# Derivates are differentiating me

1. A short position in a forward rate agreement is equivalent to: A) writing an interest rate put and buying an interest rate call. B) buying an interest rate put and an interest rate call. C) writing an interest rate call and buying an interest rate put. D) writing both an interest rate put and an interest rate call. 2. A long interest rate call and a short interest rate put is an equivalent position to: A) a short position in a forward rate agreement. B) a long position in a forward rate agreement. C) a pay-fixed interest rate swap. D) a pay-floating interest rate swap. 3. Buying an interest-rate cap and selling an interest-rate floor is equivalent to: A) buying a series of interest-rate puts and selling a series of interest rate calls. B) buying a series of interest-rate puts and calls. C) buying a series of interest-rate calls and selling a series of interest-rate puts. D) selling a series of interest-rate puts and calls

Can someone explain what the following mean: 1. Long Interest rate call and Short IR put? 2. Buy IR cap and Sell IR floor ? PS: Can someone also Short IR Call and Long IR put? Is there some easy way to remember: Long/Short + Call/Put combinations

C, B, D

is #1 B ? good one. FRA buyers typically want to covert floating into fixed, b/c they think rates will climb, so i assumed the inverse. Sellers of FRAS think rates will fall 2 B or C, wlll go w/ C 3 C

a, b,c

I’d say: 1. B 2. B 3. C

rpradeephere u have the answers before i start trying to explain if i’m wrong and confuse everyone…lol

Dreary Wrote: ------------------------------------------------------- > I’d say: > > 1. B > 2. B > 3. C the fact that you have answers similar to mine makes me feel good : ) not to sh\$\$ on anyone else, i luv all of yall

Answers are: 1. C 2. B 3. C

Now please explain. Atleast 2 and 3. One seems workable though it took some time.

why is C for Q1? S

rpradeephere Wrote: ------------------------------------------------------- > Now please explain. Atleast 2 and 3. One seems > workable though it took some time. # 3 is C and it is straight out of the book. They are asking for a strict definition. 2 is B b/c most users of FRAS want to get into a floating deal b/c they think rates are going up. If you are bullish in rates, I imagine you can buy calls on rates (See volume 6)… lost on #1, sorry

Q1. a is long fra c is short fra. drawing the payoff diagram would help

Explanation for Q1 @ Saurya from schweser A short position in a forward rate agreement is an obligation to make a hypothetical loan at the contract rate and will be profitable when the forward rate falls. An equivalent position using interest rate options is to buy a put and write a call.

I really lack the knack of making payoff diagram!

1. > A short position in a forward rate agreement is equivalent to: Bet is that IR will go down, that’s why you want to lock in the current rate, so answer C > writing an interest rate call and buying an interest rate put. writing (selling) a call (betting IR won’t go IR), check buying an interest rate put. (betting IR will go down), check 2) > A long interest rate call and a short interest rate put is an equivalent position to: Bet is that IR will go up, that’s why you are going long the call, and selling the put, so answer B A long interest rate call (betting IR up), check short (sell) interest rate put (betting IR up, because you are collecting premium from someone who thinks interest rates will go down), check, or like daj224 says BOOM. 3) > Buying an interest-rate cap and selling an interest-rate floor is equivalent to: answer C Bet is that IR will go up (you’re betting it will bust the cap, and no chance it will drop below floor) Buying an interest-rate cap (bet IR up) check. selling an interest-rate floor (bet IR up) BOOM.

C) B) C)

> Buying an interest-rate cap (bet IR up) check. > selling an interest-rate floor (bet IR up) BOOM. i see you like my cat call.