Flashcards in Reading #59&60- Futures Mkts, Contracts & Options Deck (52):
major difference between future and forward contracts
future contracts are standardized and done through clearinghosue
define initial margin
"money that must be deposited in futures account before any trading takes place"
define maintenance margin
"amt of margin that must be maintained in futures account"
define variation margin
"funds that must be deposited into account to bring it back to initial margin amt"
define settlement price
closing price, but not just last trade; "average of prices of trades during last period of trading"
Eurodollar futures - long position pays or receives when rates decrease?
receives - opposite form FRA
define "long call"
"buyer of call option - right to buy underlying asset"
define short call
"writer (seller) of a call - obligation to sell underlying asset"
define long put
"buyer of put option - right to sell underlying asset"
define short put
"writer of a put - obligation to buy the underlying asset"
define american options
can be "exercised at any time up to and including the contract's expiration date"
define european options
can be "exercised only on the contract's expiration date"
FORMULA: call option in-the- money
If S-X >0 (S = selling and X = bought share for price)
FORMULA: call option out-of-the-money
If S-X< 0
FORMULA: options that are at-the-money (put and call)
FORMULA: put option in-the-money
if X-S>0 , bought the share (s) and exercising at X
FORMULA: put option out-of-the-money
LEAPS (long-term equity anticipatory securities)
most options expire 2-4 months of current dates, leaps have expirations +1 year
for retail trade, largely unregulated
define financial options
"include equity options and options based on stock indices" can include interest rates and foreign currencies
define options on futures
also called futures options - i.e. the call or put options
define commodity options
gives holder right to buy or sell fixed quantity of physical asset
define interest rate options
"similar to stock options, but exercise price is interest rate and underlying asset is a ref. rate like LIBOR"
how are interest rate options and FRAs similar
neither have deliverable assets, settled in cash based on notional amount
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
define interest rate cap
"series of interest rate call options" expiration dates correspond to reset date on floating rate loan
define interest rate floor
"series of interest rate put options - expiration dates correspond to reset on floating rate loan"
define interest rate collar
combo of cap and floor "borrower to buy a cap and sell a floor"
define option intrinsic value
"amount option is in-the-money"
define time value of option
amount by which option premium exceeds intrinsic value
time value of option formula
option value = intrinsic value + time value
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
Upper bound for euro and US CALL options
max value for either is share price of underlying stock. therefore C
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)
Euro Call MINIMUM Value
c>or= S-X/(1+RFR)raised to T-t
Euro Call MAXIMUM Value
European PUT MINIMUM Value
p0 +S0-X/(1+RFR)raised to T > or = 0
European PUT MAXIMUM Value
X/(1+RFR)raised to (T-t)
US Call MINIMUM Value
c>or= S-X/(1+RFR)raised to T-t
US Call MAX Value
US Put MIN Value
US PUT MAX Value
call prices - inversely or directly related to exercise price?
put prices - inversely or directly related to exercise price?
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)
define put-call parity
"payoffs of two portfolio combinations - fiduciary call and protective put"
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
define protective put
"share of s tock together with a put option on the stock", when put is in money (X-S)+S = X
Put Call Parity FORUMLA
c+ X / (1+RFR)raised to T = S +P
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 in the RFR has what value on a put and call?
Call goes up and put down