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L1 60 Option Markets and Contracts > g define interest rate caps, floors, and collars; > Flashcards

g define interest rate caps, floors, and collars; Flashcards

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L1 60 Option Markets and Contracts (17 decks)

A - D Options Terminology, The Mechanics of Trading Options

60.F: COMPARE INTEREST RATE OPTIONS WITH FORWARD RATE AGREEMENTS (FRAS)

a describe call and put options;

b distinguish between European and American options;

c define the concept of moneyness of an option;

d compare exchange-traded options and over-the- counter options;

e identify the types of options in terms of the underlying instruments;

g define interest rate caps, floors, and collars;

h calculate and interpret option payoffs and explain how interest rate options differ from other types of options;

i define intrinsic value and time value, and explain their relationship;

j determine the minimum and maximum values of European options and American options;

k calculate and interpret the lowest prices of European and American calls and puts based on the rules for minimum values and lower bounds;

l explain how option prices are affected by the exercise price and the time to expiration;

m explain put–call parity for European options, and explain how put–call parity is related to arbitrage and the construction of synthetic options;

n explain how cash flows on the underlying asset affect put–call parity and the lower bounds of option prices;

o determine the directional effect of an interest rate change or volatility change on an option’s price.

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