do the value of the underlying, strike price and time to expiration affect option value?
Explain how rf, volatility and Income/costs affect option value
Explain how put-call parity is derived
From put call parity the value of a company can be interpreted as?
Formula for hedge ratio and how to solve for C0
What is the maximum and minimum price of a call?
Maximum value is the underlying
Min and max price for a put
Maximum value is the discounted value of the strike
Formula for probability of probability and then call price
