Derivatives

Question 1

What is derivative?

Answer 1

It is security that derives its value from an underlying asset

Question 2

What happens when spot price=forward price?

Answer 2

No party has profit

Question 3

What happens when spot price>forward price?

Answer 3

Buyer has profit, seller has loss

Question 4

What happens when spot price<forward price?

Answer 4

Seller has profit, buyer has loss

Question 5

What is derivable contract?

Answer 5

Payment and shares are exchanged

Question 6

What is cash-settled contract?

Answer 6

Only gains/losses are exchanged

Question 7

What is central clearhouse?

Answer 7

It is party that takes opposite position to each side of trade guaranteering the payments promised under the contract, requires deposits from each party

Question 8

What is central clearing mandate?

Answer 8

It is used for swap trades, a central counterparty takes credit risk of both sides

Question 9

Where swap trades trade?

Answer 9

In dealer market, where margin deposits and MtM payments may be required

Question 10

What is credit default swaps?

Answer 10

It is when buyers makes fixed paymens on settlement date and seller pays only if underlying asset has a credit event

Question 11

What is option premium?

Answer 11

It is price of an option

Question 12

What is payoff of call option to the owner?

Answer 12

Max(0, S-X), benefits when S>X

Question 13

What is payoff of put option to the owner?

Answer 13

Max (0, X-S), benefits when X>S

Question 14

What is maximum loss for the buyer of an option?

Answer 14

Its premium

Question 15

What is loss for the writter of an option?

Answer 15

Unlimited

Question 16

What is forward commitment?

Answer 16

It is legally binding promise to perform some actions in the future

Question 17

What is contingent claim?

Answer 17

It is claim that is dependent on particular event

Question 18

What is hedge accounting?

Answer 18

It is recognition of gains/losses of qualifying derivative hedges at the same time they recognise changes in values of assets and liabilities being hedged

Question 19

What are considered cash flow hedge?

Answer 19

It is floating to fixed rate liability, exchange rate value hedge

Question 20

What are considered fair value hedge?

Answer 20

It reduces changes in the value of firms assets/liabilities

Question 21

What is net investment hedge?

Answer 21

It reduces volatility of equity in value on the BS

Question 22

What is two portfolio theory?

Answer 22

Two portofolios with the same payoff in the future for any future value will have the same cost today

Question 23

What strategy should be employed when forward price is too high?

Answer 23

Sell forwards and buy the underlying asset

Question 24

What strategy should be employed when forward price is too low?

Answer 24

Buy forwards and sell underlying asset

Question 25

What is replication?

Answer 25

It is creating a portfolio with cash market transactions that has the same payoffs as a derivative for all possible future values of the underlying

Question 26

Formula of no-arbitrage forward price

Answer 26

S0(1+Rf)^t

Question 27

Formula of no-arbitrage forward price with costs and benefits

Answer 27

[S0+PV0(Costs)-PV(benefits)](1+Rf)^t

Question 28

Formula of value of forward contract to the buyer with benefits and costs

Answer 28

St+PV(costs)-PV(benefits)-F0(T)(1+Rf)^-(T-t)

Question 29

What is implied forward rate?

Answer 29

It is forward rate for which two strategies have the same yield over the total period: lending for the whole period or dividing lending into separate period

Question 30

Formula of interest rate future prices

Answer 30

100-(100*MRR)

Question 31

What is basis point value of interest rate futures contracts?

Answer 31

It is one basis point change on futures contract value

Question 32

Formula of basis point value of interest rate futures contract

Answer 32

notional principle*period*0.01%

Question 33

Are futures marked-to-market daily?

Answer 33

Yes

Question 34

What is attractiveness relationship with futures and interest rates?

Answer 34

They are more attractive when positevely correlated

Question 35

What is interest rate swap equivalent to?

Answer 35

It is equivalent to a series of forward contracts each with a forward contract rate equal to fixed swap rate

Question 36

What is par swap rate?

Answer 36

It is fixed swap rate that gives zero value at initiation

Question 37

What is swap equivalence formula?

Answer 37

MRR/1+S=F/1+S

Question 38

What is considered in the money?

Answer 38

When immediate exercise of an option creates positive payoff

Question 39

What is considered out of money?

Answer 39

When immediate exercise would create a loss

Question 40

When are options in the money?

Answer 40

Call: S-X>0, put: X-S>0

Question 41

When options are out of money?

Answer 41

Call: S-X<0, put: X-S<0

Question 42

What is time value of an option?

Answer 42

It is amount by which option premium exceeds the exercise value

Question 43

Formula of option premium

Answer 43

exercise value+time value

Question 44

What is upper bound for call options?

Answer 44

c<=St

Question 45

What is upper bound for put options?

Answer 45

pt<=X(1+rf)^-(T-t)

Question 46

What is lower bound of call option?

Answer 46

c0>=Max[0 ; S0-X(1+rf)^-T

Question 47

What is lower bound of put option?

Answer 47

p0>=Max[0 ; X(1+rf)^-T-S0]

Question 48

What is fiduciary call?

Answer 48

It is combination of call with exercise price X and pure discount bond that pays X at maturity

Question 49

What is payoff of protective call when in/out of money?

Answer 49

X when out of money, S when in the money

Question 50

What is protective put?

Answer 50

It is share of stock and put of stock

Question 51

What is payoff of fiduciary put when in/out of money?

Answer 51

X when in the money, S when out of money

Question 52

Formula of put-call parity relationship

Answer 52

c+X(1+rf)^-T=S+p

Question 53

What is put-call forward parity

Answer 53

Derived with forward contracts rather than underlying asset

Question 54

Formula of put-call forward parity

Answer 54

c+X(1+Rf)^-T=F(T)(1+Rf)^-T+p