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Study Session 14: Derivative Investments: Valuation and Strategies

Derivatives- Value of the bond futures

Reading 37 states that for forward contracts with underlying being bonds says that when we calculate the value of forward contracts at a certain time, we need to take the present value of the forward price at certain time minus the present value of the forward price we have established today.

In example 10 , the investor bought eurobund forward contract at $145 with 2 months at expiration and at 1 month to expire, the current forward price was $148. Thus, they have asked us to calculate the value of this forward contract at time 1. 

Synthetic cash

Can anyone please help me to clarify the following statement? 

“The investor has a dividend-paying stock and wants to lock in a future selling price. The investor might enter into a forward or future contract. Because initial and final stock prices are known, this investment should earn the risk-free rate. What actually happens is that the dividends earned on the stock + return from the futures contract equal the risk-free rate.” 

Why does the investment earn risk-free rate? What kind of return do the futures earn? 

2020 derivatives strategies removal

I feel like we haven’t talked about this much…

Derivative strategies for 2020 is completely removed. That includes:

Interest Rate Swap Valuation


Could anyone of you help me with the following interest rate swap? I am trying to value the swap at the 31/12/x2 Settlement dates, I tried the two bond approach and got different values as compared to the sample solution; I included the sample solution down below.

Type: Interest Rate Swap / Notional: 500.000.000 USD / Start Date: 1/7/20x2 / Maturity Date: 30/6/20x5 / Receive six-month LIBOR / Pay 2%

Settlement Dates: 31 Dec and 30 June

I want to value the Swap as at 31/12/x2, rates are:

Derivatives- Interest rate options

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


Derivative Equivalency (see so many of these on mocks!)

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?\


Arbitrage profit using Delts hedging.

“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? 

Related to Mock Exam A, Afternoon Session - Derivatives "Madafi Case scenario"


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.


Protective put

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?