Midterm #1 (things To work on)

Question 1

What is a derivative

Answer 1

A financial instrument whose payoff depends on the value of the underlying.

Question 2

2 Risks of Bonds

Answer 2

1. ) Inflation Risk: purchasing power lost

2. ) Credit Risk: issuer can’t make payments and defaults

Question 3

What is Hedging

Answer 3

Taking an offsetting position to mitigate risk and protect from losses
Ex.) Home Insurance is hedging fires and floods

Question 4

What is Speculation

Answer 4

Taking a leveraged position where you make a small initial payment for the chance of a large gain (or loss)

Question 5

Formula for long forward

Answer 5

Long Forward= Long Stock+Short Bond

Long Forward = St - So(1+i)^t

Question 6

What is Lease Rate

Answer 6

This is the difference between the market rate and the rate of return that you get when you get back your collateral. Lender charges this due to scarcity.

Question 7

Examples of Stock Index’s

Answer 7

• TSX60
• S&P 500
• Dow Jones Industrial Average
• NASDAQ 100
• Heng Seng