Derivatives

Question 1

Derivative

Answer 1

financial product whose payoff depends on something else

Question 2

what could that something else be?

Answer 2

commodities
equity
interest rates
credit
foreign exchange
exotic derivatives
weather
abstract

Question 3

forward contract

Answer 3

derivative contract to buy/ sell at
- pre agreed quant (of underlying)
- on pre agreed date (delivery date)
-at pre agreed price( forward price)

Question 4

forward price

Answer 4

pre agreed price to buy underlying at not price of forward

Question 5

physically settles forward

Answer 5

if underlying asset is delivered/transferred in exchange for specific payment
actually get underlying @agreed price

Question 6

cash settled forward

Answer 6

settled with cash instead of stock, bond, commodity
pay/get paid cash amount to payoff
actual physical delivery of underlying not required

Question 7

payoff diagram

Answer 7

tells us how much financially we benefit from owning this derivative

Question 8

can payoff be negative?

Answer 8

yes

Question 9

x and y axis labels for payoff diagram

Answer 9

x- price of underlying on delivery/expiry date
y- payoff

Question 10

payoff depends on

Answer 10

underlying

Question 11

long forward means you are __

Answer 11

buying it

Question 12

future contract

Answer 12

similar to forward but lose flexibility with
- underlying
- q
- delivery date
- future price (price @ which buying underlying)
- however, gives flexibility with respect to getting in and out of contract

Question 13

European call option

Answer 13

derivative that gives the holder the option to
- buy underlying
- on a given date (exp date)
- at agreed price (strike price)

Question 14

on a date vs upto a date

Answer 14

eu vs us

Question 15

option to buy

Answer 15

call

Question 16

option to sell

Answer 16

put

Question 17

european vs american for timing/when can exercise

Answer 17

EU- can only be used at expiry
US- can exercise anytime

Question 18

forward is like tied to___ and more __

Answer 18

tailor
customisable

Question 19

future is like just __

Answer 19

buying at the shop, random shirt

Question 20

call option

Answer 20

right to buy underlying at fixed price decided today for in the future

Question 21

put option

Answer 21

right to sell underlying at fixed price decided today for in the future

Question 22

in silicon valley what do they usually give instead of some salary?

Answer 22

euro call option as motivates workers to work hard and increase stock price as unlimited upside and keeps there there

Question 23

pricing principal 0

Answer 23

for any derivative:
any value of underlying p on exp date
Payoff >= 0
some values of underlying
Payoff >0
Price derivative, call, put>0

Question 24

profit vs payoff

Answer 24

not equal
payoff is what you would get if gifted for free and what you would make on expiry date
profit= payoff- price of deriv

Question 25

when would you start actually making money

Answer 25

SP> (K + option price)

Question 26

pricing principal I

Answer 26

2 derives with same underlying, same expiry
Payoff A>= Payoff B always
Payoff A> Payoff B sometimes
then
Price A> Price B

Question 27

pricing principal II

Answer 27

if have derives ABC with same underlying, same expiry
if Payoff A= Payoff B+/-Payoff C
Price A= Price B+/- Price C

Question 28

Put, call, forward on payoff diagram

Answer 28

put starts on y axis negative sloping
call starts on x axis positive sloping
forward usually goes under but would be same as call when price above>K