PS multiple choice potential short questions Flashcards
. Suppose that I am paying fixed on an accreting fixed-for-floating 10-year interest rate swap and the forward curve is upwards sloping. Which of the following is true?
A) The fixed rate will be higher than a non-accreting fixed-for-floating 10-year interest rate swap.
B) The fixed rate will be lower than a non-accreting fixed-for-floating 10-year interest rate swap.
C) The implicit loan will be over a longer period.
D) The implicit loan will be over a shorter period.
E) None of the above
A) The fixed rate will be higher than a non-accreting fixed-for-floating 10-year interest rate swap.
What would require a larger purchase or sale of futures contracts to hedge ones existing position
A low volatility of the existing position.
Suppose that I am paying fixed on an accreting fixed-for-floating 10-year interest rate swap and the forward curve is upwards sloping. If the swap is accreting …
then later payments are more heavily weighted. Later payments are bigger because of the slope of the forward curve.
Consider a gamble where you toss a fair coin. If it comes up heads, you receive $100, and if it comes up tails you receive nothing. Suppose also that the gamble is securitized – so you can trade securities that reflect the gamble’s market price. Suppose that the price of such a security in the market has recently dropped from $40 to $30. What could explain this drop in price. 3 reasons
) Traders are demanding higher returns.
Traders have become more risk averse.
Traders believe the physical probability of the coin coming up heads is lower.
explain what would cause an increase of variance in the risk-neutral distribution implied by options prices
An increase in options prices could cause this. So investors more willing to to purchase options with the right to buy or sell an underlying assets. This increases the variance as the spectrum of possible prices increases meaning more uncertainty.
The stochastic discount factor is higher in bad states of the world and falls with interest rates.
In bad states economic downturns can happen so investors want higher discount rate greater risks. Falls with interest rates, because lower cost of capital leads to higher asset valuations, which reduces the discount rate applied to future cash flows.
Consider an amortizing fixed-for-floating 10-year interest rate swap where the forward curve is upwards sloping. Is this fixed rate lowe than non-amortizing swap
If the curve is upwards sloping and the interest rate is amortizing, most of the cash changes hands at the beginning. Therefore the fixed rate will be lower than for a non-amortizing swap
Consider a gamble where you toss a fair coin. If it comes up heads, you receive $100, and if it comes up tails you receive nothing. Suppose also that the gamble is securitized – so you can trade securities that reflect the gamble’s market price, and that the current market price is $30. What would happen to the market price and expected volatility if I replaced the fair coin with a weighted coin, so the coin is now more likely to come up tails than heads?
The price would decrease and expected volatility would decrease.
What does put call parity say
Put call parity says that if put price goes up and call option goes down, spot price must decrease if strike price and risk free interest rate are unchanged.
What does a high correlation in the pool of assets reduce and increase the value of tranches of?
A high correlation in the pool of assets reduces the value of senior tranches, and increases the value of junior tranches.
