Finance & Risk 3&4 Flashcards
(18 cards)
What is a financial product in terms of contingent cashflows?
A contract specifying a schedule of payments c(t) at dates t.
How do you value a financial product?
v = Σ c_{t_k} · d_{t_k}, summing each payment discounted by its discount factor.
What is the discount factor for annual compounding at rate r?
d_t = 1 / (1 + r)^t.
How is the discount factor computed with compounding frequency f?
d_t = (1 + r/f)^(-f · t).
What is the discount factor under continuous compounding?
d_t = e^{-r·t}.
What is the formula for the price of a coupon bond?
p = Σ_{k=1}^n c·d_k + F·d_n, summing coupons and face value.
How is yield to maturity (YTM) defined?
The rate r that solves the bond price equation for a given p.
State the quick bond pricing shortcut formula using ρ and d.
v = ρ + (1 - ρ)·d^n, where ρ = c/(F·y), d = 1/(1+y).
How do you extract the zero-coupon discount factor d_t from market data?
d_t = (p_t - Σ_{k<t} c·d_k) / (c + F).
How do you compute the semi-annual YTM y(t) from d_t?
y(t) = 2·(d_t^{-1/(2t)} - 1).
What is the no-arbitrage forward price F_{0,T} under continuous compounding?
F_{0,T} = S_0 · e^{rT}.
What are the payoffs for a European call and put at maturity?
Call: max(S_T - K, 0); Put: max(K - S_T, 0).
What distinguishes a forward contract from an option?
Forwards obligate both parties; options give the right without obligation.
Describe an interest-rate swap.
An exchange of fixed rate K for floating (e.g., LIBOR) on a notional, like a series of FRAs.
What is the primary role and risk of a bank?
Borrow short (deposits), lend long (loans); faces credit and liquidity mismatch risk.
What is the primary role and risk of a fund?
Pool capital for collective investment; faces market risk from asset-price fluctuations.
What is the primary role and risk of an insurer?
Underwrite contingent liabilities; faces underwriting and market risk.
What is the primary role and risk of a broker-dealer?
Make markets in securities and derivatives; faces market, counterparty, and liquidity risk.
