Financial Derivatives
Financial Derivatives
Financial Derivatives
Set of flashcards Details
| Flashcards | 115 |
|---|---|
| Language | English |
| Category | Finance |
| Level | University |
| Created / Updated | 06.04.2018 / 07.04.2018 |
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Dividends paid during the life of an option contract reduces the stock value. (Announcement reduces call value, increases put value)
A spread position is entered by buying and selling equal number of options of the same class on the same underlying security but with different strike prices or expiration dates.
Combination of options with the same strikes but with different expiry dates.
Combination of options with different strikes and differnet expiry dates.
Binomial trees and the black-scholes formula
They tell us what the market believes forward-looking future volatility will be like on a stock or underlying until the option's maturity.
Most popular index of expected market volatility.
Hedging refers to all trading activity that reduces risks/minimises unwanted exposures, or neutralises portfolio risks.
Delta refers to the change in value of options when the underlying moves. Delta is the first derivative of the options price with respect to the underlying S.
Delta is a quick way of determining, ata given S how options values change with small movements in S over the next short period of time.
The sensitivity of option values to the passage of time. Longer dated options are worth more. Time decay. First derivative with respect to time.
Rho measures the sensitivity of options valuations to change in interest rates.
Rate of change of the value of an option with respect to the changes in the volatility of the underlying asset. Volatility does not stay constant.
They profit as long as they stay well delta hedged. Make money if they sell options with Implied Volatility higher than volatility realises over the life of the option.
The rate of change of delta with respect to the underlying. It is the second derivative with respect to S.
National indices; Sector indices; Ethnical Indices
As portfolio insurance or for speculation purposes.
It is called Garman-Kohlhagen model
Volatility increases as options become increasingly in the money or out of the money.
It can be used as a measurement of fear in the market.
How many periods management must wait before cumulative cash flows from a project exceed the cost of the investment.
The ratio of the average forecast profits over the project's lifetime.
Difference between the present value of projected inflows and the projected outflows.
A real option is a choice made available with business investment opportunities, referred to as "real" because it typically references a tangible asset instead of financial instrument.
Ovesrestimation of the value, to simplistic, hard to find good proxies, overvalue unpredictable projects, time period can be problematic, garbage in - garbage out problem.
The london interbank offered rate
Short-term agreements to sell and repurchase securities at a specified rate
In order to be valued at zero, the Present Value of the CFs of each of the two streams must be equal.
Take benefit from comparative advantage. Transforming a fixed rate loand into a floating loan or vice versa.
One party agrees to pay on a fixed notional principal for a number of years and the other agrees to pay floating.
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