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Study Session 14: Derivative Investments: Valuation and Strategies

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.

Option Values and Interest Rates

My understanding of the relationship between stock option pricing and interest rates is that rates affect option values due to the cost of carrying a hedged portfolio; leading to a positive relationship between rates and calls, and inverse relationship between rates and puts.  Am I thinking of this correctly?

Also, if my earlier statement holds true, then why do we discount the payoff with binomial model valuation by the risk-free rate for both calls and puts?

Any and all help is appreciated.

Implied volatility vs stock Volatility

In CAFI Exam 1 morning session Q 54 what is the difference between stock volatility and implied volatility, is not both are expectations of the volatility of the stock in the future?

Bear spread maximum loss

Why is the maximum loss with a bear spread is only the net cost of the options, why didn’t we include the short put value in the calculation, since we are losing  as we are buying the stock at for example Strike price (low let’s say 45) when it is market value lower than that?