I&R M Pricing Derivatives

7 important questions on I&R M Pricing Derivatives

What is a Futures? (Futures contract)

A futures contract is an agreement to buy or sell an asset at a certain time in the future for a pre-specified price.

What is meant with open interest?

With Futures: Open interest is the total number of contracts outstanding. This equals to the number of long positions or the number of short positions.

What is meant with the settlement price?

The settlement price is the price just before the final bell each day. This is used for the daily settlement process, refer to a margin account
  • Higher grades + faster learning
  • Never study anything twice
  • 100% sure, 100% understanding
Discover Study Smart

What is the difference between an American and a European option?

  • American options permit exercise at any date up to T.
  • European options permit exercise only on date T

How do you profit from a long futures position?

With a long futures position, you profit when the price of the underlying increases.

What are the steps to determine the forward price of a non-dividend-paying stock with a current price of S0?

The formula is F0>S0(1+rf)^T

at time 0
  1. Borrow S0 euros at the interest rate of rf for T years.
  2. Buy one stock at S0
  3. Short a forward contract on one stock

At time T
  1. Sell the stock at the forward price and receive F0
  2. pay back the loan

  

What are the steps to determine the forward exchange rate?

At time 0
  1. borrow 1 $ at the interest rate of r$ for 1 year.
  2. convert 1 $ to S0 Euros, and invest at the interest rate of r for 1 year.
  3. Enter a forward contract to buy 1 $ at F0.


At time T,
  1. receive euro deposit of S0(1+r€), convert to us$ to obtain S0(1+r)/F0
  2. pay back the $ loan 1+r$

The question on the page originate from the summary of the following study material:

  • A unique study and practice tool
  • Never study anything twice again
  • Get the grades you hope for
  • 100% sure, 100% understanding
Remember faster, study better. Scientifically proven.
Trustpilot Logo