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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.

Earning Risk Free Rate

Can someone please advise 

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

Ta v much in advance

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.


Option hedging


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

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



Are buying payer swaption and selling receiver swaption the same?

Option strategy equivalent to Futures/Fwd


Could someone explain to me the following:

Buy ATM calls + Sell ATM puts is equivalent to Buy Futures/Fwd

Sell ATM calls + Buy ATM Puts is equivalent to Sell Futures/Fwd