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Flashcards in S15 Deck (33):
1

synthetic risk-free asset =

long stock - stock index futures

2

synthetic equity =

long risk-free asset [BONDS, NOT FUTURES]
+
stock index futures

3

stock futures needed to equitise RFR holding

N = V0*(1+RFR)^T/(Futures price*multiplier)

4

3 types of fx risk

transaction - when foreign currency will be recieved later
economic - when fx affect competitiveness
translation - when converting financial statements into a foreign currency

5

futures vs forwards

forwards:
- can be customized
- have counterparty risk
- less regulated
- have no margin requirement
- are private

6

empiricals on hedging (futures vs forwards)

- most bond/equity hedging done with futures for liquidity and continued pricing (despite cross hedge or basis risk)
- interest payments AND currency = are hedged with forwards for exact amounts/dates
- Eurodolar futures are very large market but are mostly used by dealers and market makers to hedge own needs/positions and not used not directly by final customers

7

when determining number of debt futures needed to hedge, which yield beta to use ?

holdings yield beta (not futures yield beta)

8

covered call

long stock + short call

motivation = generation of additional income

9

protective put

long stock + long put

motivation = portfolio insurance

10

bull spread

long call with low exercise + short call with high exercise

motivation = expecting small increase in asset value

11

bear spread

short call with low exercise + long call with high exercise

motivation = expecting small drop in asset value

12

butterfly spread with calls

long call with low exercise + long call with high exercise + 2 short calls with mid exercise

motivation = expecting little market move

13

butterfly spread with puts

long put with low exercise + long put with high exercise + 2 short puts with mid exercise

motivation = expecting little market move

14

straddle

long put + long call with same exercise

motivation = bet on volatility

15

collar (zero cost)

protective put (lower exercise) + covered call (higher exercise)

motivation = locking value of portfolio at minimal cost

16

box spread

bull call spread + bear put spread

motivation = RFR

17

delta =

change in call price / change in stock price

18

gama

change in delta / change in stock price

19

number of shares to sell to delta hedge a position in options

number of shares = number of options X option delta

20

interest call - payoff payment date

not at expiration but after number of months indicated in the contract

21

in interest swaps days used are 91/360 90/360 91/365 or 90/365

91/360

22

number of synthetic units of stock, based on futures number =

number of futures X multiplier / (1+Div rate)^T

23

effective amount of stock committed when creating synthetic cash position =

number of futures sold * multiplier * price of futures sold / (1+RFR)^T

24

effective number of stock committed when creating synthetic cash position =

number of futures sold * multiplier / (1+RFR)^T

25

breakeven price for collar

= current stock price :)

26

largest gamma have options which are

closest to the at the money and near expiration

27

straddle vs butterly

bet on volatility vs bet on stability

28

how to synthetically remove option from a callable bond issued

by selling interest rate receiver swaption.

motivation: offsetting the higher coupon paid fro the call feature of the issued bond

29

how to synthetically add callable feature to an issued bond

by buying interest rate receiver swaption

motivation: paying smaller coupon if rates drop

30

duration of pay fixed 4 year qly swap

4*75% - 1/4*50% (75% is a given assumption)

31

swap notional principal =

Existing bond value* (target dur - existing dur)/(swap dur)

32

swap risk

credit risk of the dealer entering into a swap

33

which periods should not be compounded?

less than one year (e,g, 6mos)