Derivatives Flashcards
Is the contract price of a forward a current price or future price?
Future price.
What does 3 x 5 FRA mean?
A 60-day contract starting in 90 days.
What is the formula for fixed swap rate?
FSR = (1 - Last DR) / Sum of DRs
How do you calculate annual swap rate?
Annual swap rate = FSR * 360/ t
What is the value of the floating side of an interest swap on a coupon payment date, and why?
0, because the coupon resets to the spot rate.
How do dividends affect the value of call options?
They decrease the value.
How do dividends affect the value of put options?
They increase the value.
What is the relationship between the risk-free rate and call value?
Positively related.
Per put-call parity, S + P = C + K/1+r, so if r increases, C must increase to balance the equation.
Are market prices required to calculate implied volatility?
Yes.
Are the inputs to calculate delta percentage changes or absolute value changes?
Absolute value changes.
In the BSM model, are asset returns or asset prices lognormally distributed?
Asset prices.
In the BSM model, does the asset have cash flows?
No.
In the BSM model, is the option American, European or Bermudan?
European - it can only be exercised at maturity.
What is the formula for calculating the up-factor and down-factor in a binomial pricing model?
Up-Factor = ((1+r) - (1-d%)) / ((1+u%) - (1-d%))
When is the delta of an option 1 and when is it 0?
In the money or at maturity date = 1
Out of the money or far from maturity date = 0
When is the gamma of an option 1 and when is it 0?
1 = At the money
0 = Away from the money
What is a covered call?
Covered Call = Long Stock - Short Call
What is a protective put?
Protective Put = Long Stock + Long Put
What is a bull call spread?
Bull Call Spread = Long Lower Call - Short Higher Call
What is a long straddle?
Long Straddle = Long Call and Long Put
What do all spread strategies have in common?
They have limited upside.
What is the gamma of equity shares?
0.
What is the formula for future price of an index, given, spot price, risk-free rate, time to maturity and dividend yield?
FP = S * Ln(Rf-D))t/365)
All things equal, which will have a higher value if the option is in the money, a future or a forward?
A forward, as the future value will only be the value gained since previous mark to market.
What is the formula for value of a convertible callable bond?
V = Value of option-free bond
+ Value of conversion option
- Value of call option
What is the formula for value of an interest rate swap?
∑DF * (PSFRt - PSFR) * Notional Amount
What is the formula for value of an equity swap?
V = Index Return - Last DF - (PSFR*∑DF) * Notional Amount
