Derivatives Flashcards

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1
Q

Value at Expiration of a Forward Contract

A

V(0,T) = ST - F(0,T)

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2
Q

Off-Market FRA

A

A contract in which the initial value is intentionally set at a nonzero value.

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3
Q

Present Value of Dividends

A

PV(D,0,T) = (sum of) D/(1 + r)^t

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4
Q

Value of a FRA on an Dividend Paying Stock

A

F(0,T) = S - PV(D,0,T)^T

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5
Q

Price of FRA on a Bond

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6
Q

Interest Rate Parity

A

Expresses the equivalence, or parity, of spot and forward exchange rates, after adjusting for differences in interest rates in two countries.

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7
Q

Fungible

A

Any futures contract with any counterparty can be offset by an equivalent futures contract with another counterparty.

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8
Q

Futures Price of a Treasury

A

Nominal Amount [(1 - Rate)(Days/360]

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9
Q

Futures Price

A

f(T) = S(1 + r)^T

Through the forces of arbitrage, the futures price is the spot price compounded at the risk-free rate.

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10
Q

Futures Price with Storage Costs

A

f(T) = S(1 + r)^T + FV(SC,0,T)

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11
Q

Futures Price with Cash Flows

A

f(T) = S(1 + r)^T - FV(CF,0,T)

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12
Q

Convenience Yield

A

The nonmonetary return offered by an asset when in short supply. Nonmonetary benefits of an asset.

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13
Q

Cost of Carry

A

FV(CB,0,T) = Costs of Storage - Nonmonetary Benefits(aka: Convenience Yield)

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14
Q

Expected Spot Price

A

S = [S(T) - FV(CB,0,T)]/(1 + r)^T

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15
Q

Futures Price of Currency

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16
Q

Put-Call Parity

A

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

17
Q

Normal Backwardation

A

The expected futures spot prices are greater than futures prices. It suggests that when hedgers are net short futures contracts, they must sell them at a discount to the expected future spot prices to get investors to buy them. The futures price rises as the contract matured to converge with spot prices.

18
Q

Normal Contango

A

A pattern of falling futures prices is known as normal Contango. When the futures price is above the expected future spot price and the futures price falls over the life of the contract.

19
Q

Delta of Options

A

Delta of a put option is 1 - delta on a call option.

20
Q

Delta of Options

A

Delta of a put option is 1 - delta on a call option.

21
Q

Fiduciary Call

A

Consists of a European Call and a risk free bond that matures on the option expiration day and has a face value of the call.

22
Q

Option Delta

A

The sensitivity if the option price to a change in the price of the underlying.

23
Q

Gamma

A

A measure of how well the delta sensitivity measure will approximate the option price’s response to a change in the price of the underlying.

24
Q

Rho

A

The sensitivity of the option price to the risk free rate.

25
Q

Theta

A

The rate at which the time value decays as the option approaches expiration.

26
Q

Vega

A

The sensitivity of the option price volatility.

27
Q

Plain Vanilla Swap

A

An interest rate swap in which one party pays a fixed rate and the other party pays a floating rate.

28
Q

Basis Swap

A

Involves one party paying LIBOR and the other paying the T-Bill rate. Both sides are paying a floating rate.

29
Q

Swaption

A

An option to enter into a swap. Used by parties who anticipate the need for a swap at a later date but would like to establish the fixed rate today, while providing the flexibility to not engage in the swap later or engage in the swap at a more favorable rate in the market.

30
Q

Payor Swaption

A

Allows the holder to enter into a swap as the fixed rate payor and floating rate receiver.