Study Session 15: Risk Management Applications of Derivatives
I am a US based investor who is exposed to Europe and what to decide if am going to hedge this exposure or not:
-Expected rate in 1Y 1.2045
-Current forward levels: Bid 1.2065 offer 1.2090
what is the incremental return of hedging 20 bps ( 1.2065-1.2045)? or it is 20 bps/1.19060?
I have the following doubt:
on 5Y semi annual swap in which I pay fixed and receive floating on a semi annual basis, how is duration calculated for each leg?
thanks in advance
Why the gamma of a stock is 0?
Gamma = change in delta 1/1=1?
change in underlying
Background: US company needs to borrow GBP 30m by borrowing USD in home country by USD36m and then swap the USD36m to GPB 30m. The EUR-USD Swap is quoted at -15 basis point and the swap is a four -year semi annual swap where both USD and GBP reference rate are based on six month LIBOR.
i am quite confused about the term “EUR-USD swap”. What does it mean? I cant distinguish this -15 basis point should be related to GBP interest on swap payment or USD interest swap receipt? Why EUR matters in this question?
Thanks a lot for your great help!!!!!
Book 3 - Exhibit 2 shows a bunch of VIX futures contracts (one stable, one contango – Day 120, one backwardization – Day 60).
On page 321, it says in the text that if the basis declines linearly until settlement when the term structure is in contango the trader who is long in the back month VIX futures contract realizes losses.
If you’re short the back-month, you will profit.
I just don’t understand what this means. Can somebody explain in basic terms. Reason I ask is, EOC 7 asks this question but I don’t understand.
Still have tough time with contango and backwardization. EOC 7 gives a first month future and second month future . To profit from a carry roll-down we buy the front month future and sell the second month future.
Spot is at 13.50 with first month at 14.10 and second month at 15.40. I realize this is in contango, and futures prices will converge to the spot VIX (13.50) by expiration.
The solution say difference between first month future and spot VIX is 0.60. DIfference between second month future and first month future is 1.30.
I think wrong here.
If we look scenario 1. They solve P&L of net position (70% original exposure and 30% hedged). They have 5M - 1.2M =3.8M.
The 5M is for 100% original but it’s only 70% now. So I use, 70M * 0.05 = 3.5M for 70% original exposure.
The net P&L I think should be = 3.5M -1.2M = 2.3M instead of 3.8M.
Any help thank you.
Im looking at part 1 of 7.6.
Question with regards to section 7.6 (page 283) of book 3. The investor is hedging an expected increase in equity market volatility and he decides to buy a call and sell a put (long risk-reversal).
The question, how can he hedge tail risk by taking advantage of increase in volatility while lowering his hedging costs?
Anyone who can help me to answer this question?
The buyer had acquired 80% of the shares of Company A. At the acquisition date, there is a shareholders agreement which crafted a buyer call option and vendor put option on the remaining 20% shares own by the minority shareholder. Both option is exercisable in one year.
For Buyer Call Option:
I’m looking over exhibit 8 on page 237. I understand that gamma is largest ATM. Exhibit 8 (book 3), the largest gamma value is at share price 15 which is not ATM. ATM is 16. Is this a mistake?
Thanks anybody in advance.
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