S15 Flashcards
synthetic risk-free asset =
long stock - stock index futures
synthetic equity =
long risk-free asset [BONDS, NOT FUTURES]
+
stock index futures
stock futures needed to equitise RFR holding
N = V0(1+RFR)^T/(Futures pricemultiplier)
3 types of fx risk
transaction - when foreign currency will be recieved later
economic - when fx affect competitiveness
translation - when converting financial statements into a foreign currency
futures vs forwards
forwards:
- can be customized
- have counterparty risk
- less regulated
- have no margin requirement
- are private
empiricals on hedging (futures vs forwards)
- most bond/equity hedging done with futures for liquidity and continued pricing (despite cross hedge or basis risk)
- interest payments AND currency = are hedged with forwards for exact amounts/dates
- Eurodolar futures are very large market but are mostly used by dealers and market makers to hedge own needs/positions and not used not directly by final customers
when determining number of debt futures needed to hedge, which yield beta to use ?
holdings yield beta (not futures yield beta)
covered call
long stock + short call
motivation = generation of additional income
protective put
long stock + long put
motivation = portfolio insurance
bull spread
long call with low exercise + short call with high exercise
motivation = expecting small increase in asset value
bear spread
short call with low exercise + long call with high exercise
motivation = expecting small drop in asset value
butterfly spread with calls
long call with low exercise + long call with high exercise + 2 short calls with mid exercise
motivation = expecting little market move
butterfly spread with puts
long put with low exercise + long put with high exercise + 2 short puts with mid exercise
motivation = expecting little market move
straddle
long put + long call with same exercise
motivation = bet on volatility
collar (zero cost)
protective put (lower exercise) + covered call (higher exercise)
motivation = locking value of portfolio at minimal cost
box spread
bull call spread + bear put spread
motivation = RFR
delta =
change in call price / change in stock price
gama
change in delta / change in stock price
number of shares to sell to delta hedge a position in options
number of shares = number of options X option delta
interest call - payoff payment date
not at expiration but after number of months indicated in the contract
in interest swaps days used are 91/360 90/360 91/365 or 90/365
91/360
number of synthetic units of stock, based on futures number =
number of futures X multiplier / (1+Div rate)^T
effective amount of stock committed when creating synthetic cash position =
number of futures sold * multiplier * price of futures sold / (1+RFR)^T
effective number of stock committed when creating synthetic cash position =
number of futures sold * multiplier / (1+RFR)^T
breakeven price for collar
= current stock price :)
largest gamma have options which are
closest to the at the money and near expiration
straddle vs butterly
bet on volatility vs bet on stability
how to synthetically remove option from a callable bond issued
by selling interest rate receiver swaption.
motivation: offsetting the higher coupon paid fro the call feature of the issued bond
how to synthetically add callable feature to an issued bond
by buying interest rate receiver swaption
motivation: paying smaller coupon if rates drop
duration of pay fixed 4 year qly swap
475% - 1/450% (75% is a given assumption)
swap notional principal =
Existing bond value* (target dur - existing dur)/(swap dur)
swap risk
credit risk of the dealer entering into a swap
which periods should not be compounded?
less than one year (e,g, 6mos)
