Forwards, futures, options, and swaps with their payoff structures tested on CFA Level 1.
36 cards · basic cards · AI-written, checked twice. Edit anything.
- What is a forward contract?
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A binding agreement between two parties to buy or sell an asset at a specified future date and predetermined price, not traded on exchanges.- What is the payoff of a long forward position at maturity if the spot price at expiration is ST and the forward price is F?
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ST - F (gain if ST > F, loss if ST < F)- What is the payoff of a short forward position at maturity?
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F - ST (gain if ST < F, loss if ST > F)- Name three key differences between forward and futures contracts.
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Forwards: customized, OTC, settled at maturity, counterparty risk. Futures: standardized, exchange-traded, marked-to-market daily, minimal counterparty risk.- What is a call option?
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The right, but not the obligation, to buy an underlying asset at a specified strike price on or before the expiration date.- What is a put option?
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The right, but not the obligation, to sell an underlying asset at a specified strike price on or before the expiration date.- What is the payoff of a long call at expiration if ST is the spot price and K is the strike price?
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max(ST - K, 0), or the maximum of zero and the difference between spot and strike.- What is the payoff of a short call at expiration?
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min(K - ST, 0) or -max(ST - K, 0), a loss if ST > K.- What is the payoff of a long put at expiration?
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max(K - ST, 0), or the maximum of zero and the difference between strike and spot.- What is the payoff of a short put at expiration?
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min(ST - K, 0) or -max(K - ST, 0), a loss if K > ST.- What does it mean for a call option to be in the money, at the money, or out of the money?
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In the money: ST > K. At the money: ST = K. Out of the money: ST < K.- What does it mean for a put option to be in the money, at the money, or out of the money?
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In the money: K > ST. At the money: K = ST. Out of the money: K < ST.- Define the intrinsic value of a call option.
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The value if exercised immediately, equal to max(ST - K, 0).- Define the intrinsic value of a put option.
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The value if exercised immediately, equal to max(K - ST, 0).- What is the time value of an option?
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The difference between the option's market price and its intrinsic value, representing the value of the right to wait.
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