Flashcards in Fixed Income IV Deck (17):

1

## Initial margin (futures)

### Amount must be deposited to trade, different for each asset class

2

## Maintenance margin (futures)

### Amount that must be maintained, if falls below, funds must be deposited to get back to initial margin.

3

## Eurodollar futures

###
(1) add on yield to LIBOR

(2) price = (100 - annualized LIBOR yield)

(3) example: Libor = 2.4%, price = 97.6

4

## Index option payoff

### (Price - strike) * multiplier

5

## Option adjustments

###
(1) adjusted for stock splits

(2) NOT adjusted for cash dividends

6

## Future call option

###
Right to enter into long future at a given futures price

Puts work the same way

7

## Interest rate caps

###
Series of interest rate call options with expirations corresponding to reset dates on floating loan.

Pay you if rate moves above cap.

8

## Interest rate floors

### Series of interest rate put options that pay you if floating rate falls

9

## Effective duration

### (bond price when yields fall - bond price when yields rise) / (2*initial price * change in yield in %)

10

## Option adjusted duration (OAS)

### Same as effective, but requires a pricing model that takes into account options.

11

## Macaulay Duration

### Estimate of bond's interest rate sensitivity based on time in years until cash flows arrive.

12

## Modified Duration

### Slight improvement to macaulay, takes into account YTM as well. Not ideal for bonds with embedded options.

13

## Interpreting duration

###
(1) slope of price-yield curve at current YTM

(2) weighted average time until cash flow received

(3) Approximate % change in price for a 1% change in yield

14

## Duration and convexity formula

### (-duration * change in yield) + (convexity*(change in yield^2))*100

15

## Convexity adjustments

### Positive when convexity is positive, and negative when convexity is negative

16

## Effective convexity

### Takes into account embedded options

17