Final Cheet Sheet.docx - Spot-Futures Parity= FT S(1 r)T...

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Spot-Futures Parity= T r) S(1 T F also S T r) (1 T F dividend paid at or near the end of the futures D T r 1 S T F If there is dividend yield (d = D/S) T d r 1 S T F Max price change you can sustain without margin call X ` ) represents (contract MM) - (IM Par value coupon Annual rate Coupon HEDGING Stock Market RISK WITH FUTURES F β p β F V P V contracts of Number price Bond coupon Annual yield Current basis = cash price – futures price HEDGING INTEREST RATE RISK WITH FUTURES F V p V F D P D contracts of Number Call option intrinsic value 5 MAX(S 2 K, 0) Put option intrinsic value 5 MAX(K 2 S, 0) Payoff to the Call Buyer at Expiration : ST – K if ST > K or 0 if ST ≤ K Payoff to the Call Writer at Expiration: –(ST – K) if ST > K or 0 if ST ≤ K Payoff to the Put Buyer at Expiration : K – ST if ST < K or 0 if ST ≥ K Payoff to the Put Writer at Expiration : –(K – ST) if ST < K or 0 if ST ≥ K The Three Types of Option Trading Strategies Type I: Traders add an option position to their stock position. These strategies help traders modify their stock risk. Type II: Spreads. A position with two or more options of the same type (i.e., only calls or only puts). Type III: Combinations. A position in a mixture of call and put options. Protective put - Strategy of buying a put option on a stock already owned. This protects against a decline in value (i.e., it is "insurance") Covered call - Strategy of selling a call option on stock already owned. This exchanges “upside” potential for current income. Straddle - Buying or selling a call and a put with the same exercise price. Buying is a long straddle; selling is a short straddle Put option price must be less than the strike price.. Call option price must be less than the stock price The Put-Call Parity P = C – S + (K / (1 + r) T ) S = C – P +(K / (1 + r) T ) C = S + P – (K / (1 + r) T ) Lester short sold 800 shares of Nu-Tek stock at $13 a share. The initial margin was 50 percent and the maintenance margin is 25 percent. Nu-Tek is currently selling for $11 a share. What is the amount of Lester’s account equity currently? (800 × $13) + (800 × $13 × .50) − (800 × $11) = $6800 A silver futures contract requires the seller to deliver 5,000 troy ounces of silver. An investor sells one July silver futures contract at a price of $8 per ounce, posting a $2,025 initial margin. If the required maintenance margin is $1,500, the price per ounce at which the investor would first receive a margin call is closest to This investor would receive a margin call if he or she loses $2,025 – $1,500 =$525 in total or $525 / 5,000 = $0.105 per troy ounce. Since this investor now sells the futures contract, he or she would lose if price per ounce increases by $0.105. Therefore, the price per ounce at which the investor would first receive a margin call is $8 + $0.105 = $8.105 or $8.11 approximately.
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