Derivatives Flashcards
____ contracts are marked to market daily whereas ____ contracts are not.
a) Future
b) Forward
What does 1 x 3 FRA means?
To borrow for 2 months after 1 month
While calculating currency forward valuation, rf is taken of which currency?
Price currency
How is price expressed for the following-
a) T Bills
b) Coupon bonds
c) FRA
d) Currency forward
a) Annualised percentage discount from fair value
b) YTM
c) Annualised MRR
d) currency exchange rate
What is delivery option?
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.
What is the SOFR rate?
The lending rate on dollar-denominated loans between banks is based on the secured overnight funding rate.
To exploit arbitrage using delta ratio, which position do we take?
Long delta shares and call seller.
When are American options more valuable than European options?
a) When put is deep in the money i.e. downtick is more than uptick.
b) Call dividend
What does N(d2) means?
It is the risk neutral probabilty that call option will expire in the money.
Also, this the number of short position on bonds.
What does N(d1) means?
It is the delta of options.
What is geometric Brownian motion process?
It is an assumption of BSM model where it states that the continuous compounded return is normally distributed.
Which greek term explains change in delta due to change in spot price?
Gamma
Gamma captures the curvature of the option-value-versus-stock-price relationship. Gamma is highest for at-the-money options.
What does delta close to -
a) 1
b) 0.5
c) 0 means for call option?
a) In the money
b) At the money
c) Out the money
What is the relationship between delta and call/put options?
Call option is positively related and put option is negatively related.
For gamma both are positively related.
Which greek terms helps in hedging and creating and neutral portfolio?
Delta and Gamma
When is volatility high for call and put options?
When the option is near the money.
What is the gamma risk of delta hedged portfolio?
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.
If market implied volatility is higher then what should we do to our call/put options?
This implies that the Call/Put prices are higher than expected. Hence, sell.
What is the black model?
The model represents call and put options on interest rate.
Call option = Right to borrow at fixed rate.
Long Call + Put Sell in interest rate implies?
Long FRA - Pay fixed, receive floating
vice versa
Series of interest rate call option?
Interest rate Cap, helps in hedging against floating rate loan.
Interest rate put option - interest rate floor - hedge against floating rate investment.
If volatility is higher for lower strike prices than for higher strike prices then out of the money put options will be ?
Generally more expensive than out of the money call options.
Synthetic European Put Options?
Long Call + Long bond - short stock
What is implied volatility?
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.
