Flashcards in Reading #59&60- Futures Mkts, Contracts & Options Deck (52):

1

## major difference between future and forward contracts

### future contracts are standardized and done through clearinghosue

2

## define initial margin

### "money that must be deposited in futures account before any trading takes place"

3

## define maintenance margin

### "amt of margin that must be maintained in futures account"

4

## define variation margin

### "funds that must be deposited into account to bring it back to initial margin amt"

5

## define settlement price

### closing price, but not just last trade; "average of prices of trades during last period of trading"

6

## Eurodollar futures - long position pays or receives when rates decrease?

### receives - opposite form FRA

7

## define "long call"

### "buyer of call option - right to buy underlying asset"

8

## define short call

### "writer (seller) of a call - obligation to sell underlying asset"

9

## define long put

### "buyer of put option - right to sell underlying asset"

10

## define short put

### "writer of a put - obligation to buy the underlying asset"

11

## define american options

### can be "exercised at any time up to and including the contract's expiration date"

12

## define european options

### can be "exercised only on the contract's expiration date"

13

## FORMULA: call option in-the- money

### If S-X >0 (S = selling and X = bought share for price)

14

## FORMULA: call option out-of-the-money

### If S-X< 0

15

## FORMULA: options that are at-the-money (put and call)

### S=X

16

## FORMULA: put option in-the-money

### if X-S>0 , bought the share (s) and exercising at X

17

## FORMULA: put option out-of-the-money

### if X-S<0

18

## LEAPS (long-term equity anticipatory securities)

### most options expire 2-4 months of current dates, leaps have expirations +1 year

19

## OTC options

### for retail trade, largely unregulated

20

## define financial options

### "include equity options and options based on stock indices" can include interest rates and foreign currencies

21

## define options on futures

### also called futures options - i.e. the call or put options

22

## define commodity options

### gives holder right to buy or sell fixed quantity of physical asset

23

## define interest rate options

### "similar to stock options, but exercise price is interest rate and underlying asset is a ref. rate like LIBOR"

24

## how are interest rate options and FRAs similar

### neither have deliverable assets, settled in cash based on notional amount

25

## what combination of an interest rate option will have same payoff as a long position in FRA?

### long interest rate call combined with a short interest rate put can have same payoff as long FRA

26

## define interest rate cap

### "series of interest rate call options" expiration dates correspond to reset date on floating rate loan

27

## define interest rate floor

### "series of interest rate put options - expiration dates correspond to reset on floating rate loan"

28

## define interest rate collar

### combo of cap and floor "borrower to buy a cap and sell a floor"

29

## define option intrinsic value

### "amount option is in-the-money"

30

## define time value of option

### amount by which option premium exceeds intrinsic value

31

## time value of option formula

### option value = intrinsic value + time value

32

## define lower bound of option for euro and US options

### no option will sell less than intrinsic and will not go neg, therefore lower bound for euro and american is 0

33

## Upper bound for euro and US CALL options

###
max value for either is share price of underlying stock. therefore C

34

## upper bound for euro and us PUT options

### US - cannot be more than strike price. euro options cannot be exercised prior to expiration, so max val is PV of exercise price discounted at RFR (risk free rate)

35

## Euro Call MINIMUM Value

### c>or= S-X/(1+RFR)raised to T-t

36

## Euro Call MAXIMUM Value

### S

37

## European PUT MINIMUM Value

### p0 +S0-X/(1+RFR)raised to T > or = 0

38

## European PUT MAXIMUM Value

### X/(1+RFR)raised to (T-t)

39

## US Call MINIMUM Value

### c>or= S-X/(1+RFR)raised to T-t

40

## US Call MAX Value

### S

41

## US Put MIN Value

### X-S

42

## US PUT MAX Value

### X

43

## call prices - inversely or directly related to exercise price?

### inversely

44

## put prices - inversely or directly related to exercise price?

### directly

45

## longer time to expiration - increase or decrease value of an option?

### increase the value (except with european puts - because the longer the time, the more it is discounted and therefore could be less than shorter term puts)

46

## define put-call parity

### "payoffs of two portfolio combinations - fiduciary call and protective put"

47

## define fiduciary call

### combo of "pure-discount that pays X at maturity and a call with exercise price X" so when in the money it is X+(S-X) = S

48

## define protective put

### "share of s tock together with a put option on the stock", when put is in money (X-S)+S = X

49

## Put Call Parity FORUMLA

### c+ X / (1+RFR)raised to T = S +P

50

## more "volatility in the price of the underlying asset will have what effect on the value of a call option and the value of a put option?"

### increase, increase

51

## Increase in the RFR has what value on a put and call?

### Call goes up and put down

52