# 3404 midterm

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1. number of future contracts needed for hedge
cash position size in d * beta / contract size in d
2. original basis
spot - forward
3. basis - if there is gain in future, there is ......
loss in basis
4. if your hedge position is short future, in basis terms, you gain when future price
drops
5. basis - gain in future/loss in spot - calculation
current - original
6. hedge ratio;
1(delta of cash position)/delta of hedge position
7. put call parity
c-p = f - k, where f and k discounted at id
8. in put call parity arbitrage, negative k means...and it is a ....CF at t=0
borrow k amount of money; positive
9. in put call parity arbitrage, positive f means.... and it is a ... CF at t=0 becuase....
• long forward;
• negative, you need to deposit money today to be able to buy in future
10. in put call parity arbitrage, negative f means.... and it is a ... CF at t=0 becuase....
• short forward;
• positive, you discount the cash inflow in future to PV
11. at reset, if A originally pays fixed interest rate and fixed interest rate rises, A gain/lose? By how much?
• gain;
• (notional amount * difference in interest rate), discounted at current interest rate
12. relationship between notional principal, vanilla fixed rate in swaps and swap size
• notional principal(A) * fixed rate(A) = swap size(pay)
• counterparty's notional amount = your notional amount converted using spot
• counterparty's notional amount * fixed rate(B) = swap size(receive)
13. if F/S > (1+id)/(1+if), arbitrage by
• borrow d --> get outflow
• convert with S to f, save at if, convert at F rate->get inflow
• borrow at id-->get outflow
• convert at S0 to f, save at if, convert back at S1-->get inflow
15. interest rate parity arbitrage with bid-ask
• write the formula, try both sets and write arrows on formula
• 1. long forward
• 2. short forward
16. q d/f = 1.022 means .....
d appreciate in real terms by 2.2%
17. formula of q
q d/f = (1+id)/(1+if)(1+change in spot d/f)
18. long spot = ...
• S d/f = pd/pf
• bid d/f -->try sell in f
• change if sign agrees with strategy
20. triangular arbitrage condition and operation
• bid >1
• bid(ie. sell) strategy>mutiply bid factor
21. cross currency swap steps
• identify what currency swap that i want, this currency will be d
• borrow in f by yourself and pay coupon
• receive f from SB that offset 2
• discount 3 CFs at swap f bid rate
• convert 3's amount in Y0 to d at spot
• pay d coupon at swap d ask rate
• convert principal f amount in 2 to d and compute actual CF of all years
• compute IRR and compare with AIC if borrow d in 2
22. how to create a position simiar to long future on f
• CF at t=T for long future on f: +f -d
• steps:
• borrow d
• covert to f at spot
• save f til maturity
23. only when maturities dont match, we consider hedge ratio; otherwise hdedge ratio is always...
1
24. delta cross hedge - cash position a/b = hedge ratio* hedge position c/d; you need to convert the hedge position as ....
d
25. option premium makes the profit/loss triangle....no matter you are long or short option, the breakeven point of the same option is the same
smaller
26. P&L from option
difference between St and K(depending on put or call),plus +/- premium(depending on long or short)
27. call option to buy demon at k num/demon is equivalent to an option to ....
sell num at 1/k
28. risk free rate id and if affect option premium through...
forward price
29. at time=t, time value is highest when ...
spot is near strike
30. If a firm expect dollar to appreciate, it would want to pay dollar payables ... and receive dolar receivables ...
faster; slower
31. the AIC cost of gettig receivables quicker
(amount without discount - discounted price)/discounted price
32. money market hedge
• first list the CF at t=T
• move the negative CF (A) at t=T to a positive CF at t=0 (A)
• convert (A) into (B)
• save (B)
• low liquidity currency
• long dated
• small transaction