410 Midterm 2 Flashcards
(44 cards)
put call parity
a principal referring to the static price relationship, given a stock price, between the prices of european put and call option of the same class (i.e. same underlying, strike price and expiration date).
forward interest rate
a type of interest rate that is specified for a loan that will occur at a specified future date.
black scholes fomula
the model is a mathematical model of a financial market containing certain derivative investment instruments. from this model, one can deduce the formula, which gives a theoretical estimate of the price of european style options.
covered interest pariry
a condition where the relationship between interest rates and the spot and forward currency values of two countries are in equilibrium. as a result, there are no interest rate arbitrage opportunities between those tow currencies.
convenience yield on a commodity
the benefit or premium associated with holding an underlying product or physical good, rather than the contract or derivatives product.
underlying
- In derivatives, the security that must be delivered when a derivative contract, such as a put or call option, is exercised.
- In equities, the common stock that must be delivered when a warrant is exercised, or when a convertible bond or convertible preferred share is converted to common stock.
Convenience yield on a commodity
The benefit or premium associated with holding an underlying product or physical good, rather than the contract or derivative product.
Duration of a bond
A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.
Yield curve
A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates.
Interest rate swap
Interest rate swaps often exchange a fixed payment for a floating payment that is linked to an interest rate (most often the LIBOR). A company will typically use interest rate swaps to limit or manage exposure to fluctuations in interest rates, or to obtain a marginally lower interest rate than it would have been able to get without the swap.
Interest rate immunization
a strategy that ensures that a change in interest rates will not affect the value of a portfolio. Similarly, immunization can be used to ensure that the value of a pension fund’s or a firm’s assets will increase or decrease in exactly the opposite amount of their liabilities, thus leaving the value of the pension fund’s surplus or firm’s equity unchanged, regardless of changes in the interest rate.
Foreign exchange swap
An agreement to make a currency exchange between two foreign parties. The agreement consists of swapping principal and interest payments on a loan made in one currency for principal and interest payments of a loan of equal value in another currency.
Documentary letter of credit
A Documentary Letter of Credit (LC) is a written undertaking given by a bank on behalf of an Importer to pay the Exporter a given sum of money within a specified time, providing that the Exporter presents documents which comply with the terms laid down in the Letter of Credit.
Standby letter of credit
Standby letters of credit are created as a sign of good faith in business transactions, and are proof of a buyer’s credit quality and repayment abilities.
DLOC V.S. SLOC
both types were created to assure the parties in a commercial transaction that contractual obligations will be honored.
Asset swap
Similar in structure to a plain vanilla swap, the key difference is the underlying of the swap contract. Rather than regular fixed and floating loan interest rates being swapped, fixed and floating investments are being exchanged.
Plain vanilla swap
The most basic type of forward claim that is traded in the OTC market between two private parties, usually firms or financial institutions.
Yield to maturity
The rate of return anticipated on a bond if held until the end of its lifetime.
Interest rate collar
An investment strategy that uses derivatives to hedge an investor’s exposure to interest rate fluctuations. The investor purchases an interest rate ceiling for a premium, which is offset by selling an interest rate floor. This strategy protects the investor by capping the maximum interest rate paid at the collar’s ceiling, but sacrifices the profitability of interest rate drops.
Securities class action lawsuit
a lawsuit filed by investors who bought or sold a company’s securities within a specific period of time (known as a “class period”) and suffered economic injury as a result of violations of the securities laws.
Efficient portfolio
A portfolio that provides the greatest expected return for a given level of risk, or equivalently, the lowest risk for a given expected return. also called optimal portfolio.
Hedge fund
Hedge funds are alternative investments using pooled funds that may use a number of different strategies in order to earn active return, or alpha, for their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns. Because hedge funds may have low correlations with a traditional portfolio of stocks and bonds, allocating an exposure to hedge funds can be a good diversifier
Call option v.s. put option
A call option gives its buyer the option to buy an agreed quantity of a commodity or financial instrument, called the underlying asset, from the seller of the option by a certain date (the expiry), for a certain price (the strike price). A put option gives its buyer the right to sell the underlying asset at an agreed-upon strike price before the expiry date.
Futures vs. forward contract
The main differentiating feature between futures and forward contracts — that futures are publicly traded on an exchange while forwards are privately traded(OTC) — results in several operational differences between them. This comparison examines differences like counterparty risk, daily centralized clearing and mark-to-market, price transparency, and efficiency，and customization(forward).
