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FM REVISH > Risk Management > Flashcards

Risk Management Flashcards

1
Q

Do you translate a GBP call option profit?

A

No

Because call = buy and buying GBP means they are already in GBP

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2
Q

Do you translate a GBP put option profit?

A

Yes!

Because put = sell and selling GBP means you receive foreign currency, which you will then need to translate

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3
Q

Traded futures pros & cons vs OTC options?

A

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

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4
Q

Issues using crypto for FX

A

It has nerd value

1. Niche (large currencies only e.g. USD, GBP)
2. Volatile (but can hedge)

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5
Q

What factors affect the time value of an option?

A

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)

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6
Q

How much does one FTSE point cost?

A

£10

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7
Q

Effective interest

A

Annual rate, so gross up

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8
Q

Time apportion an option premium?

A

NEVER

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9
Q

Hedge efficiency

A

The amount of the hedge profit covers the adverse movement

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10
Q

Buy or sell and FRA when lending money?

A

Sell

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11
Q

Buy or sell an FRA when borrowing?

A

Buy

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12
Q

Buy or sell an IRF when lending?

A

Buy

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13
Q

Buy or sell an IRF when borrowing?

A

Sell

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14
Q

Overseas trade risks

A

Over the rainbow curious cats love exploring secret gardens, investigating rare treasure (ethically :D)

  1. Currency
  2. Credit
  3. Liquidity
  4. Economic stability
  5. Special taxes & regulations
  6. Governmental stability
  7. Import restrictions
  8. Remittance restrictions
  9. Trading risks (e.g. physical)
    (Ethics of politics and business)
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15
Q

What does an FRA do to risk?

A

Eliminates downside and upside risk

Because the rate is locked in

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16
Q

What is the basis at a future’s expitry?

A

Nil

(Because of arbitrage)

17
Q

How to work out whether call or put option

A

Look at what the currency is of the option in question

18
Q

What is the profit/loss on a traded futures contract?

A

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)

19
Q

How to calculate GBP profit where you have FC/GBP

A

Fine to X no. contracts X contract size then convert

20
Q

What does ‘forward rate on xyz’ mean?

A

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)

21
Q

What can you do if asked to comment on something (e.g. forward rate) you have calculated?

A

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)

22
Q

What is the intrinsic value of an option?

A

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)

23
Q

What is the time value of an option?

A

The REST of the premium

I.e. premium - intrinsic value

24
Q

What options have intrinsic value?

A

IN THE MONEY options only

25
Q

Benefit of volatility for time value of options?

A

Same old reason: More probability of being in money (/more in money)

26
Q

Factors that affect intrinsic value of options?

A

Don’t overthink: Market value and exercise price

27
Q

What factors does one consider when deciding on an option strike price?

A
  1. Level of cover required
  2. Expense of premium
28
Q

Other thing you can work out when demonstrating option?

A

Maximum loss

29
Q

Selecting whether to put or call for interest rate options

A

It is THE OPPOSITE OF NORMAL assets, because higher interest rate = lower value

30
Q

Working out contract size (for options): How long is a contract?

A

“options on three month interest rate futures” … so three months

(Will always be 3m for futures anyway I think)

31
Q

How to work out no. contracts (when interest hedge for part of the year)?

A

Amount/Contract size, TIME APPORTION FOR CONTRACT LENGTH AND AMOUNT OF TIME NEEDED

*E.g. need 7m / 3m contracts

32
Q

Calculating option profit for contracts less then 12m?

A

TIME APPORTION DOWN OPTION PROFIT

Because futures price quoted pa (maybe :D )

FM REVISH (4 decks)

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