Exam FM2 Review Introduction and Time Value of 考试FM2复习引入时间价值.pptxVIP

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Exam FM2 Review Introduction and Time Value of 考试FM2复习引入时间价值.pptx

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Exam FM/2 ReviewIntro to derivatives options Basic derivatives Derivatives are products with value derived from underlying assets Ask price- Market maker asks for this price, so you can buy here Bid price- Market maker bids this price, so you can sell here Bid-ask spread is an inherent cost in transactions Short versus long Short position- You profit from declines in underlying asset value Long position- You profit from increases in underlying asset value Short-selling Basic short position Borrow stock, sell it to someone else, then buy stock at end and return to lender You must pay dividends to lender Lender may demand that the proceeds and possibly more (haircut) be held by a third party to avoid credit risk You may get interest on the proceeds and/or hair cut Forward contract Basic long position Agreement to enter transaction in future for specified date and price What is an option Gives you the option to enter a transaction Buying one limits your losses Often used in combinations to hedge risk Call option Option to buy asset at strike price Put option Option to sell asset at strike price Features Style European- can only exercise at expiration American- can be exercised at any time Bermudan- can exercise during specified times, but this style is rare Position In-the-money- Profit if exercised now At-the-money- Neutral is exercised now Out-of-the-money- Loss if exercised now Covered call- writing a call when you own the asset Covered put- writing a put when you are short in the asset Put Call Parity Cost of buying asset with forward contract must equal the cost of buying it at a fixed rate with options, due to the concept of no arbitrage Problem 1 Samantha buys 100 shares of stock but changes her mind and immediately sells the stock. The broker’s commission is $20 on a purchase or sale. Samantha lost $70 on this transaction. What was the difference between the bid and ask price per share?ASM p.487 Answer: $.30 Problem 2 John short sells a stock for $10,000. Th