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Flashcards in Practice questions Deck (16)
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1
Q

what is the delta of an option?

A

change in call price for a small change in stock price

2
Q

what is inversely related to the value of a call option?

A

the strike price

3
Q

according to the put call parity which of the following is true:

a) buying a call and selling a put is equivalent to buying a stock and borrowing PV(X)
b) buying a call and selling a put is equivalent to buying a stock and lending PV(X)
c) selling a call and buying a put is equivalent to selling a stock and borrowing PV(X)
d) selling a call and buying a put is equivalent to selling a stock and lending PV(X)

A

a) buying a call and selling a put is equivalent to buying a stock and borrowing PV(X)

P - C = X - S

4
Q
purchased futures at 349, contract is for 2500 units. margin requirement 10%. sold for 278, what is return on invested capital?
a -255.4%
b -203.4%
c -155.4%
d -103.4%
A

b -203.4%

5
Q

what is a long stable strategy used for?

A

a strategy that produces profit when price of underlying move significantly in either direction

6
Q

in almost all cases what is the purpose of a hedge?

A

to reduce or eliminate risk

7
Q

a put has fundamental value as long as:

a) MV of underlying financial asset has a positive value
b) MV of underlying financial asset is less than strike price
c) strike price of put is greater than it’s time premium
d) strike price of put is less than MV of underlying asset

A

b) MV of underlying financial asset is less than strike price

P = X - S

8
Q

a deep in the money call option on futures is exercised early because:

a) the intrinsic value is maximised
b) it behaves like a futures but it ties up funds
c) futures price is not likely to rise any further
d) none of the above

A

b) it behaves like a futures but it ties up funds

9
Q

what is the margin deposits associated with the purchase of a forwards contract for?

A

its used to cover any losses in market value of contract resulting from adverse price fluctuations

10
Q

spot price of gold = 904
storage cost of carry = 1.5
rf = 7.25%
contract is 4months, what is the price of a futures at equilibrium?

A

926.84

f(t) = So(1+r)^t/n + cost of carry

11
Q

what does the BS model assume about the probability distribution of stock prices?

A

that they are log normal

12
Q

what does the BS model assume about the continuously compounded rate of return during the year?

A

assumes that the continuously compounded rate of return is normally distributed

13
Q

what are the shortcomings of LTCM? 7

A
  • reliance on short term history
  • risk concentration
  • bias in risk measurement
  • strategy was based on relative value
  • tiny profits needed leverage to make returns attractive
  • leverage ration of 25:1
  • market downturn (Russian debt crisis, Asian financial crisis)
14
Q

why did BS fail in LTCM?

A
  • over reliance on mathematical modelling
  • non normal market conditions (Russian Debt crisis)
  • unexpected events couldn’t be accounted for causing non log-normal returns
15
Q

what is the purpose of margin accounts? why can it be considered an insurance?

A

limit default risk

because it is marked to market daily, losses and gains are received/deducted throughout the life of the contract not just at expiry

16
Q

how is the margin balance determined?

A

in Australia its determined using SPAN, deposits amount determined by 16 risk scenarios, each based on loss potentials across 1 day with a 99% CI, the highest risk is then used to determine the initial deposit.