Derivatives

Question 1

Advanced set

Answer 1

the reference interest rate is set at beginning of the settlement period

Question 2

At market

Answer 2

when a forward contract is established, the forward price is negotiated so that the market value of the forward contract on the initiation date is zero

Question 3

Convergence

Answer 3

The property of forward and futures contracts in which the derivative price becomes the spot price at expiration of the derivative

Question 4

Covered interest rate parity

Answer 4

the relationship among the spot exchange rate, the forward exchange rate, and the interest rates in two currencies that ensures that the return on a hedged (i.e. covered) foreign risk-free investment is the same as the return on a domestic risk free investment

Question 5

Law of one price

Answer 5

a principle that states that if two investments have the same or equivalent future cash flows regardless of what will happen in the future, then these two investments should have the same current price

Question 6

Reverse carry arbitrage

Answer 6

a strategy in involving the short sale of the underlying and an offsetting opposite position in the derivative