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CFA > Derivatives > Flashcards

Derivatives Flashcards

1
Q

____ contracts are marked to market daily whereas ____ contracts are not.

A

a) Future
b) Forward

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2
Q

What does 1 x 3 FRA means?

A

To borrow for 2 months after 1 month

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3
Q

While calculating currency forward valuation, rf is taken of which currency?

A

Price currency

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4
Q

How is price expressed for the following-
a) T Bills
b) Coupon bonds
c) FRA
d) Currency forward

A

a) Annualised percentage discount from fair value
b) YTM
c) Annualised MRR
d) currency exchange rate

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5
Q

What is delivery option?

A

Bond futures contracts often allow the short an option to deliver any of several bonds, which will satisfy the delivery terms of the contract. This is called a delivery option and is valuable to the short.

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6
Q

What is the SOFR rate?

A

The lending rate on dollar-denominated loans between banks is based on the secured overnight funding rate.

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7
Q

To exploit arbitrage using delta ratio, which position do we take?

A

Long delta shares and call seller.

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8
Q

When are American options more valuable than European options?

A

a) When put is deep in the money i.e. downtick is more than uptick.
b) Call dividend

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9
Q

What does N(d2) means?

A

It is the risk neutral probabilty that call option will expire in the money.
Also, this the number of short position on bonds.

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10
Q

What does N(d1) means?

A

It is the delta of options.

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11
Q

What is geometric Brownian motion process?

A

It is an assumption of BSM model where it states that the continuous compounded return is normally distributed.

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12
Q

Which greek term explains change in delta due to change in spot price?

A

Gamma
Gamma captures the curvature of the option-value-versus-stock-price relationship. Gamma is highest for at-the-money options.

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13
Q

What does delta close to -
a) 1
b) 0.5
c) 0 means for call option?

A

a) In the money
b) At the money
c) Out the money

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14
Q

What is the relationship between delta and call/put options?

A

Call option is positively related and put option is negatively related.
For gamma both are positively related.

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15
Q

Which greek terms helps in hedging and creating and neutral portfolio?

A

Delta and Gamma

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16
Q

When is volatility high for call and put options?

A

When the option is near the money.

17
Q

What is the gamma risk of delta hedged portfolio?

A

When price of stock abruptly jumps, the delta will change leaving the previously hedged position unhedged.
The risk of no rebalancing due to change in stock.
A delta-hedged portfolio with a long position in stocks and a short position in calls will have negative net gamma exposure.

18
Q

If market implied volatility is higher then what should we do to our call/put options?

A

This implies that the Call/Put prices are higher than expected. Hence, sell.

19
Q

What is the black model?

A

The model represents call and put options on interest rate.
Call option = Right to borrow at fixed rate.

20
Q

Long Call + Put Sell in interest rate implies?

A

Long FRA - Pay fixed, receive floating
vice versa

21
Q

Series of interest rate call option?

A

Interest rate Cap, helps in hedging against floating rate loan.
Interest rate put option - interest rate floor - hedge against floating rate investment.

22
Q

If volatility is higher for lower strike prices than for higher strike prices then out of the money put options will be ?

A

Generally more expensive than out of the money call options.

23
Q

Synthetic European Put Options?

A

Long Call + Long bond - short stock

24
Q

What is implied volatility?

A

It is a measure of future estimated volatility which varies across both exercise price and time to expiration for various options. It is a measure of market price of risk.

25
Q

True or False?
Volatility skew tends to steepen whenever the market price of hedging is rising, which causes the its shape to be different from volatility smile.

A

True

26
Q

True or false?
For a deep-in-the money put option, the upside is limited (because the stock price cannot fall below zero). In such cases, the interest on intrinsic value can exceed the option’s time value

A

True

27
Q

What is the put call parity theory if option pays dividend?

A

P0 + S0e ^–δT = C0 + e^–rTX

28
Q

The value of an option on a currency can be thought of as being made up of two components, which are?

A

A bond component and a foreign exchange component

29
Q

What is time decay?

A

As time passes and a call option approaches maturity, its speculative value declines, all else equal.
Deep in-the-money put options close to maturity may actually increase in value as time passes.

30
Q

What is the relationship between future and bond component for-
a) Long Call (for declining interest rate
b) Long Put (for rising interest rate)

A

a) Future component – bond component
b) Bond component – Future component

CFA (10 decks)

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