Risk Management

Question 1

Do you translate a GBP call option profit?

Answer 1

No

Because call = buy and buying GBP means they are already in GBP

Question 2

Do you translate a GBP put option profit?

Answer 2

Yes!

Because put = sell and selling GBP means you receive foreign currency, which you will then need to translate

Question 3

Traded futures pros & cons vs OTC options?

Answer 3

Pros
1. Lower transaction costs (traded)
2. Traded
3. Flexible (date)

Cons
1. Not exact (size & basis)
2. Not all currencies available
3. Non-USD conversion more complicated

Question 4

Issues using crypto for FX

Answer 4

It has nerd value

1. Niche (large currencies only e.g. USD, GBP)
2. Volatile (but can hedge)

Question 5

What factors affect the time value of an option?

Answer 5

Remember: time value!

1. Time (More time = more value)
2. Volatility (Volatile underlying price = more value)
3. Time value of money (Because value is present value of exercise price)

Question 6

How much does one FTSE point cost?

Answer 6

£10

Question 7

Effective interest

Answer 7

Annual rate, so gross up

Question 8

Time apportion an option premium?

Answer 8

NEVER

Question 9

Hedge efficiency

Answer 9

The amount of the hedge profit covers the adverse movement

Question 10

Buy or sell and FRA when lending money?

Answer 10

Sell

Question 11

Buy or sell an FRA when borrowing?

Answer 11

Buy

Question 12

Buy or sell an IRF when lending?

Answer 12

Buy

Question 13

Buy or sell an IRF when borrowing?

Answer 13

Sell

Question 14

Overseas trade risks

Answer 14

Over the rainbow curious cats love exploring secret gardens, investigating rare treasure (ethically :D)

1. Currency
2. Credit
3. Liquidity
4. Economic stability
5. Special taxes & regulations
6. Governmental stability
7. Import restrictions
8. Remittance restrictions
9. Trading risks (e.g. physical)
   (Ethics of politics and business)

Question 15

What does an FRA do to risk?

Answer 15

Eliminates downside and upside risk

Because the rate is locked in

Question 16

What is the basis at a future’s expitry?

Answer 16

Nil

(Because of arbitrage)

Question 17

How to work out whether call or put option

Answer 17

Look at what the currency is of the option in question

Question 18

What is the profit/loss on a traded futures contract?

Answer 18

Difference in FUTURES RATES
NOT SPOT RATES
TRADING FUTURES HAS NOTHING TO DO WITH THE SPOT RATE (Just the futures price)
(i.e. sell - buy)

Question 19

How to calculate GBP profit where you have FC/GBP

Answer 19

Fine to X no. contracts X contract size then convert

Question 20

What does ‘forward rate on xyz’ mean?

Answer 20

The forward rate now, for that date in the future

(i.e. for ‘forward rate on xyz’ if the xyz is three months in advance, then they want a three month forward rate)

Question 21

What can you do if asked to comment on something (e.g. forward rate) you have calculated?

Answer 21

Does it also appear in question (e.g. they have given you forward rate discount). Then COMPARE to figure in question (so here, -> think; I have forward rate, there is a forward rate discount in question, so work out the discount with my rate and compare)

Question 22

What is the intrinsic value of an option?

Answer 22

It’s value NOW
Based on a. strike price b. market value and c. put or call
Must be positive (i.e. negative IV = 0)

Question 23

What is the time value of an option?

Answer 23

The REST of the premium

I.e. premium - intrinsic value

Question 24

What options have intrinsic value?

Answer 24

IN THE MONEY options only

Question 25

Benefit of volatility for time value of options?

Answer 25

Same old reason: More probability of being in money (/more in money)

Question 26

Factors that affect intrinsic value of options?

Answer 26

Don't overthink: Market value and exercise price

Question 27

What factors does one consider when deciding on an option strike price?

Answer 27

1. Level of cover required 2. Expense of premium

Question 28

Other thing you can work out when demonstrating option?

Answer 28

Maximum loss

Question 29

Selecting whether to put or call for interest rate options

Answer 29

It is **THE OPPOSITE OF NORMAL** assets, because higher interest rate = lower value

Question 30

Working out contract size (for options): How long is a contract?

Answer 30

"options on **three month** interest rate futures" ... so three months (Will always be 3m for futures anyway I think)

Question 31

How to work out no. contracts (when interest hedge for part of the year)?

Answer 31

Amount/Contract size, TIME APPORTION FOR CONTRACT LENGTH AND AMOUNT OF TIME NEEDED *E.g. need 7m / 3m contracts

Question 32

Calculating option profit for contracts less then 12m?

Answer 32

TIME APPORTION DOWN OPTION PROFIT Because futures price quoted pa (maybe :D )