Exam: Ch 21 Interest rate options Flashcards Preview

Financial Risk Management > Exam: Ch 21 Interest rate options > Flashcards

Flashcards in Exam: Ch 21 Interest rate options Deck (13)
Loading flashcards...
1
Q

What are 2 Exchange-Traded Interest Rate Options

A
  • Treasury bond futures options

- Eurodollar futures options

2
Q

What is the issuer of a callable bond able to do?

A
  • Issuer has option to buy

bond back at the “call price.” The call price may be a function of time

3
Q

What is the holder of a puttable bond able to do?

A
  • Holder has option to sell

bond back to issuer

4
Q

What is blacks model used for?

A
  • used to value many

interest rate options

5
Q

What does blacks model assume?

A
  • It assumes that the value of an interest rate, a bond price, or some other variable at a particular time T in the future has a lognormal distribution
6
Q

What happens with the payoff from blacks model?

A
  • The payoff is discounted from the time of the payoff to today at today’s risk-free rate
7
Q

What is assumed when valuing a European bond option?

A
  • that the future bond price is lognormal
8
Q

What should the bond price and strike price in Black’s model be?

A
  • should be cash (i.e. dirty)

prices not quoted (i.e. clean) prices

9
Q

What is the cash price?

A
  • The cash price is the quoted price plus accrued interest
10
Q

What is an interest rate cap?

A
  • A floating rate note where interest rate is reset periodically equal to LIBOR
11
Q

What does a floor provide?

A
  • A floor provides payoffs to compensate the holder for situations where LIBOR is below a certain level (the floor rate)
12
Q

What does a cap provide?

A
  • A cap provides payoffs to compensate the holder for situations when LIBOR is above above a certain level (the cap rate)
13
Q

What is a tenor?

A
  • The time between resets