Module 48.2: Swaps and Options Flashcards
1
Q
What is a credit spread option and a credit default swap?
A
credit spread option - call option on the yield of a bond, so if yield rises the value of the option increases
credit default swap - essentially insurance against default
2
Q
What is the main criticism of derivatives and benefits?
A
criticisim - too risky, likened to gambling
benefits - provide price inforamtion, allow risk to managed, and reduce transaction costs.
3
Q
What is the law of one price in arbitrage?
A
two securities or portfolios that have identical cash flows in the futrue, regardless of future events, should have the same price.
