# Study Session 15: Risk Management Applications of Derivatives

## Collar: Max Profit

In CAFI Derivatives vignettes Q8.

Isn’t max profit =Maximum profit = X2 – S0

This is stated on p.305 in CAFI

why do we use this equation instead Max profit per collar = ST + max(0, X1 − ST) − max(0, ST − X2) − S0 − (p0 − c0), i.e why did we deduct the  − (p0 − c0)?

## Synthetic Equities and Cash

When does the dividend yield and risk free rate come into play for synthetic equities and synthetic cash? I see them listed as supplementary info in most questions, but I feel like they are rarely used and I get the answer right every time without ever addressing them. I feel like I just typically need the betas, contract futures price, etc..

Any help here on when/how dividends for synthetic equity and risk free rate for synthetic cash should be applied? I can clarify in more detail if you need me to.

Disclaimer: I will promptly forget any advice given by Saturday at 5pm.

## Calculating hedged return when risk-free rates given, need help with inconsistent treatments

Hi guys, this may be a stupid question but I really can’t wrap my head around it.  I often come across this type of question: a foreign currency portfolio and you hedge away the FX risk with FX forward, what is the hedged return, provided domestic risk-free rate = 3% and foreign risk-free rate = 2%?

## Earning Risk Free Rate

If a fund was Shorting European stock market futures, selling euros, and buying US dollars how does it earn the US risk free rate?

## Question 46 - MM Mock PM #3

Hello everybody,

I have a question regarding a MM Mock, particularly mock number 3 PM session.

Question 46 deals with equitizing cash, and different information is provided, interest rates from two countries included.

However those interest rates are ignored and the calculation simply goes on to Market Value to equitize/Price forward.

I wonder why interest rates are ignored, since according page 237 of Book 5 where an example of Equitizing cash is provided we have to use them.

Regards

## Option hedging

Hi!

I need some help in understanding the CFAI mock exam question below thank you.

## when to/not use delta of the option when calculating hedging contracts?

Home currency: USD

Own Euro-denominated bond.

Want to hedge currency risk by purchasing ATM put (Delta 0.5).

Portfolio size is Euro 1B, Contract size is Euro 100K.

Is the contract # 1B/100K = 10K or

10K/0.5 = 20K?

Why is the delta not considered here?

## Stewart Mink Case Scenario

I just do not get the answer, if someone can elaborate more. Why would the cost of the put be lower?

Compared with the collar created from the Texmaco loan and the options described in Exhibit 2, which of the following combinations of option exercise rates will provide the lowest cost collar?

1. 4.0% put and 6.5% call
2. 4.0% put and 5.5% call
3. 5.0% put and 6.5% call

Solution