Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

Options and Futures > Final > Flashcards

Final Flashcards

(72 cards)

Start Studying
1
Q

What are the four ways to buy a share of stock?

A

Outright Purchases
Fully Leveraged Purchase
Prepaid Forward
Forward Contract

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Describe an outright purchase

A

Pay at Time: 0
Receive Security at Time: 0
Payment: S0 at Time 0

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Fully Leveraged Purchase

A

Pay at Time: T
Receive Security at Time: 0
Payment: S0 e^rt at Time T

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Prepaid Forward

A

Pay at Time: 0
Receive Security at Time: T
Payment: ?

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Forward Contract

A

Pay at Time: T
Receive Security at Time: T
Payment: ? e^ert

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Prepaid Forward: Non-Dividend

A

F0,t = So

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Prepaid Forward: Discreet Dividend

A

F0,t = So - PV(D1) - PV(D2)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Prepaid Forward: Continuously Compounded Dividend

A

F0,t = Soe^-deltat

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Forward: Non-Dividend, Discreet Dividend, Continuously Compounded Dividend

A

Same as prepaid, but *e^rt

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Assumptions for Continuously Compounded Dividend Yield

A

Bid + Ask Spread = 0
0 Brokerage Fees
Create an ideal world w/ no imperfections

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Fair Value

A

The price the formula gives you, given you know the stock price and interest rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Forward Premium

A

The ratio of the current forward price to the stock price

Infers the current stock price from forward price

=F0,t/So
sometimes expressed as annualized percent: ln(F0,t/So)/t

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are synthetics?

A

Give you a financial equivalent

Can offset risk of a forward by creating a synthetic forward to offset a position in the actual forward

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

How do you create a synthetic long forward?

A

Long Stock and Borrow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What transactions make up Cash + Carry Arbitrage? What does it tell you?

A

Long Stock
Borrow
Short Forward

The upper bound

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What transactions make up Reverse Cash + Carry Arbitrage? What does it tell you?

A

Short Stock
Lend
Long Forward

The lower bound

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What do synthetics do?

A

They create a link between markets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is a synthetic forward’s equation?

A

Forward = stock - zero-coupon bond

(long stock, borrow)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is a synthetic stock’s equation?

A

Stock = forward - zero-coupon bond

(long forward, lend)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is a synthetic zero-coupon bond’s equation?

A

Zero-Coupon Bond = stock - forward

(long stock, short forward)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is borrowing?

A

Shorting

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is lending?

A

Longing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Where does Cash and Carry get its name?

A

You carry the spot asset forward through time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is your net cost of carry?

A

(r-delta)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
What is the initial value of a forward contract?
0
26
What makes futures contracts different than forward contracts?
Futures are: Exchange-traded Standardized Go through a clearinghouse Settled daily Low credit risk Highly liquid
27
Forward:
Private contracts between two parties Not standardized One specific delivery date Delivery or final cash settlement Some credit risk
28
Futures:
Exchange Traded Standardized Range of Delivery Dates Settles Daily Contract closed prior to maturity Virtually no credit risk
29
What requirements do futures have that forward contracts don't?
Margin Requirements, marking to market and margin calls are required
30
What is a maintenance margin?
Minimum amount of margin balance that you need to have in your account in order to keep your futures position valid
31
Do most investors hold their futures contracts until maturity?
No, 95% are effectively cancelled
32
When are forward and futures prices different?
A strong positive correlation between interest rates and the asset price implies the futures price is slightly higher A negative correlation implies forward price is slightly higher
33
What makes up the price of an option premium?
Intrinsic Value and Time Value
34
What makes up intrinsic value?
stock price and strike price
35
What makes up time value?
time to maturity volatility interest rates
36
What synthetic securities can you create using parity?
Stock T-Bill Call Put
37
How do you create a synthetic stock?
long call, short put, lend pv
38
How do you create a synthetic T-Bill?
long stock, short call, long put (conversion)
39
How do you create a synthetic call?
long stock, long put, borrow PV of strike
40
How do you create a synthetic put?
long stock, long call, lend PV of strike
41
How do you figure out how to create synthetics?
Rearrange the PC Parity formula until so you have what you are looking for on one side.
42
When are european options and american options equal?
american call = european call
43
Call price cannot:
be negative exceed stock price be less than price implied by pc parity
44
Put price cannot:
be negative exceed stock price be less than the price implied by pc parity
45
When is a european stock option less valuable than otherwise identical options with less time to maturity?
on dividend paying stocks
46
What is property 1 (calls) and what strategy do you use?
lower call premium means higher strike price bull spread Long call (lower k) Short Call (higher k) Above 0
47
What is property 2 (calls) and what strategy do you use?
difference between call premium is less than the difference between the strike prices bear spread long call (higher k) short call (lower k) Above 0
48
What is property 3 (calls) and what strategy do you use?
difference of call premiums divided by differences in strike prices butterfly spread
49
What is property 1 (puts) and what strategy do you use?
lower the strike price, lower the put premium bear spread long call (lower k) short call (higher k)
50
What is property 2 (puts) and what strategy do you use?
differences in put premiums is less than differences in strike prices bull spread long call (higher k) short call (lower k)
51
What is property 3 (puts) and what strategy do you use?
differences of put premiums divided by differences in strike prices butterfly spread
52
When is exercising early optimal?
when the underlying asset pays large dividend (call) when an investor holds both the underly8ing asset and deep in the money puts
53
What does each symbol represent in reference to the binomial model?
Delta = number of shares of the stock B = $ investment in the risk-free asset total equation = current value of portfolio
54
What is p*?
Risk neutral probability
55
What does delta and beta > 0 mean?
Long, lend
56
What assumptions are made to use the black-scholes model?
continuously compounded returns is known and constant future dividends are known risk free rate is known and constant no transaction costs possible to short-sell costless no arbitrage opportunity possible to borrow/lend at the risk-free rate
57
When does the BS model not work?
On American puts or calls with dividends
58
What are the option Greeks?
Delta, Gamma, Theta, Vega, Rho
59
What does Delta represent?
expected price change with a $1 change in stock price also tells position in underlying asset IV
60
What does Gamma represent?
delta's expected change with a $1 change in stock price IV
61
What does Theta represent?
decrease of an option's extrinsic value with the passing of one day TtM
62
What does Vega represent?
expected price change when volatility increases 1% Volatility
63
What does Rho represent?
expected price change when interest rate increases by 1% r
64
What does a positive delta mean, negative?
long call long put
65
What must the deltas of call and put add up to?
1
66
In the BS equation, what is delta?
N(d1)
67
When is gamma most sensitive?
near ATM put gamma = call gamma
68
What type of theta do the different options have?
all options have negative theta
69
When is theta larger?
at the money
70
When will a theta be positive?
with a put deep in the money
71
What type of Vega do the different options have?
positive put vega = call vega
72
What options have a positive rho?
long call and short put negative is opposite

Options and Futures (2 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions