SS 17. Derivatives Flashcards Preview

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Flashcards in SS 17. Derivatives Deck (20)
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1
Q

If a forward contract requires no cash outlay at initiation, it is most likely true that at initiation:

A

price exceeds value.

At initiation, value is equal to zero. Price is a positive number which states the amount that must be paid when the purchase takes place.

2
Q

Convenience Yields are primarily associated with:

A

Commodities

3
Q

Combining a long call and a long bond position creates a:

A

Fiduciary call

4
Q

Combining a long call, a short put and a long bond position creates a synthetic:

A

Long position

5
Q

What are the two types of derivatives?

A

Contingent Claims

Forward Commitments

6
Q

Name 5 OTC contingent claim derivatives:

A
  1. Standard options on assets
  2. Interest rate options
  3. Callable bonds
  4. Convertible bonds
  5. Exotic options
7
Q

The derivatives that best allow market watchers to infer what investors feel about volatility are:

A

Options

8
Q

‘Bullish, maximum gain is the premium, maximum loss is strike minus premium’ describes a:

A

Short put position

9
Q

In contrast to a futures contract, a forward contract:

A

gains the entire value at expiration

10
Q

A short call is (bearish/bullish)

A

Bearish

11
Q

Name 5 Exchange-traded contingent claim derivatives:

A
  1. Standard options on assets
  2. Interest rate options
  3. Warrants
  4. Callable bonds
  5. Convertible bonds
12
Q

Put-call parity formula:

A

Stock + put = call + strike/(1+RFR)^T

13
Q

Based on put-call parity, a trader who combines a long forward, a long bond, and a long put will create a synthetic:

A

Protective put

14
Q

Name 2 OTC Forward commitment derivatives:

A
  1. Forward contracts

2. Swaps

15
Q

The underlying in a forward rate agreement is most likely a(n):

A

interest rate

16
Q

Combing a long call, long bond, short the underlying creates a:

A

Long put position

17
Q

The value of a long position in a forward contract at expiration is best defined as:

A

spot price of the underlying minus forward price agreed in the contract.

18
Q

The arbitrage-free pricing model assumes (3):

A
  1. That the investors can short as much stock as required to exploit the arbitrage opportunity
  2. Transaction costs are limited and will not affect pricing
  3. Investors can calculate the volatility of securities accurately
19
Q

List 6 ways in which swaps are similar to forwards:

A
  • Swaps typically require no payment by either party at initiation.
  • Swaps are custom instruments.
  • Swaps are not traded in any organized secondary market.
  • Swaps are largely unregulated.
  • Default risk is an important aspect of the contracts.
  • Most participants in the swaps market are large institutions.
20
Q

How is the settlement price for a futures contract determined?

A

An average of the trade prices taken during the closing period