Risk Management Flashcards
Do you translate a GBP call option profit?
No
Because call = buy and buying GBP means they are already in GBP
Do you translate a GBP put option profit?
Yes!
Because put = sell and selling GBP means you receive foreign currency, which you will then need to translate
Traded futures pros & cons vs OTC options?
Pros
1. Lower transaction costs (traded)
2. Traded
3. Flexible (date)
Cons
1. Not exact (size & basis)
2. Not all currencies available
3. Non-USD conversion more complicated
Issues using crypto for FX
It has nerd value
1. Niche (large currencies only e.g. USD, GBP)
2. Volatile (but can hedge)
What factors affect the time value of an option?
Remember: time value!
1. Time (More time = more value)
2. Volatility (Volatile underlying price = more value)
3. Time value of money (Because value is present value of exercise price)
How much does one FTSE point cost?
£10
Effective interest
Annual rate, so gross up
Time apportion an option premium?
NEVER
Hedge efficiency
The amount of the hedge profit covers the adverse movement
Buy or sell and FRA when lending money?
Sell
Buy or sell an FRA when borrowing?
Buy
Buy or sell an IRF when lending?
Buy
Buy or sell an IRF when borrowing?
Sell
Overseas trade risks
Over the rainbow curious cats love exploring secret gardens, investigating rare treasure (ethically :D)
- Currency
- Credit
- Liquidity
- Economic stability
- Special taxes & regulations
- Governmental stability
- Import restrictions
- Remittance restrictions
-
Trading risks (e.g. physical)
(Ethics of politics and business)
What does an FRA do to risk?
Eliminates downside and upside risk
Because the rate is locked in
What is the basis at a future’s expitry?
Nil
(Because of arbitrage)
How to work out whether call or put option
Look at what the currency is of the option in question
What is the profit/loss on a traded futures contract?
Difference in FUTURES RATES
NOT SPOT RATES
TRADING FUTURES HAS NOTHING TO DO WITH THE SPOT RATE (Just the futures price)
(i.e. sell - buy)
How to calculate GBP profit where you have FC/GBP
Fine to X no. contracts X contract size then convert
What does ‘forward rate on xyz’ mean?
The forward rate now, for that date in the future
(i.e. for ‘forward rate on xyz’ if the xyz is three months in advance, then they want a three month forward rate)
What can you do if asked to comment on something (e.g. forward rate) you have calculated?
Does it also appear in question (e.g. they have given you forward rate discount). Then COMPARE to figure in question (so here, -> think; I have forward rate, there is a forward rate discount in question, so work out the discount with my rate and compare)
What is the intrinsic value of an option?
It’s value NOW
Based on a. strike price b. market value and c. put or call
Must be positive (i.e. negative IV = 0)
What is the time value of an option?
The REST of the premium
I.e. premium - intrinsic value
What options have intrinsic value?
IN THE MONEY options only
Benefit of volatility for time value of options?
Same old reason: More probability of being in money (/more in money)
Factors that affect intrinsic value of options?
Don’t overthink: Market value and exercise price
What factors does one consider when deciding on an option strike price?
- Level of cover required
- Expense of premium
Other thing you can work out when demonstrating option?
Maximum loss
Selecting whether to put or call for interest rate options
It is THE OPPOSITE OF NORMAL assets, because higher interest rate = lower value
Working out contract size (for options): How long is a contract?
“options on three month interest rate futures” … so three months
(Will always be 3m for futures anyway I think)
How to work out no. contracts (when interest hedge for part of the year)?
Amount/Contract size, TIME APPORTION FOR CONTRACT LENGTH AND AMOUNT OF TIME NEEDED
*E.g. need 7m / 3m contracts
Calculating option profit for contracts less then 12m?
TIME APPORTION DOWN OPTION PROFIT
Because futures price quoted pa (maybe :D )
