Derivatives

[June 2013 CFA Level 1 Group]

Use this discussion thread to ask and discuss queries related to Derivatives Topic.

[asad.himself]

Kindly Explain these questions in the respective Derivatives crash class.

[Satyajit Mahapatro]

Use the formula for synthetic call and put option to get to the answer here.
It has a variable of interest rates in its equation.

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[asad.himself]

Calling A.I, calling A.I  assistance regarding these questions 

[talha arif]

Travis Dillard, CFA, is the equity return receiver in a monthly-pay equity swap. If the equity index declines by 2% in a month, Dillard must pay the swap counterparty an amount of cash that is:

A) equal to 2% of the notional amount of the swap.

B) less than 2% of the notional amount of the swap.

C) greater than 2% of the notional amount of the swap.

If the equity return is negative, the equity return receiver (fixed rate payer) in an equity swap owes the equity return payer (fixed rate receiver) the percentage decline in the equity index times the notional amount, plus the fixed rate payment for the period.

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[Arif Irfanullah]

Find attached our CFA Level I Derivatives Quiz.  Please share any comments or feedback you might have.  Do so under this discussion thread. 

[Lev Elgudin]

Hi Arif,

please note the following typos in the Derivatives Quiz and its solution:

1) Q.4 - answer C in the quiz is listed as ($494), but should be presented as $494 (gain). At the same time, the answer sheet lists this answer in a correct form;

2) Q.22 - answer is C, not A (as MF makes net payment as its total due > dealer's). The explanation for the answer is correct though.

3) Q.23 -answer is B, not A;

4) Q.24 -answer is B, not C.

Thank you,

Leo

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[Arif Irfanullah]

Leo, 

Thanks for your feedback.

All,

Click here for an updated version of the quiz.

Click here for an updated  version of the quiz solution. 

If you have further feedback please post here.

:

On Tuesday, February 12, 2013 9:12:21 PM UTC+5, June 2013 CFA Level 1 Group wrote:

[Subramanian L V]

My doubt pertains to Q 5 part A of Future Mkts & contracts from the curriculum.

I am not able to completely understand how the fraction is depicted for some price changes.I have attached the table of the sol 5 A here.

 

Day Future Prices Price Change

0    96-06

1    96-31            25/32

2    97-22            23/32

3    97-18            -4/32

4    97-24             6/32

5    98-04           12/32

6    97-31   -5/32

For the price change in day 1 I understood that the fig 25 from 25/32 has come from the difference between 6 & 31. Now, how is the price change fig of day 2 shown as 23/32.

Again on day 3 the price change fig -4/32, I have understood that the fig -4 comes from the difference between 22 & 18.

On day 5 when future price change from 97-24 of the previous day to 98-04 how is this fraction 12/32 calculated. Also on day 6, regard to the price change I am not able to understand the fig -5/32.

 

Pls explain the same.

Thank You 

 

[haidriqbal]

Which of the following statements regarding both futures contracts and forward contracts is least accurate?

 A) They are priced to have zero value at the initiation of the contract. 

 

 B) They carry counterparty risk. 

 

 C) For deliverable contracts, the short must deliver the underlying asset at a future date. 

 

Your answer: A was incorrect. The correct answer was B) They carry counterparty risk. 

The clearinghouse of the futures exchange is the counterparty to all futures contracts so that, unlike forward contracts, counterparty risk is not a concern with futures contracts.

Could someone explain why this isn't A? Isn't that least accurate for both whereas B is least accurate for just one.

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[Lev Elgudin]

Not sure if I answer it correctly, but logically you cannot say that both contracts have no value at the initiation. After all, these are contracts and always have value until the settlement. You are confusing it with the fact that there is no upfront payment involved but it doesn't mean the contracts do not have any value. This is how I would answer it.

Leo

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[Lev Elgudin]

I just realized that my answer actually proves your claim is right so disregard it:)