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Study Session 14: Derivative Investments: Valuation and Strategies

Derivatives

When one is LONG or SHORT in a derivative transaction do we look from point of view of Cash or Possession.

Considering Stock,Bond, Options,Interest rate, Currencies and Futures

pricing and valuation of floating rate bond

I read a sentence from the note - Reading #40 - Pricing and valuation of forward commitments : Because the relevant portion of the yield curve has shifted up, the fixed - rate liability has decreased in present value terms relative ot the floating -rate asset. The reason the floating-rate bond appears to have appreciated above par value is that we have included the accrued interest by valuing the full first coupon. (this paragraph is right after the example - valuing an interest rate swap between payment dates)

Any Easy Way to Quickly understand the Derivative Strategies?

Unfortunately schedule-wise I didn’t have time to really cover this. The whole min/max thing looks real confusing thus preventing me from attempting to straight memorize it. I’m therefore trying to get a fundamental understanding, however with time constrictions considering the exam is tomorrow.

Any quick tips y’all could give? Thanks.

Straddle: max gain & max loss

Hey forum,

I have just a quick question regarding the straddle (long call & long put, both at same exercise price).

For the maximum gain, I assume that the stock price rises above the exercise price. This means my put option has 0 value but my call option increases in value the higher the stock goes. So maximum gain is unlimited.

Derivatives Question - CFAI Derivative TT #53

Can someone help me with this one - it is question 53 of the derivatives section on CFAI

Ndlovu is also evaluating the forward contract in Zulu Mineral Mining (Zulu) stock to determine if an arbitrage opportunity exists. The South African 12-month prime rate is 3.25%. The spot price for Zulu is ZAR 60.50. Zulu pays an annual dividend of ZAR3.00 on a semiannual basis, and the next dividend is paid in three months. Interest compounds annually.

Q. The three-month forward price for Zulu stock is closest to:

Currency Swap Cash Flows

I am trying to find the value of a currency swap to someone after 450 days. I have all of the necessary rates and the PV factors calculated. I also have the exchange rates.  I am struggling with calculating the cash flows for the pay side and the receive side. I want to use the method where I multiply the cash flow by the PV factor to get the pv of each cash flow and then add together to find the total value of each side. Thank you!

Futures vs Forwards, underlying is negatively correlated to interest rate

If you are short futures/forwards and the underlying is negatively correlated to interest rate, which one would you prefer? 

You should prefer futures, right? Since as price goes down, your margin account gets larger, and you can reinvest at a higher rate?

The answer from Konvexity says you should invest in forwards.