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CFA Level 2 > Derivatives > Flashcards

Flashcards in Derivatives Deck (30):
1

Value at Expiration of a Forward Contract

V(0,T) = ST - F(0,T)

2

Off-Market FRA

A contract in which the initial value is intentionally set at a nonzero value.

3

Present Value of Dividends

PV(D,0,T) = (sum of) D/(1 + r)^t

4

Value of a FRA on an Dividend Paying Stock

F(0,T) = [S - PV(D,0,T)](1 + r)^T

5

Price of FRA on a Bond

F(0,T) = [Bond(T + Y) - PV(Coupons)](1 + r)^T

6

Interest Rate Parity

Expresses the equivalence, or parity, of spot and forward exchange rates, after adjusting for differences in interest rates in two countries.

7

Fungible

Any futures contract with any counterparty can be offset by an equivalent futures contract with another counterparty.

8

Futures Price of a Treasury

Nominal Amount [(1 - Rate)(Days/360]

9

Futures Price

f(T) = S(1 + r)^T

Through the forces of arbitrage, the futures price is the spot price compounded at the risk-free rate.

10

Futures Price with Storage Costs

f(T) = S(1 + r)^T + FV(SC,0,T)

11

Futures Price with Cash Flows

f(T) = S(1 + r)^T - FV(CF,0,T)

12

Convenience Yield

The nonmonetary return offered by an asset when in short supply. Nonmonetary benefits of an asset.

13

Cost of Carry

FV(CB,0,T) = Costs of Storage - Nonmonetary Benefits(aka: Convenience Yield)

14

Expected Spot Price

S = [S(T) - FV(CB,0,T)]/(1 + r)^T

15

Futures Price of Currency

f(T) = [S/(1 + foreign RFR)^T](1 + r)^T

16

Put-Call Parity

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

17

Normal Backwardation

The expected futures spot prices are greater than futures prices. It suggests that when hedgers are net short futures contracts, they must sell them at a discount to the expected future spot prices to get investors to buy them. The futures price rises as the contract matured to converge with spot prices.

18

Normal Contango

A pattern of falling futures prices is known as normal Contango. When the futures price is above the expected future spot price and the futures price falls over the life of the contract.

19

Delta of Options

Delta of a put option is 1 - delta on a call option.

20

Delta of Options

Delta of a put option is 1 - delta on a call option.

21

Fiduciary Call

Consists of a European Call and a risk free bond that matures on the option expiration day and has a face value of the call.

22

Option Delta

The sensitivity if the option price to a change in the price of the underlying.

23

Gamma

A measure of how well the delta sensitivity measure will approximate the option price's response to a change in the price of the underlying.

24

Rho

The sensitivity of the option price to the risk free rate.

25

Theta

The rate at which the time value decays as the option approaches expiration.

26

Vega

The sensitivity of the option price volatility.

27

Plain Vanilla Swap

An interest rate swap in which one party pays a fixed rate and the other party pays a floating rate.

28

Basis Swap

Involves one party paying LIBOR and the other paying the T-Bill rate. Both sides are paying a floating rate.

29

Swaption

An option to enter into a swap. Used by parties who anticipate the need for a swap at a later date but would like to establish the fixed rate today, while providing the flexibility to not engage in the swap later or engage in the swap at a more favorable rate in the market.

30

Payor Swaption

Allows the holder to enter into a swap as the fixed rate payor and floating rate receiver.