IFM All Chapters

Question 1

Haircut

Answer 1

Additional collateral set aside to compensate for risk which belongs to the short seller, held by the lender until position is closed

Question 2

Short Rebate

Answer 2

Interest earned on the collateral in the stock market

Question 3

Repo Rate

Answer 3

Interest earned on the collateral in the bond market

Question 4

Short-sale

Answer 4

Believes that the price of the stock will decrease and profit can be made from this

Question 5

Payoff

Answer 5

If one completely cashes out, does not consider cash flows on other dates

Question 6

Profit

Answer 6

Considers cash flow on other dates with accumulated value at the given rate

Question 7

Profit of Long Position

Answer 7

Payoff - AV(premium) at risk-free rate

Question 8

Profit of Short Position

Answer 8

Payoff + AV(premium) at risk-free rate

Question 9

Bull Spread

Answer 9

Long Call + Short Higher Strike Call

Long Put + Short Higher Strike Put

Question 10

Bull Spread used when

Answer 10

belief price of asset will increase between two strike prices

Question 11

Bear Spread

Answer 11

Short Call + Long Higher Strike Call

Short Put + Long Higher Strike Put

Question 12

Bear Spread used when

Answer 12

price of asset decrease between two strike price

Question 13

Box Spread

Answer 13

• Long Bull (call) + LongBear (put)
• Long Bull (put) + Long Bear (call)

Question 14

Box Spread used when

Answer 14

lend or borrow money

Question 15

Box Spread (lending money)

Answer 15

Long Bull (call) + Long Bear (put)

Question 16

Box Spread (borrowing money)

Answer 16

Long Bull (put) + Long Bear (call)

Question 17

Ratio Spread

Answer 17

Long M options (K1) + Short N options (K2)

Where K1 differs from K2

Question 18

Collar

Answer 18

Long Put (K1) + Short Call (K2); where K2 > K1

Question 19

Collar used when

Answer 19

wishes to benefit from underlying asset price decreasing

Question 20

Collared Stock

Answer 20

Combination of purchased collar + long stock

Question 21

Straddle

Answer 21

Long Call (K1) + Long Put (K1)

Question 22

Straddle used when

Answer 22

price of underlying asset will have large movements in either direction

Question 23

Strangle

Answer 23

Long put (K1) + Long call (K2); where K2 > K1

Question 24

Strangle used when

Answer 24

price of underlying asset will have large movements in either direction but with low initial cost (however lower payoff)

Question 25

Butterfly Spread used when

Answer 25

Underlying asset will stay close to its current price but protect against large losses

Question 26

Asymmetric Butterfly Spread

Answer 26

Strike Price Unequally Spaced

Question 27

Symmetric Butterfly Spread

Answer 27

Strike Price Equally Spaced

Question 28

Put-Call Parity Equation

Answer 28

**C(S,K) - P(S,K) = F^P(S) - Ke^-rt**

Question 29

Law Of One Price

Answer 29

Two portfolios with exact same payoffs must have the same cost

Question 30

Put-Call Parity Equation

Answer 30

C(S,K) - P(S,K) = F^P(S) - Ke^-rt

Question 31

Floor

Answer 31

Long Asset + Long Put

Question 32

Floor useful for

Answer 32

guaranteeing a minimum price at which an asset can be sold with payoff of at least K

Question 33

Caps

Answer 33

Short Asset + Long Call

Question 34

Caps useful for

Answer 34

Insurance against short selling asset Risk of price increasing Buying asset for fixed price (k) Capped the cost to close short position

Question 35

Write a Covered Call

Answer 35

Short Call + Long Asset

Question 36

Write a Covered Put

Answer 36

Short Put + Short Asset

Question 37

Payoff of Call as K increases

Answer 37

The payoff will decrease and the cost decreases

Question 38

Payoff of Put as K increases

Answer 38

Payoff of put will increase and the cost will also increase

Question 39

Maximum Loss on Long Put

Answer 39

AV(Put Premium) at risk-free rate

Question 40

Maximum Loss on Short Put

Answer 40

Limited to: K - AV(Put Premium)

Question 41

Assume you short-sell an asset and will have to buy the asset at a future date to close your short position. You wish to insure against an increase in the asset price.

Answer 41

Short Asset + Long Call = Cap

Question 42

Assume you own an asset, and you wish to insure against a decrease in its price

Answer 42

Long Asset + Long Put = Floor

Question 43

Identity: **Floor** Long Asset + Long Put =

Answer 43

Long Call + Long risk free zero coupon Bond

Question 44

Identity: **Cap** Short Asset + Long Call

Answer 44

Long Put + Short risk-free rate zero coupon Bond

Question 46

Long Put + Short risk-free rate zero coupon Bond Identity for?

Answer 46

Identity: **Cap** Short Asset + Long Call

Question 47

Long Asset + Long Put =

Answer 47

Floor

Question 48

Short Asset + Long Call =

Answer 48

Caps

Question 49

Short Call + Long Asset =

Answer 49

Write a Covered Call

Question 50

Short Put + Short Asset =

Answer 50

Write a Covered Put

Question 51

AV(Put Premium) at risk-free rate; Max Loss for?

Answer 51

Maximum Loss on Long Put

Question 52

K - AV(Put Premium) Max Loss on?

Answer 52

Maximum Loss on Short Put

Question 53

Purpose of Covered Call?

Answer 53

Given Option Writer Shorts Call Faces risk of asset price increases Thus buys asset to offset

Question 54

Long Call + Long risk free zero coupon Bond Identity for?

Answer 54

Identity: **Floor** Long Asset + Long Put =

Question 55

Additional collateral set aside to compensate for risk which belongs to the short seller, held by the lender until position is closed

Answer 55

Haircut

Question 56

Interest earned on the collateral in the stock market

Answer 56

Short Rebate

Question 57

Interest earned on the collateral in the bond market

Answer 57

Repo Rate

Question 58

Believes that the price of the stock will decrease and profit can be made from this

Answer 58

Short-sale

Question 59

Long Call + Short Higher Strike Call Long Put + Short Higher Strike Put

Answer 59

Bull Spread

Question 60

Short Call + Long Higher Strike Call Short Put + Long Higher Strike Put

Answer 60

Bear Spread

Question 61

belief price of asset will increase between two strike prices

Answer 61

Bull Spread used when

Question 62

price of asset decrease between two strike price

Answer 62

Bear Spread used when

Question 63

Long Bull (call) + Long Bear (put)

Answer 63

Box Spread (lending money)

Question 64

Long Bull (put) + Long Bear (call)

Answer 64

Box Spread (borrowing money)

Question 65

Purpose of covered put?

Answer 65

Given Option Writer Shorts Puts Faces risk of asset price decrease Thus offsets with shorting the asset

Question 66

Maximum Loss of Long Call

Answer 66

Accumulated Value of Cash OutFlow from purchasing the Call

Question 67

Maximum Gain of Long Call

Answer 67

Infinite

Question 68

Maximum Loss of Short Call

Answer 68

Infinite

Question 69

Maximum Gain of Short Call

Answer 69

Accumulated Value of Cash InFlow from selling the Call

Question 70

Maximum Loss of Long Put

Answer 70

Accumulated Value of Cash OutFlow from purchasing the Put

Question 71

Maximum Gain of Long Put

Answer 71

Strike price to which you have the right to sell - Accumulated Value of Cash OutFlow used to purchase the Put

Question 72

Maximum Loss of Short Put

Answer 72

Strike price at which you need to buy the asset - Accumulated Vaue of Cash InFlow from selling the Put

Question 73

Maximum Gain from Short Put

Answer 73

Accumulated Value of Cash InFlow from selling the Put

Question 74

How to hedge short position on underlying asset with Collar

Answer 74

Written Collared Stock Short Put Strike Price + Long Call Higher Strike Price

Question 75

Risk Premium for Security (i)

Answer 75

E[R_i] - r_f

Question 76

Expected Market Risk Premium

Answer 76

E[_market] - r_f

Question 77

Expected excess return of the Market

Answer 77

E[R_market] - r_f

Question 78

Expected excess return for Security (i)

Answer 78

E[R_i] - r_f

Question 79

CAPM Formula

Answer 79

E[Return on Investment] = Risk-free rate + (Beta of investment security)\*(Expected Market Risk Premium)

Question 80

Enterprise Value

Answer 80

Which is the risk of the firm's underlying business operation that is seperate from its cash holdings.

Question 81

Enterprise Value Formula:

Answer 81

**Net Debt = Debt - Excess cash and short-term investments**

Question 82

r_U=w_E⋅r_E+w_D⋅r_D

Answer 82

Unlevered Cost of Capital or Asset

Question 83

If project is financed purely with equity, considered to be

Answer 83

unlevered

Question 84

Project finanaced with Debt and Equity considered to be

Answer 84

levered

Question 85

β_U=w_E⋅β_E+w_D⋅β_D

Answer 85

Unlevered Beta or Asset

Question 86

Benefits from Tax Deduction

Answer 86

Reduces Debt Cost of Capital -\> more money to pay equity holders

Question 87

Effective after-tax cost of debt

Answer 87

rD•(1−τC) τC = coporate tax rate rD = Cost of Debt

Question 88

weighted-average cost of capital (WACC)

Answer 88

r_WACC = w_E⋅r_E + w_D⋅r_D⋅(1−τC)

Question 89

WACC vs Unlevered Cost Of Capital (is based off of?)

Answer 89

WACC = based on firm's after-tax cost of debt Unlevered Cost Of Capital = based on firm's pretax cost of debt

Question 90

Beta is calculated as

Answer 90

B_i = ( Cov[R_i,R_Mkt] / σ²_Mkt )

Question 91

equation for the CAPM is

Answer 91

r_i = E[R_i] = r_f + β_i(E[R_Mkt]−r_f)

Question 92

security market line (SML) represents

Answer 92

is a graphical representation of the CAPM

Question 93

CML vs SML

Answer 93

**CML**_vs_**SML** Uses Total Risk _vs_ Systematic Risk Uses Efficient Portfolios Only _vs_ Any security/combination of securities

Question 94

The difference between a security's expected return and the required return

Answer 94

alpha

Question 95

Alpha equation

Answer 95

α_i = E[R_i]−r_i = E[R_i]−[r_f + β_i(E[R_Mkt]−r_f)]

Question 96

ADDING A NEW INVESTMENT

Answer 96

r_New=r_f+β_New,_P⋅(E[R_P]−r_f)

Question 97

market risk premium

Answer 97

E[R_Mkt] − r_f

Question 98

Beta Formula in words

Answer 98

Change in an Asset's Return / Change in Market Return

Question 99

What does Beta Meaasure?

Answer 99

Systematic Risk of an asset by calculating the sensitivity of the **Asset's** **return** to the **Market return**

Question 100

Statisitical term of Beta defined as:

Answer 100

COV[Asset_i, Market] / Variance of Market Return

Question 101

Linear Regression estimate of Beta

Answer 101

R_i - r_f = a_i + B_i (R_mkt - r_f) + e_i

Question 102

# Chapter 5 Delta

Answer 102

Change in option cost per $1 of underlying asset movement

Question 103

Gamma

Answer 103

Measures Delta's expected rate of change

Question 104

If Delta is 0.40 and Gamma is .05 then first $1 dollar change is 0.40 of option's price, second $1 dollar change is 0.45

Answer 104

How Gamma works

Question 105

# Chapter 5 Vega

Answer 105

How much option cost may change with each 0.01 change in implied volatility

Question 106

Option with Delta of .40 is also interpreted

Answer 106

as 40% chance of expiring in the money

Question 107

IRR

Answer 107

Internal Rate of Return

Question 108

What is IRR

Answer 108

Rate at which the Present Value of cash Inflow = Present Value of cash Outflow

Question 109

Geometric Series Finite

Answer 109

(First Term - First Omitted Term) / (1 - Common Ratio)

Question 110

Geometric Series Infinite

Answer 110

(First Term) / (1 - Common Ratio)

Question 111

Present Value Annuity one period before the first payment date

Answer 111

1 - vⁿ / i

Question 112

Present Value Annuity on the date of the first payment

Answer 112

1 - vⁿ / d

Question 113

Present Value Annuity with payments one period after the comparison date and continuing forever

Answer 113

1 / i

Question 114

Present Value Annuity with payments on the comparison date continuing forever

Answer 114

1 / d

Question 115

Sensitivity Analysis

Answer 115

changing the input variable one at a time to see how sensitive NPV is to each variable

Question 116

Scenario Analysis

Answer 116

Changing several input variables at a time

Question 117

Semi-Variance

Answer 117

**= E [min( 0, R - E[R] )² ]**

Question 118

Semi-Variance can be estimated by the **sample semi - variance** ## Footnote **What is the Formula?**

Answer 118

(1/n) \* Summation_iⁿ (min ( 0, R_i - E[R] )²

Question 119

VaR (Value-at-Risk) of a Random Variable

Answer 119

Simply its **Percentile**

Question 120

When risk-neutral probabilities are given, Calculate NPV with

Answer 120

risk-free rate

Question 121

Black Schole Call Price Formula

Answer 121

C = F^p(S)•N(d₁) - F^p(K)•N(d2​) = (Prepaid Forward Price Stock)\*N(d₁) - (Prepaid Forward Price Strike)\*N(d₂)

Question 122

What is a Forward Contract

Answer 122

Agreement between two parties, the buyer and seller, to exchange an asset on specified date AND specified price

Question 123

Agreement between two parties, the buyer and seller, to exchange an asset on specified date AND specified price

Answer 123

Forward Contract

Question 124

Long Forward makes investor

Answer 124

obligated to buy the underlying asset at the forward price

Question 125

Payoff Long Forward

Answer 125

Spot Price at Expiration - Forward Price ## Footnote **Also equals the Profit of Long Forward**

Question 126

Profit Long Forward

Answer 126

Payoff_{long forward}

Question 127

Forward Price should equal?

Answer 127

AV of the Prepaid Forward Price at risk-free rate - compounded cont.

Question 128

F_0,T = (AV-prepaid forward price)

Answer 128

(F^P)(e^rt) r = risk free rate

Question 129

Pre-paid forward price = Stock's Price at

Answer 129

Stock's Price at T=0

Question 130

Notional Value means

Answer 130

Size

Question 131

Liquidity

Answer 131

How easy is it to buy and sell an asset

Question 132

Black Scholes price for Put Option

Answer 132

P = F^p(K)•N(-d₂) - F^p(S)•N(-d₁)

Question 133

Call Option Price Min Boundary

Answer 133

C(S,K,T) \>= max [0, F^P(S) - Ke^-rt

Question 134

Put Option Price Min Boundary

Answer 134

P(S,K,T) \>= max [0, Ke^-rT - F^P(S)]

Question 135

Call Option Price Max Boundary

Answer 135

S \>= C(S,K,T)

Question 136

Put Option Price Max Boundary

Answer 136

K \>= P(S,K,T)

Question 137

Strike Price Proposition 1

Answer 137

C(K₁) \>= C(K₂) \>= C(K₃) P(K₁) \<= P(K₂) \<= P(K₃)

Question 138

Strike Price Proposition 2

Answer 138

C(K₁) - C(K₂) \<= (K₂ - K₁)e^-rT P(K2) - P(K1) \<= (K₂ - K₁)e^-rT

Question 139

d₁ =

Answer 139

**ln (** (F^P(S) / F^P(K) **) + (0.5)(σ²)(T)** **/** **σ • sqrt(T)**

Question 140

d₂ =

Answer 140

**d₁ - (**σ • sqrt(T)**)**