Derivatives Flashcards

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1
Q

FS1 Futures Treasury Bond contract

Pricing/Valuation of Fwd Commitments

Futures contracts - Treasury Bond

  • Describe/compare features/formula
A

Futures Price:

FP = [(full price)(1 + Rf)T - AIT - FVC]

Quoted Futures Price:

QFP = FP / CvF

QFP = [(full price)(1 + Rf)T - AIT - FVC] x ( 1 / CvF )

Futures Contracts w/ Treasury Bond

  • Must adjust fwd pricing formula to account for short delivery option
  • Each deliverable bond assigned Conversion Factor (CvF) to adjust settlement pmt for delivery of higher or lower cpn bonds
  • Use CvF for cheapest-to-deliver (CTD) bond

Note - Kaplan books uses CF in place of my CvF for term. I’m choosing to use CF as cashflow for all divs, cpns, etc.

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2
Q

FS1 - Fwd contracts w/ CF

Pricing/Valuing Fwd Commitments

Describe/Compare

Pricing/Valuing Fwd Contracts with Cash Flows

(same for dividends, coupons, etc)

  • FP = ?
  • V = ?
A

FP = (S0 - PVCF) x (1 + Rf)T

= S0 x (1 + Rf)T - FVCF

Vt (long position) = (St - PVCFt) - [FP / (1+Rf)(T-t)]

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3
Q

Cash & Carry

Pricing/Valuing Forward Committments

Cash and Carry

(forward contact model example)

A
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4
Q

Fwd Contract Valuation and Price (cost-of-carry model)

Pricing and Valuing Forward Commitments

Fwd contract price (cost-of-carry model)?

Fwd contract valuation?

A

Price

FP = S0 x (1 + Rf)T

S0 = FP / (1+Rf)T

Value

= St - [ FP / (1+Rf)T-t

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5
Q

PVFC - Equity Index pricing forward contracts

Pricing & Valuation of Forward Commitments

Describe/Compare

price of an equity index forward contract with continuous dividends

A

FS1

FP (equity ix) = S0 x e(Rf^c - g^c) x T

Focus on above formula. Easier to remember. (Rf^c - g^c) is the net cost to carry (Rf rate minus dividend yield). Calcuate the raised e factors first then hit ex

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6
Q

Futures price for a bond

Pricing & Valuation of Fwd Commitments

price of a bond futures contract:

A

FP

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7
Q

price of a currency forward contract?

value of a currency forward contract?

A
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8
Q
  • breakeven price analytics
  • volatility needed to break even
A
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9
Q
  • put-call parity
  • put-call parity when stock pays div
A
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10
Q

BSM model

A
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11
Q

change in option value

A
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12
Q

dynamic hedging

A
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13
Q

Option value using artbitrage-free pricing portfolio

A
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14
Q

price and value for a currency forward contract (continuous time)

A
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15
Q

probability of movements in binomial stock tree:

  • up-move
  • down-move
A
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16
Q

swap fixed rate

A
17
Q

value of plain vanilla interest rate swap (to payer) after inception

A
18
Q

value prior to expiration of a forward contract on a coupon-paying bond:

A
19
Q

Futures arbitrage example

Pricing & Valuation of Forward Commitments

Describe/compare

See slide example

A
20
Q

FRA - Forward Rate Agreement

Pricing & Valuing Fwd Comittments

Describe/Compare

Forward Rate Agreements (FRA)

  • Describe basics?
  • What is “2x3” FRA?
A

Describe FRAs

  • Agreement to borrow (long) or lend (short) in future
  • Based on LIBOR w/ #days/360

2x3 FRA

  • Fixed rate starts today and FRA starts today
  • Think of both numbers starting from today to specify:
    • when he FRA expires and floating rate beings (2mo from today)
    • when notional borrowing/lending ends (3mo from today) and difference is paid to winner
21
Q

FRA pricing example

Pricing/Valuing Forward Comittments

Calculate/Interpret

Pricing a FRA

A
  • need to calculate implied forward rate to solve
  • implied forward rates needs Bracketing Rates!
  • must un-annualize the bracket spot rates and the find Implifed forward rate for 60-days
  • Insert long and short rates into formula for IFR and then multiply by 360/60 to annualize the 60-day spot rate 30-days from now.
    • FR60 = [(1 + Long) / (1 + Short) - 1] x ( 360/days )
      *
22
Q

FRA - Valuing at Maturity

P/V Fwd Commits

Calculate/Interpret

Valuing an FRA at Maturity

A
23
Q

Currency Swaps - describe/compare

P/V Fwd Commit

Currency Swaps

  • priced w/?
  • principal?
  • periodic payments?
A
  • Interest rates used to price currency swaps are simply swap rates calculated from each currency’s term structure.
  • Currency swaps exchange principal [at initiation’s F(x) rate] b/c participants actually need other currency
    • Other swaps (equity rate, etc) d__o not exchange principal
  • Periodic payments based on each currency’s fixed rate
  • know this slide:
24
Q

Currency Swap Valuation

A