Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFA Level 3 > Risk Management Applications of Options > Flashcards

Risk Management Applications of Options Flashcards

You may prefer our related Brainscape-certified flashcards:
CFA flashcards
1
Q

Notation

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Value of a covered call at time T

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Profit of a covered call a time T

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Covered call summary

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Value of a protective put at time T

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Profit of a protective put at time T

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Protective put summary

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Bull spread (bull vertical call & bull vertical put)

A
  • Long call + short call with a higher exercise price
  • Short put + long put with a lower exercise price
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Value of a bull spread at time T

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Profit of a bull spread at time T

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Bull spread summary

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Value of a bear spread at time T

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Profit of a bear spread at time T

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Bear spread (bear vertical put & bear vertical call)

A
  • Long put + short put with a lower exercise price
  • Short call + long call with a higher exercise price
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Bear spread summary

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Butterfly spread

A
  • An option strategy that combines a bull and a bear spreads and has three exercise prices
  • Long butterfly spead (the wings are long) →
    • Long call at X1, short 2 calls at X2 and long call at X3
    • Long put at X1, short 2 puts at X2 and long put at X3
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Value of a butterfly spread (long bull spread + short bull spread) at time T

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Profit of a butterfly spread at time T

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Butterfly spread summary

A
20
Q

Black-Scholes-Merton

A
  • rc is the continuously compounded risk-free rate
  • N(d1) and N(d2) are normal probabilities associated with the values d1 and d2
21
Q

Value of a collar at time T

A
22
Q

Profit of a collar at time T

A
23
Q

Collar summary

A
  • Sometimes called a range forward or a risk reversal
24
Q

Box spread

A
  • Is composed of a bull spread and a bear spread
  • Long call and short put at X1
  • Short call and short put at X2
  • If the present value of the payoff exceeds the initial value, the box spread is underpriced and should be purchased
  • (X2 − X1) / (1 + r)T > c1 − c2 + p2 − p1
25
Q

Value of a straddle at time T

A
26
Q

Profit of a straddle at time T

A
27
Q

Straddle summary

A
28
Q

Value of a box spread at time T

A
29
Q

Profit of a box spread at time T

A
30
Q

PV of the payoff on a box spread

A
  • If the present value of the payoff exceeds the initial value, the box spread is underpriced and sould be purchased
31
Q

Box spread summary

A
32
Q

Straddle variant

  • Strap
  • Strip
  • Strangle
A
  • Straddle + call
  • Straddle + put
  • Straddle with a put and call that have a different exercise price
33
Q

Collar

A

Long put at X1 and short call at X2

34
Q

Risk reversal

A

Short put at X1 and long call at X2

35
Q
  • Straddle (long)
  • Strangle (long)
  • Collar (long)
  • Risk reversal (short collar)
  • Butterfly (long)
  • Seagull (short)
A
  • Long ATM put and long ATM call
  • Long OTM put and long OTM call
  • Long OTM put and short OTM call
  • Short OTM put and long OTM call
  • Long OTM call at X1, short 2 ATM calls at X2 and long OTM call at X3
  • Short OTM put at X1, long ATM put at X2 and short OTM call at X3
36
Q

Payoff of an interest rate call option

A
37
Q

Payoff of an interest rate put option

A
38
Q

Caplets payoff (based on libor)

A
  • The payoff for the caplets is made at the end of the period
39
Q

Floorlets payoff (based on libor)

A
40
Q

Interest call options effective rate

A
  • Effective loan proceeds = notional amount - value of the option at the initiation of the loan
  • Call payoff = notional amount * [Max(0, rate at time t – strike rate)(n/360)]
  • Effective interest = interest on the loan - call payoff
  • Effective annualized loan rate = [(notional amount + effective interest) / effective proceeds]365/n -1
41
Q

Interest rate collar

A
  • Long position in a cap with a short position in a floor
  • The borrower will benefit from falling rates and be hurt by rising rates within that range. Any rate increases above the cap exercise rate will have no net effect, and any rate decreases below the floor exercise rate will have no net effect
42
Q

The ratio of calls to shares for Delta hedging

A
  • Is the negative of 1 over the delta
43
Q

Delta hedge with two options

A
44
Q

Delta hedging asymmetric effects

A
  • For calls, the delta underestimates the effects of increases in the underlying and overestimates the effects of decreases in the underlying
45
Q

Gamma

A

= Change in delta / Change in underlying price

46
Q

Vega

A

Change in the option price / Change in volatility

47
Q

Delta of a spread

A
  • The delta is the sum of the delta and not the average
  • Intuition → Close to the expiration, if one option is in-the-money and the other is out-the-money, the first one will have a delta of 1 and the second a delta of 0. The result will be that the position moves 1-to-1 with the underlying. Hence, a delta of 1.

CFA Level 3 (19 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions