# Study Session 17: Derivatives

## SWAPS, FRA, PUT CALL PARITY

Please can explain replication of SWAPs, FRA, Put call parity and put call parity forward?

I have spent lots of time reading these concepts with zero understanding.

I need someone to break it down for me to its simplest term

## Replication of portfolio

In SchweserNotes, there is an example for replicating and risk-neutral pricing:

For a share of stock and a short forward at 50 with six months until settlement,
we can write:
S − F(50) = 50 / (1 + Rf)0.5
and replicate a long forward position as
F(50) = S − 50 / (1 + Rf)0.5

Can anyone explain what do S and F(50) stand for since I am so confuse about these equations.

## Kaplans' Derivatives Question - seems wrong

Hi All, Could some of you look at these question from quiz 57.1. To me the answers seem wrong.

1. Derivatives pricing models use the risk-free rate to discount future cash flows
because these models:
A. are based on portfolios with certain payoffs.
B. assume that derivatives investors are risk-neutral.
C. assume that risk can be eliminated by diversification.

## Option's pricing - anomaly?

Hello everyone :)

I have a question with regard to the option pricing - not really a CFA I level topic but I hope someone will help me to understand the issue.

Lets assume situation below (which has actually happened in the past):

Current spot exchange-rate for TRY/EUR = 6.8. Below we have following put options and its prices:

- 1-day PUT 8.80 (premium of 2.00 TRY for every EUR)

- 1-month PUT 8.80  (premium of 1.87 TRY for each EUR)

- 12-month PUT 8.80 (premium 0.80 TRY for every EUR)

## Derivatives Replication

Hello.
Can someone give a numerical example regarding replication of derivatives?

Thanks.

## Put-Call Parity question

I understand that when the put-call parity equation is rearranged to be p = c - S + X/(1+r)T, this means long put = long call, short asset, long bond.  My question is regarding the “short asset”.  Does shorting the asset in this equation mean that the analyst take either of these 2 positions to short the asset?…

1. Selling a call option (short the position and short the asset)
2. Buying a put option (long the position and short the asset)

## Payoffs in Futures

Is it true that value of futures don’t consider present value of profit unlike forwards. I mean do the mark to market payouts consider time value?

Thanks for contributions

## Arbitrage - I got the answer but could I prove with math from dat?

The question is below.  I get the answer given the concept of arbitrage, but how would I prove this out mathematically from the data easily?

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An analyst determines that a portfolio with a 35% weight in Investment P and a 65% weight in Investment Q will have a standard deviation of returns equal to zero.

## Future Contracts

(1) Is a future contract American or European by nature?

(2) Can a future converge to the spot price even before expiry?

(3) Can a future contract be sold before expiry?

## The Nature of a Future Contract

(1) Is a future contract American or European by nature?

(2) Can a future converge to the spot price even before expiry?

(3) Can a future contract be sold before expiry?