SS 17. Derivatives Flashcards
If a forward contract requires no cash outlay at initiation, it is most likely true that at initiation:
price exceeds value.
At initiation, value is equal to zero. Price is a positive number which states the amount that must be paid when the purchase takes place.
Convenience Yields are primarily associated with:
Commodities
Combining a long call and a long bond position creates a:
Fiduciary call
Combining a long call, a short put and a long bond position creates a synthetic:
Long position
What are the two types of derivatives?
Contingent Claims
Forward Commitments
Name 5 OTC contingent claim derivatives:
- Standard options on assets
- Interest rate options
- Callable bonds
- Convertible bonds
- Exotic options
The derivatives that best allow market watchers to infer what investors feel about volatility are:
Options
‘Bullish, maximum gain is the premium, maximum loss is strike minus premium’ describes a:
Short put position
In contrast to a futures contract, a forward contract:
gains the entire value at expiration
A short call is (bearish/bullish)
Bearish
Name 5 Exchange-traded contingent claim derivatives:
- Standard options on assets
- Interest rate options
- Warrants
- Callable bonds
- Convertible bonds
Put-call parity formula:
Stock + put = call + strike/(1+RFR)^T
Based on put-call parity, a trader who combines a long forward, a long bond, and a long put will create a synthetic:
Protective put
Name 2 OTC Forward commitment derivatives:
- Forward contracts
2. Swaps
The underlying in a forward rate agreement is most likely a(n):
interest rate
Combing a long call, long bond, short the underlying creates a:
Long put position
The value of a long position in a forward contract at expiration is best defined as:
spot price of the underlying minus forward price agreed in the contract.
The arbitrage-free pricing model assumes (3):
- That the investors can short as much stock as required to exploit the arbitrage opportunity
- Transaction costs are limited and will not affect pricing
- Investors can calculate the volatility of securities accurately
List 6 ways in which swaps are similar to forwards:
- Swaps typically require no payment by either party at initiation.
- Swaps are custom instruments.
- Swaps are not traded in any organized secondary market.
- Swaps are largely unregulated.
- Default risk is an important aspect of the contracts.
- Most participants in the swaps market are large institutions.
How is the settlement price for a futures contract determined?
An average of the trade prices taken during the closing period
