***Derivatives Review***

  1. Know future and forwards – advantages and disadvantages of each and the characteristics of each contract. 2) Know FRAs, qualitative and quantitative and who made/lost money and how much. Know how to calculate the gain/loss and when it will be paid. 3) Know the law of one price and what it is. 4) Know put-call parity COLD and how to manipulate it and determine whether the put, call, stock, bond are overpriced, underpriced or properly valued and what strategy you would undertake and to calculate the arbitrage profit. 5) Know the difference between American and European options. 6) Know the upper and lower bounds for European puts and calls and American puts and calls. 7) For FRA know that the long position in FRA is the party that would borrow. If LIBOR ends up above forward rate in FRA, long side has right to borrow at below market rates and receives a payment. 8) Know caps and floors and when to use them and how. 9) Know the effect of each variable on a call option (asset price, volatility, time, etc.) 10) Know interest rate, currency and equity swaps as we did in class – Remember: LIBOR is paid in arrears… 11) Know swaptions COLD!!!