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SOA/CFA > IFM All Chapters > Flashcards

IFM All Chapters Flashcards

Contains Chapter 2 - Option Strategies Chapter 8 - Capital Asset Pricing Model Chapter 11 - Investment Risk and Project Analysis

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CFA flashcards
1
Q

Haircut

A

Additional collateral set aside to compensate for risk which belongs to the short seller, held by the lender until position is closed

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2
Q

Short Rebate

A

Interest earned on the collateral in the stock market

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3
Q

Repo Rate

A

Interest earned on the collateral in the bond market

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4
Q

Short-sale

A

Believes that the price of the stock will decrease and profit can be made from this

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5
Q

Payoff

A

If one completely cashes out, does not consider cash flows on other dates

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6
Q

Profit

A

Considers cash flow on other dates with accumulated value at the given rate

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7
Q

Profit of Long Position

A

Payoff - AV(premium) at risk-free rate

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8
Q

Profit of Short Position

A

Payoff + AV(premium) at risk-free rate

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9
Q

Bull Spread

A

Long Call + Short Higher Strike Call

Long Put + Short Higher Strike Put

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10
Q

Bull Spread used when

A

belief price of asset will increase between two strike prices

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11
Q

Bear Spread

A

Short Call + Long Higher Strike Call

Short Put + Long Higher Strike Put

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12
Q

Bear Spread used when

A

price of asset decrease between two strike price

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13
Q

Box Spread

A
  • Long Bull (call) + LongBear (put)
  • Long Bull (put) + Long Bear (call)
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14
Q

Box Spread used when

A

lend or borrow money

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15
Q

Box Spread (lending money)

A

Long Bull (call) + Long Bear (put)

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16
Q

Box Spread (borrowing money)

A

Long Bull (put) + Long Bear (call)

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17
Q

Ratio Spread

A

Long M options (K1) + Short N options (K2)

Where K1 differs from K2

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18
Q

Collar

A

Long Put (K1) + Short Call (K2); where K2 > K1

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19
Q

Collar used when

A

wishes to benefit from underlying asset price decreasing

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20
Q

Collared Stock

A

Combination of purchased collar + long stock

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21
Q

Straddle

A

Long Call (K1) + Long Put (K1)

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22
Q

Straddle used when

A

price of underlying asset will have large movements in either direction

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23
Q

Strangle

A

Long put (K1) + Long call (K2); where K2 > K1

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24
Q

Strangle used when

A

price of underlying asset will have large movements in either direction but with low initial cost (however lower payoff)

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25
Q

Butterfly Spread used when

A

Underlying asset will stay close to its current price but protect against large losses

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26
Q

Asymmetric Butterfly Spread

A

Strike Price Unequally Spaced

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27
Q

Symmetric Butterfly Spread

A

Strike Price Equally Spaced

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28
Q

Put-Call Parity Equation

A

C(S,K) - P(S,K) = FP(S) - Ke-rt

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29
Q

Law Of One Price

A

Two portfolios with exact same payoffs must have the same cost

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30
Q

Put-Call Parity Equation

A

C(S,K) - P(S,K) = FP(S) - Ke-rt

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31
Q

Floor

A

Long Asset + Long Put

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32
Q

Floor useful for

A

guaranteeing a minimum price at which an asset can be sold with payoff of at least K

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33
Q

Caps

A

Short Asset + Long Call

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34
Q

Caps useful for

A

Insurance against short selling asset

Risk of price increasing

Buying asset for fixed price (k)

Capped the cost to close short position

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35
Q

Write a Covered Call

A

Short Call + Long Asset

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36
Q

Write a Covered Put

A

Short Put + Short Asset

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37
Q

Payoff of Call as K increases

A

The payoff will decrease and the cost decreases

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38
Q

Payoff of Put as K increases

A

Payoff of put will increase and the cost will also increase

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39
Q

Maximum Loss on Long Put

A

AV(Put Premium) at risk-free rate

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40
Q

Maximum Loss on Short Put

A

Limited to:

K - AV(Put Premium)

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41
Q

Assume you short-sell an asset and will have to buy the asset at a future date to close your short position. You wish to insure against an increase in the asset price.

A

Short Asset + Long Call = Cap

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42
Q

Assume you own an asset, and you wish to insure against a decrease in its price

A

Long Asset + Long Put = Floor

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43
Q

Identity: Floor

Long Asset + Long Put =

A

Long Call + Long risk free zero coupon Bond

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44
Q

Identity: Cap

Short Asset + Long Call

A

Long Put + Short risk-free rate zero coupon Bond

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45
Q
A
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46
Q

Long Put + Short risk-free rate zero coupon Bond

Identity for?

A

Identity: Cap

Short Asset + Long Call

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47
Q

Long Asset + Long Put =

A

Floor

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48
Q

Short Asset + Long Call =

A

Caps

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49
Q

Short Call + Long Asset =

A

Write a Covered Call

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50
Q

Short Put + Short Asset =

A

Write a Covered Put

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51
Q

AV(Put Premium) at risk-free rate;

Max Loss for?

A

Maximum Loss on Long Put

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52
Q

K - AV(Put Premium)

Max Loss on?

A

Maximum Loss on Short Put

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53
Q

Purpose of Covered Call?

A

Given Option Writer Shorts Call

Faces risk of asset price increases

Thus buys asset to offset

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54
Q

Long Call + Long risk free zero coupon Bond

Identity for?

A

Identity: Floor

Long Asset + Long Put =

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55
Q

Additional collateral set aside to compensate for risk which belongs to the short seller, held by the lender until position is closed

A

Haircut

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56
Q

Interest earned on the collateral in the stock market

A

Short Rebate

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57
Q

Interest earned on the collateral in the bond market

A

Repo Rate

58
Q

Believes that the price of the stock will decrease and profit can be made from this

A

Short-sale

59
Q

Long Call + Short Higher Strike Call

Long Put + Short Higher Strike Put

A

Bull Spread

60
Q

Short Call + Long Higher Strike Call

Short Put + Long Higher Strike Put

A

Bear Spread

61
Q

belief price of asset will increase between two strike prices

A

Bull Spread used when

62
Q

price of asset decrease between two strike price

A

Bear Spread used when

63
Q

Long Bull (call) + Long Bear (put)

A

Box Spread (lending money)

64
Q

Long Bull (put) + Long Bear (call)

A

Box Spread (borrowing money)

65
Q

Purpose of covered put?

A

Given Option Writer Shorts Puts

Faces risk of asset price decrease

Thus offsets with shorting the asset

66
Q

Maximum Loss of Long Call

A

Accumulated Value of Cash OutFlow from purchasing the Call

67
Q

Maximum Gain of Long Call

A

Infinite

68
Q

Maximum Loss of Short Call

A

Infinite

69
Q

Maximum Gain of Short Call

A

Accumulated Value of Cash InFlow from selling the Call

70
Q

Maximum Loss of Long Put

A

Accumulated Value of Cash OutFlow from purchasing the Put

71
Q

Maximum Gain of Long Put

A

Strike price to which you have the right to sell

-

Accumulated Value of Cash OutFlow used to purchase the Put

72
Q

Maximum Loss of Short Put

A

Strike price at which you need to buy the asset

-

Accumulated Vaue of Cash InFlow from selling the Put

73
Q

Maximum Gain from Short Put

A

Accumulated Value of Cash InFlow from selling the Put

74
Q

How to hedge short position on underlying asset with Collar

A

Written Collared Stock

Short Put Strike Price + Long Call Higher Strike Price

75
Q

Risk Premium for Security (i)

A

E[Ri] - rf

76
Q

Expected Market Risk Premium

A

E[market] - rf

77
Q

Expected excess return of the Market

A

E[Rmarket] - rf

78
Q

Expected excess return for Security (i)

A

E[Ri] - rf

79
Q

CAPM Formula

A

E[Return on Investment]

= Risk-free rate + (Beta of investment security)*(Expected Market Risk Premium)

80
Q

Enterprise Value

A

Which is the risk of the firm’s underlying business operation that is seperate from its cash holdings.

81
Q

Enterprise Value Formula:

A

Net Debt = Debt - Excess cash and short-term investments

82
Q

rU=wE⋅rE+wD⋅rD

A

Unlevered Cost of Capital or Asset

83
Q

If project is financed purely with equity, considered to be

A

unlevered

84
Q

Project finanaced with Debt and Equity considered to be

A

levered

85
Q

βU=wE⋅βE+wD⋅βD

A

Unlevered Beta or Asset

86
Q

Benefits from Tax Deduction

A

Reduces Debt Cost of Capital -> more money to pay equity holders

87
Q

Effective after-tax cost of debt

A

rD•(1−τC)

τC = coporate tax rate

rD = Cost of Debt

88
Q

weighted-average cost of capital (WACC)

A

rWACC = wE⋅rE + wD⋅rD⋅(1−τC)

89
Q

WACC vs Unlevered Cost Of Capital (is based off of?)

A

WACC = based on firm’s after-tax cost of debt

Unlevered Cost Of Capital = based on firm’s pretax cost of debt

90
Q

Beta is calculated as

A

Bi =

( Cov[Ri,RMkt]

/

σ2Mkt )

91
Q

equation for the CAPM is

A

ri = E[Ri] = rf + βi(E[RMkt]−rf)

92
Q

security market line (SML) represents

A

is a graphical representation of the CAPM

93
Q

CML vs SML

A

CMLvsSML

Uses Total Risk vs Systematic Risk

Uses Efficient Portfolios Only vs Any security/combination of securities

94
Q

The difference between a security’s expected return and the required return

A

alpha

95
Q

Alpha equation

A

αi = E[Ri]−ri = E[Ri]−[rf + βi(E[RMkt]−rf)]

96
Q

ADDING A NEW INVESTMENT

A

rNew=rf+βNew,P⋅(E[RP]−rf)

97
Q

market risk premium

A

E[RMkt] − rf

98
Q

Beta Formula in words

A

Change in an Asset’s Return

/

Change in Market Return

99
Q

What does Beta Meaasure?

A

Systematic Risk of an asset by calculating the sensitivity of the Asset’s return to the Market return

100
Q

Statisitical term of Beta defined as:

A

COV[Asseti, Market]

/

Variance of Market Return

101
Q

Linear Regression estimate of Beta

A

Ri - rf = ai + Bi (Rmkt - rf) + ei

102
Q

Chapter 5

Delta

A

Change in option cost per $1 of underlying asset movement

103
Q

Gamma

A

Measures Delta’s expected rate of change

104
Q

If Delta is 0.40 and Gamma is .05 then first $1 dollar change is 0.40 of option’s price, second $1 dollar change is 0.45

A

How Gamma works

105
Q

Chapter 5

Vega

A

How much option cost may change with each 0.01 change in implied volatility

106
Q

Option with Delta of .40 is also interpreted

A

as 40% chance of expiring in the money

107
Q

IRR

A

Internal Rate of Return

108
Q

What is IRR

A

Rate at which the Present Value of cash Inflow

=

Present Value of cash Outflow

109
Q

Geometric Series Finite

A

(First Term - First Omitted Term)

/

(1 - Common Ratio)

110
Q

Geometric Series Infinite

A

(First Term)

/

(1 - Common Ratio)

111
Q

Present Value Annuity one period before the first payment date

A

1 - vn

/

i

112
Q

Present Value Annuity on the date of the first payment

A

1 - vn

/

d

113
Q

Present Value Annuity with payments one period after the comparison date and continuing forever

A

1

/

i

114
Q

Present Value Annuity with payments on the comparison date continuing forever

A

1

/

d

115
Q

Sensitivity Analysis

A

changing the input variable one at a time to see how sensitive NPV is to each variable

116
Q

Scenario Analysis

A

Changing several input variables at a time

117
Q

Semi-Variance

A

= E [min( 0, R - E[R] )2 ]

118
Q

Semi-Variance can be estimated by the sample semi - variance

What is the Formula?

A

(1/n) * Summationin (min ( 0, Ri - E[R] )2

119
Q

VaR (Value-at-Risk) of a Random Variable

A

Simply its Percentile

120
Q

When risk-neutral probabilities are given, Calculate NPV with

A

risk-free rate

121
Q

Black Schole Call Price Formula

A

C = Fp(S)•N(d1) - Fp(K)•N(d2​)

= (Prepaid Forward Price Stock)*N(d1) - (Prepaid Forward Price Strike)*N(d2)

122
Q

What is a Forward Contract

A

Agreement between two parties, the buyer and seller, to exchange an asset on specified date AND specified price

123
Q

Agreement between two parties, the buyer and seller, to exchange an asset on specified date AND specified price

A

Forward Contract

124
Q

Long Forward makes investor

A

obligated to buy the underlying asset at the forward price

125
Q

Payoff Long Forward

A

Spot Price at Expiration - Forward Price

Also equals the Profit of Long Forward

126
Q

Profit Long Forward

A

Payofflong forward

127
Q

Forward Price should equal?

A

AV

of the Prepaid Forward Price

at risk-free rate - compounded cont.

128
Q

F0,T = (AV-prepaid forward price)

A

(FP)(ert)

r = risk free rate

129
Q

Pre-paid forward price = Stock’s Price at

A

Stock’s Price at T=0

130
Q

Notional Value means

A

Size

131
Q

Liquidity

A

How easy is it to buy and sell an asset

132
Q

Black Scholes price for Put Option

A

P = Fp(K)•N(-d2) - Fp(S)•N(-d1)

133
Q

Call Option Price Min Boundary

A

C(S,K,T) >= max [0, FP(S) - Ke-rt

134
Q

Put Option Price Min Boundary

A

P(S,K,T) >= max [0, Ke-rT - FP(S)]

135
Q

Call Option Price Max Boundary

A

S >= C(S,K,T)

136
Q

Put Option Price Max Boundary

A

K >= P(S,K,T)

137
Q

Strike Price Proposition 1

A

C(K1) >= C(K2) >= C(K3)

P(K1) <= P(K2) <= P(K3)

138
Q

Strike Price Proposition 2

A

C(K1) - C(K2) <= (K2 - K1)e-rT

P(K2) - P(K1) <= (K2 - K1)e-rT

139
Q

d1 =

A

ln ( (FP(S) / FP(K) ) + (0.5)(σ2)(T)

/

σ • sqrt(T)

140
Q

d2 =

A

d1 - (σ • sqrt(T))

141
Q
A

SOA/CFA (6 decks)

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