S15 Flashcards
(33 cards)
synthetic risk-free asset =
long stock - stock index futures
synthetic equity =
long risk-free asset [BONDS, NOT FUTURES]
+
stock index futures
stock futures needed to equitise RFR holding
N = V0(1+RFR)^T/(Futures pricemultiplier)
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
futures vs forwards
forwards:
- can be customized
- have counterparty risk
- less regulated
- have no margin requirement
- are private
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
when determining number of debt futures needed to hedge, which yield beta to use ?
holdings yield beta (not futures yield beta)
covered call
long stock + short call
motivation = generation of additional income
protective put
long stock + long put
motivation = portfolio insurance
bull spread
long call with low exercise + short call with high exercise
motivation = expecting small increase in asset value
bear spread
short call with low exercise + long call with high exercise
motivation = expecting small drop in asset value
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
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
straddle
long put + long call with same exercise
motivation = bet on volatility
collar (zero cost)
protective put (lower exercise) + covered call (higher exercise)
motivation = locking value of portfolio at minimal cost
box spread
bull call spread + bear put spread
motivation = RFR
delta =
change in call price / change in stock price
gama
change in delta / change in stock price
number of shares to sell to delta hedge a position in options
number of shares = number of options X option delta
interest call - payoff payment date
not at expiration but after number of months indicated in the contract
in interest swaps days used are 91/360 90/360 91/365 or 90/365
91/360
number of synthetic units of stock, based on futures number =
number of futures X multiplier / (1+Div rate)^T
effective amount of stock committed when creating synthetic cash position =
number of futures sold * multiplier * price of futures sold / (1+RFR)^T
effective number of stock committed when creating synthetic cash position =
number of futures sold * multiplier / (1+RFR)^T
