R.41 Derivatives Strategies

Question 1

Managing Portfolio Duration

Answer 1

Increase duration:

1. enter into receive fixed interest rate swap, or
2. buy bond futures contracts.

Reduce duration:

1. enter into pay fixed interest rate swap, or
2. sell bond futures contracts.

Question 2

Managing equity exposure

Answer 2

Increase exposure:

1. enter into receive-total-return-on-equity-index,
2. pay-LIBOR swap, or
3. buy stock index futures contracts.

Reduce exposure:

1. enter into pay-total-return-on-equity-index,
2. receive-LIBOR swap, or
3. sell equity futures contracts.

Question 3

Covered call

Protective put

Collar

Bull Spread

Bear Spead

Long straddle

Answer 3

• Covered call = long stock + short call on stock
• Protective put = long stock + long put on stock
• Collar = long stock + long put on stock + short call on stock
• Bull spread = long call (or put) + short call (or put) with higher exercise price. Profit if expected increase in stock price materialises.
• Bear spread = long call (or put) + short call (or put) with lower exercise price. Profit if expected decrease in stock price materializes.
• Long straddle = long call + long put with same strike price and expiration. Profit if expected increase in volatility materialises.