Derivatives

Question 1

What are the assumptions of arbitrage free pricing and valuation, notation for S, s, F,f,V,v? What is V0 for futures and forwards? What is convergence?

Answer 1

Question 2

What is the formula for futures/forwards with periodic and continuous compounding?

Answer 2

Question 3

What is carry and reverse carry arbitrage?

Answer 3

Question 4

How to value a forward/futures with no underlying cashflows?

Answer 4

Question 5

How to value forward/futures with underlying cashflows?

Answer 5

Question 6

What is an FRA and what does it mean to be long/short?

Answer 6

Question 7

payoff formula for FRA short/long?

Answer 7

Question 8

Describe fixed income forwards? Why is a conversion factor needed?

Answer 8

Question 9

Describe forward/futures with known yield?

Answer 9

Question 10

What is the concept of cheapest to deliver (CTD)? What is the cost to purchase deliverable bond?

Answer 10

Question 11

Valuing a fixed income forward example?

Answer 11

Question 12

Valuing a currency forward example?

Answer 12

Question 13

What is an interest rate swap and how does it work?

Answer 13

Question 14

How to get the fixed rate of interest rate swap?

Answer 14

Question 15

Formula for value of swap?

Answer 15

Question 16

What is a currency swap and how does it work?

Answer 16

Question 17

Valueing a currency swap example?

Answer 17

Question 18

Explain what an equity swap is and how it works?

Answer 18

Question 19

How is an equity swap valued?

Answer 19

Question 20

Equity swap value example

Question 21

What is a contingent claim and what are the assumptions to value them?

Answer 21

Question 22

Describe the 1-period binomial model and how to find the hedge ratio?

Answer 22

Question 23

How to determine risk-neutral probability and how to then compute C0 or P0?

Answer 23

Question 24

2 period bimonial model: what is the hedge ratio?

Answer 24

Question 25

Formula for C0 for 2 period binomial in one step and put-call parity?

Answer 25

Question 26

What are the differences between valuing American and european options?

Answer 26

Question 27

How to find the early exercise put premium us over eu?

Answer 27

Question 28

How to adjust for dividends and the adjustment for US?

Answer 28

Question 29

How do interest rate options work with 2p binomial?

Answer 29

Question 30

What are the BSM assumptions about percentage chanegs in stock prices, changes in successive periods and the stock price distribution (mean and std dev)?

Answer 30

Question 31

What are the 10 BSM assumptions?

Answer 31

Question 32

BSM: formula for put, call and d1 and d2?

Answer 32

Question 33

How can a call and a put be represented in terms of stock and bond?

Answer 33

Question 34

Replication of buying/selling call/put? Formula for each

Answer 34

Question 35

How is BSM modified to account for carry benefits? How do carry benfits affect puts and calls?

Answer 35

Question 36

BSM applied to equities and currencies?

Answer 36

Question 37

Explain the black model for options on futures?

Answer 37

Question 38

Explain how moneyness affects the probability of exercise?

Answer 38

Question 39

Explain the black model with interest rates

Answer 39

Question 40

Buying an ATM FRA call example? How are calls used for caps (hedging)?

Answer 40

Used to to put a cap on loan payments

Question 41

Example of how caps work with 2p binomial?

Answer 41

Question 42

Explain how FRA floors work?

Answer 42

Question 43

What is a swaption?

Answer 43

Question 44

What happens to the black model with a swaption?

Answer 44

Question 45

Greeks: What is delta?

Answer 45

Question 46

How accurate is delta for small/large changes in S?

Answer 46

Question 47

What is delta hedging and how to do it?

Answer 47

Question 47

Greeks: What is Gamma? What can it be interpreted in terms of curvature?

Answer 47

Question 48

What are the properties of Gamma and what risk does gamma measure?

Answer 48

Question 49

How does gamma help with approximating call price?

Answer 49

Question 50

Greeks: What is theta? Can it be hedged?

Answer 50

Question 51

Greeks: what is vega?

Answer 51

Question 52

Greeks: what is Rho?

Answer 52

Question 53

What is implied volatility?

Answer 53