Vol5 P500 Derivative and option option

cfalevel2011

in Vol5, P533, Q10: Gide use six month forward, I check the text, there is no place mentioned that 65 bil yen was parked in the Japan bank to receive 0.066 % interest for six month, why answer including interest?

P526, for including put into non-puttable bond, we need to buy payer swaption like including call using receiver swaption, I think the text is not correct.

P502, again text is not correct, since issuer is paying swiss franc, it should include two cash flow for swiss franc, one is on swap, the other is for bond interest payment, but the text using two cash flow for USD, it is not correct.

P457, text is not correct, we need to own 100/delta shares not 100delta shares

P434, why text using 0.075 as interest rate for compound call premium calculation, it should use 0.055because from Apr.14 to Aug.19, we are using 5.5% interest rate.

P427, why for the profit for collar, we need to minus S0, I remember for collar, we don't need to own stock, collar is using interest rate call and put, there is nothing to do with equity.

P421, for option for butterfly, box spread, do we need to remember formula for max and breakeven point, I spend more than 15 minutes to work out it after close the book, sometimes make error, I use profit formula, then discuss different range of S, finally I got max. gain/loss/breakeven, I think in exam i DON'T HAVE Time to derive, how about you, do you rot the formula?

p516, TO terminate swap, when should we use swaption instead of create a new offset swap?

P472, Q1, for bull spread, why we buy call with small execise price and sell call with high exercise price? call with small exercise price is expensive compares with call of high exercise price, why we buy high, sell low?

P461, in delta hedging, why we -17010 instead of +17010 for loan, for loan side, we are having extra money, why minus sign?

P465, gamma for put option, when out-of-money, approaching expiry of put, is Gamma, i-99999, for in-the-money put, appraching expriey, is gamma +99999 like call option?

IAmNeil

Ignore my answer above for p465.

skycfa

p533.
It is specifically mentioned in the text that "Gide plans to invest the sale proceeds in six-month..." on p532, point no.1, line no. 5.

p526.
Text is correct. A callable bond issuer is also call option holder. However, a putable bond issuer is not put option holder. Rather, the putable bond holder has the right to sell the bond back to the issuer (a put option). Therefore, a nonputable bond issuer should sell a payer swaption (similar to issuing a put option)

p502.
Text is correct. Example 7 relates to a synthetic bond. Actual bond is a single currency dollar bond paying coupon in dollar of $1.1Million. There is no coupon payment in Swiss franc. However, issuer is synthetically creating a swiss franc exposure by entering into a currency swap.

p457.
Text is correct. If we have written options on 100 shares, we need to own (100 X delta) shares. As it discusses in the next few lines. We use 100/delta in a different situation (i.e. when we own stocks and want to calculate number of options to write)

p434.
You need to add 200bp spread to 5.5%

p427.
Here, collar is not referring to the interest rate collar created by a borrower. Rather, collar here refers to an investment strategy using options. These options can be on any asset (e.g. stocks, bonds). S0 represents spot price of the underlying asset

p421.
Best would be an excel sheet for all these formula. Saves lot of time while doing practice.

p516.
Swaption is purchased way earlier than the offsetting date. However, another offsetting swap can be done only on the offsetting date. Swaption is like insurance. You pay upfront and then get protected from adverse price/rate movements. Refer page 519 for further details.

p472.
Bull call spread is an advanced version of long call strategy. Idea is that we think that asset price will rise and we are willing to invest our money in anticipation of the rise in price of the underlying asset (i.e. buying a call option with exercise price of $75). However, we also think that asset price will not rise much. We can reduce our initial investment by selling a call option for $2 with an exercise price of $85. This makes our net investment $8 instead of $10.

p461.
Here, calculation is of "value of position" not "cash flow". As we have taken a loan, therefore, we have a negative position.

p465.
For Long (Call) Put, Gamma is (negative) positive when option is near or at the money. Gamma is zero for both call and put options if these are out of the money or deep in the money.

Any more questions ?

justin88

francisgy is no joke studying so much this early.

NakedPuts2011

the amount of questions here makes me dizzy. here's one. i am too lazy to open up the books now and go past that, but if you're jamming out derivs this early, you're going to be just fine buddy.

P472, Q1, for bull spread, why we buy call with small execise price and sell call with high exercise price? call with small exercise price is expensive compares with call of high exercise price, why we buy high, sell low?

for a "bull" spread, you want the stock to go up and you'll profit when it does. call side you buy the lower strike- say you buy a $50 call for $3 when the stock is at $52. you write a $55 call for 75 cents to offset some of the cost of buying the in the money more expensive one. do your profit out- you'll make the most money when the stock goes up, hence "bull" spread. but it's a spread because you are capping your gains by writing that call- there is a max you can make as opposed to just buying a call outright. a bear spread you go the other way, you'd get a net credit by doing it, but you're going to profit also when the stock goes down.

ok fine, I'll answer 2-
P421, for option for butterfly, box spread, do we need to remember formula for max and breakeven point, I spend more than 15 minutes to work out it after close the book, sometimes make error, I use profit formula, then discuss different range of S, finally I got max. gain/loss/breakeven, I think in exam i DON'T HAVE Time to derive, how about you, do you rot the formula?

you don't really have to memorize any of the formulas if you don't want to in the profit/loss derivs section, whatever works for you. i just lay options out there and see where it makes or loses $$. this section sort of seems painful to start but once you get it, you'll be begging for these exam day. we got a q last year on it, so who knows if it'll show up again. crap, i should've passed last year, bad me.