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CFA level I > Derivatives > Flashcards

Derivatives Flashcards

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CFA flashcards
1
Q

What is derivative?

A

It is security that derives its value from an underlying asset

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2
Q

What happens when spot price=forward price?

A

No party has profit

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3
Q

What happens when spot price>forward price?

A

Buyer has profit, seller has loss

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4
Q

What happens when spot price<forward price?

A

Seller has profit, buyer has loss

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5
Q

What is derivable contract?

A

Payment and shares are exchanged

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6
Q

What is cash-settled contract?

A

Only gains/losses are exchanged

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7
Q

What is central clearhouse?

A

It is party that takes opposite position to each side of trade guaranteering the payments promised under the contract, requires deposits from each party

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8
Q

What is central clearing mandate?

A

It is used for swap trades, a central counterparty takes credit risk of both sides

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9
Q

Where swap trades trade?

A

In dealer market, where margin deposits and MtM payments may be required

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10
Q

What is credit default swaps?

A

It is when buyers makes fixed paymens on settlement date and seller pays only if underlying asset has a credit event

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11
Q

What is option premium?

A

It is price of an option

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12
Q

What is payoff of call option to the owner?

A

Max(0, S-X), benefits when S>X

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13
Q

What is payoff of put option to the owner?

A

Max (0, X-S), benefits when X>S

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14
Q

What is maximum loss for the buyer of an option?

A

Its premium

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15
Q

What is loss for the writter of an option?

A

Unlimited

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16
Q

What is forward commitment?

A

It is legally binding promise to perform some actions in the future

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17
Q

What is contingent claim?

A

It is claim that is dependent on particular event

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18
Q

What is hedge accounting?

A

It is recognition of gains/losses of qualifying derivative hedges at the same time they recognise changes in values of assets and liabilities being hedged

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19
Q

What are considered cash flow hedge?

A

It is floating to fixed rate liability, exchange rate value hedge

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20
Q

What are considered fair value hedge?

A

It reduces changes in the value of firms assets/liabilities

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21
Q

What is net investment hedge?

A

It reduces volatility of equity in value on the BS

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22
Q

What is two portfolio theory?

A

Two portofolios with the same payoff in the future for any future value will have the same cost today

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23
Q

What strategy should be employed when forward price is too high?

A

Sell forwards and buy the underlying asset

24
Q

What strategy should be employed when forward price is too low?

A

Buy forwards and sell underlying asset

25
Q

What is replication?

A

It is creating a portfolio with cash market transactions that has the same payoffs as a derivative for all possible future values of the underlying

26
Q

Formula of no-arbitrage forward price

A

S0(1+Rf)^t

27
Q

Formula of no-arbitrage forward price with costs and benefits

28
Q

Formula of value of forward contract to the buyer with benefits and costs

A

St+PV(costs)-PV(benefits)-F0(T)(1+Rf)^-(T-t)

29
Q

What is implied forward rate?

A

It is forward rate for which two strategies have the same yield over the total period: lending for the whole period or dividing lending into separate period

30
Q

Formula of interest rate future prices

A

100-(100*MRR)

31
Q

What is basis point value of interest rate futures contracts?

A

It is one basis point change on futures contract value

32
Q

Formula of basis point value of interest rate futures contract

A

notional principleperiod0.01%

33
Q

Are futures marked-to-market daily?

A

Yes

34
Q

What is attractiveness relationship with futures and interest rates?

A

They are more attractive when positevely correlated

35
Q

What is interest rate swap equivalent to?

A

It is equivalent to a series of forward contracts each with a forward contract rate equal to fixed swap rate

36
Q

What is par swap rate?

A

It is fixed swap rate that gives zero value at initiation

37
Q

What is swap equivalence formula?

A

MRR/1+S=F/1+S

38
Q

What is considered in the money?

A

When immediate exercise of an option creates positive payoff

39
Q

What is considered out of money?

A

When immediate exercise would create a loss

40
Q

When are options in the money?

A

Call: S-X>0, put: X-S>0

41
Q

When options are out of money?

A

Call: S-X<0, put: X-S<0

42
Q

What is time value of an option?

A

It is amount by which option premium exceeds the exercise value

43
Q

Formula of option premium

A

exercise value+time value

44
Q

What is upper bound for call options?

A

c<=St

45
Q

What is upper bound for put options?

A

pt<=X(1+rf)^-(T-t)

46
Q

What is lower bound of call option?

A

c0>=Max[0 ; S0-X(1+rf)^-T

47
Q

What is lower bound of put option?

A

p0>=Max[0 ; X(1+rf)^-T-S0]

48
Q

What is fiduciary call?

A

It is combination of call with exercise price X and pure discount bond that pays X at maturity

49
Q

What is payoff of protective call when in/out of money?

A

X when out of money, S when in the money

50
Q

What is protective put?

A

It is share of stock and put of stock

51
Q

What is payoff of fiduciary put when in/out of money?

A

X when in the money, S when out of money

52
Q

Formula of put-call parity relationship

A

c+X(1+rf)^-T=S+p

53
Q

What is put-call forward parity

A

Derived with forward contracts rather than underlying asset

54
Q

Formula of put-call forward parity

A

c+X(1+Rf)^-T=F(T)(1+Rf)^-T+p

55
Q
A

CFA level I (12 decks)

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