# Study Session 15: Risk Management Applications of Derivatives

## 2012 AM Q9B

Question in the exam: Determine whether the change in the price of the put option will be greater for an increase or decrease in the price of the underlying equity. Justify your response with one reason.

Answer: The change in the price of put options will be greater for an instantaneous decrease in the price of the underlying equity than for an instantaneous increase in the price of the underlying equity of equal size.

## Difference between Reverse Knock Out, Knock Out, Reverse Knock In and Knock In. Are any of them equivalent?

Is reverse knock out equivalent to knock in or knock out? What are the differences between them?

#exoticoptions

## Interest Rate Floor - First Payoff

Hi all,

I’m a little confused by the wording in Scheweser’s notes.

April 15, a bank makes a one-year floating rate loan for $10M. Payments are due: July 15, Oct 15, Jan 15, Apr 15.

Bank then buys a 9-month, quarterly pay floor.

The part I’m confused is in this sentence:

“Because the first loan interest payment is known at initiation of the analysis, the first floorlet expires July 15** with payoff (if in the money) on October 15.”**

## Looking for study group for CFA III/Princeton NJ vicinity

If you are within 30 miles of Princeton NJ and would like to study with others, please write your contact info and times/days of week you are flexible.

Thanks!

## Synthetic Index Fund and Dividends

The CFAI’s curriculum states that since the index is a price index only and does not include dividends, the synthetic replication strategy can capture only the index performance without the dividends. It also states that the dividend yield is important in the calculations, but the fund does not earn these dividends. Why is that?

## Book 5, Reading 34, EOC question 3

Hi!

I’m stuggling with the EOC question #3 from reading 34.

In the question, they say :

[question removed by moderator]

My question is, where does this “2,5” come from? As per my understanding, the terms of the swap were 1. fixed leg with 6% 2. floating leg with LIBOR.

## synthetic cash from equity

From Schweser, example on page 144 of book 4.

Manager B has a large position in UK stocks that are similar to a major UK stock index. She wishes to create GBP 15,000,000 of synthetic cash earning 2.0% for a six-month period. The futures index contract is priced at 3,700 with a multiplier of 10. The stock have a dividend yield of 3.0%.

## FRA vs. Interest Rate Options

Hi Level III-ers!

Can someone please explain why when calculating the effective rate on an FRA (Ch. 28 – blue box example 1), you annualize at the end of the calculation by subtracting 1 then MULTIPLYING by 360/# of days, but when calculating effective rate on interest rate options (Ch. 29 – blue box example 11), you annualize by RAISING to 365/# of days, then subtract 1. I understand that you use the 360 convention for FRAs, but don’t understand why the calculation is different.

Thanks so much in advance and good luck to everyone out there studying!

## Future Value: Why relevant for equitizing / synthectic positions but not adjusting asset allocation or modifying portfolio beta?

Hey all,

why do we not need to calculate future of the investment value when we adjust the asset allocation (or do any of the other forward tricks)?

If we want to create a synthetic position, bond or equity, we need to use the FV of the amount to modifiy:

N_{f} = 1*cash*(**1+RFR) ^{t}** / (P

_{f}* multiplier)

And I think I understand why we need to do this to create the exact dollar amount of equity or cash that we want.

## Credit risk from OTC dealer - 2018 AM Mock Q38

Hi guys - Confused with this question re the Apollo Bank Case Scenario.

Item says investment portfolio includes large and small cap domestic stocks and global bonds. Bonds denominated in various currencies and have fixed and floating rates. Fund uses OTC derivatives to hedge risks related to interest rates, FX, adverse security price movements, and payment default.

Q: portfolio most likely has greatest net exposure to which source of risk?

A) Credit Risk

B) Market Risk

C) Liquidity Risk

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