Derivatives

Question 1

Value at Expiration of a Forward Contract

Answer 1

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

Question 2

Off-Market FRA

Answer 2

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

Question 3

Present Value of Dividends

Answer 3

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

Question 4

Value of a FRA on an Dividend Paying Stock

Answer 4

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

Question 5

Price of FRA on a Bond

Answer 5

F(0,T) = Bond(T + Y) - PV(Coupons)^T

Question 6

Interest Rate Parity

Answer 6

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

Question 7

Fungible

Answer 7

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

Question 8

Futures Price of a Treasury

Answer 8

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

Question 9

Futures Price

Answer 9

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

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

Question 10

Futures Price with Storage Costs

Answer 10

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

Question 11

Futures Price with Cash Flows

Answer 11

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

Question 12

Convenience Yield

Answer 12

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

Question 13

Cost of Carry

Answer 13

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

Question 14

Expected Spot Price

Answer 14

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

Question 15

Futures Price of Currency

Answer 15

f(T) = S/(1 + foreign RFR)^T^T

Question 16

Put-Call Parity

Answer 16

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

Question 17

Normal Backwardation

Answer 17

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.

Question 18

Normal Contango

Answer 18

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.

Question 19

Delta of Options

Answer 19

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

Question 20

Delta of Options

Answer 20

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

Question 21

Fiduciary Call

Answer 21

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.

Question 22

Option Delta

Answer 22

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

Question 23

Gamma

Answer 23

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.

Question 24

Rho

Answer 24

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

Question 25

Theta

Answer 25

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

Question 26

Vega

Answer 26

The sensitivity of the option price volatility.

Question 27

Plain Vanilla Swap

Answer 27

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

Question 28

Basis Swap

Answer 28

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

Question 29

Swaption

Answer 29

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.

Question 30

Payor Swaption

Answer 30

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