Study Session 17 - Derivative Investments Flashcards
(43 cards)
What does a fiduciary call portfolio consist of?
- A long position in a European call option
- A long position in a pure-discount riskless bond
**gets its name because it is faithful to the notion of preserving capital**
What does a protective put portfolio consist of?
- A long position in a European put option
- A long position in the underlying stock
What is the formula for put-call parity for European options?
What is the general formula used to solve any “synthetic” options?
What are the steps to creating a synthetic European call option ?
- Buy a European put option on the same stock with the same exercise price (X) and the same maturity (T)
- Buying the stock
- Short the present value of X worth of a pure-discount riskless bond
What are the steps to creating a synthetic European put option ?
- Buying a European call option
- Shorting the stock
- Buying (i.e. investing in) the pure-discount riskless bond
What are the steps to creating a synthetic stock position ?
- Buy a European call option
- Short (i.e. writing) a European put option
- Buying ( i.e. investing in) the pure-discount riskless bond
What are the steps to creating a synthetic pure-discount riskless bond ?
- Buying a European put option
- Buying the stock
- Shorting (i.e. writing) a European call option
What is the equation we use to calulate the the size of the Up (U) or Down (D) of the possible price changes in a binomial option model?
Either the U or D will be given. The equation to solve for the other is:
How do you calculate the risk-neutral probability of an up-move or down-move binomial option model?
How is an option’s delta calculated?
How do you calculate the expiration value of a caplet of European style options???
How do you calculate the expiration value of a floorlet of European style options???
What are the 5 inputs to the BSM model?
- Asset price (Delta)
- Exercise price
- Asset price volatility (Vega)
- Time to expiration (Theta)
- The risk-free rate (Rho)
What does Delta measure?
It describes the relationship between asset price and option price.
* A call option’s delta is positive b/c as the underlying prices increases, so does the call options value
* A put option’s delta is negative b/c the put value falls as the asset price increases.
What does Vega measure?
It measures the sensitivity of the option price to changes in the volatility of returns on the underlying asset.
***Since calls and puts are more valuable the higher the volatility, vega is positive for puts and calls.
What does **Rho **measure?
It measures the sensitivity of the option price to changes in the risk free rate.
**Call option is positive
***Put option is negative
What does Theta measure?
It measures the sensitivity of the option price to the passage of time.
As time passes and a call option approaches maturity, its value declines, all else equal. aka “time decay”
What does Gamma measure?
How well the delta sensitivity measure will approximate the option price’s response to a change in the price of the underlying.
**Is larger when there is more uncertainty about whether the option will expire in or out of the money. This means gamma will tend to be large when the option is at-the-money and close to expiration
What is the formula to calculate the # of options needed to delta hedge?
What is a plain vanilla swap?
A fixed to floating interest rate swap.
What is a swaption?
An option that gives the holder the right to enter into an interest rate swap.
What is a payer swaption?
The right to enter into a specific swap at some date in the future as the fixed-rate payer at a rate specified in the swaption
What is a receiver swaption?
The right to enter into a specific swap at some date in the future as the fixed-rate receiver at the rate specified in the swaption.
