Study Session 14: Derivative Investments: Valuation and Strategies
Someone please explain this to me—-
When interest rates increase, would you buy call option or a put option to hedge against that risk?
Call Option- Pay fixed, receive floating
Pay option- Pay floating, receive fixed
does anyone has a good strategy for equivalencies in the exam?
like a long callable bond is equivalent to having a long option-free bond plus short a receiver swaption
or payer swap = long paywer swaption + short receiver swaption
I usually go by thinking about the fix and float side, but some times I ll get it wrong, any strategy for solving this kinda problems?\
“You cannot make an arbitrage profit with delta hedging. Arbitrage is, by definition, risk-free. Delta hedging is not risk-free.”
This was posted by one of the forum editors last year, just to make sure schweser example on pg 180 that exactly does that is incorrect, right?
What does the formula below mean?
I have a doubt related to the question number 48 in the Mock Exam A afternoon session “Madafi Case scenario”, Equity Swap Contract, the solution says the following:
A is correct. The quarterly interest rate is calculated as [(1 + 3.2%)^(1/4)] – 1 = 0.0079, so the fixed cash flow Ndlovu receives is ZAR5,000,000 × 0.0079 = ZAR39,528.77 ….
My doubt is: Shouldn’t the 3.2% (the fixed rate) be multiple by * 90/360 (because that is the convention) instead of ^(1/4)? 0.008
Thank you very much in advance for your help.
for protective put, if the exercise price is less than estimated stock price at expiration, will we use stock price at expiration instead of exercise price to calculate the maximum loss?
Can someone please explain to me how to use call and put options on Eurodollar futures to hedge against interest rate movements?
Which to use when hedging against increases and decreases?
And also for the future itself is long equivalent to lending and short equivalent to borrowing or do I have it wrong?
My apologies for the length of this question. I’ve been trying to wrap my head around this for a while…question comes from an example that starts off like this:
One-year currency swap, quarterly payments. The two currencies are USD and EUR, and the current exchange rate is $1.25/€ (assume constant for the rest of this for simplicity). The current term structures of Libor (for USD) and Euribor (for EUR) are as follows:
Days Libor% Euribor%
90 3.25 3.80
180 3.75 4.65
270 4.25 5.90
360 4.60 6.75
For valuing the long you subtract the dividends, but for short so you add dividends to the spot??
As I know of, the duration is just a sensitivity of price to changes in interest rates.
so I cannot understand why with my intuition.
What does this statement mean-
“The carry adjustment in a currency derivative contract is very similar to other carry models such as equity derivatives.”
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