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?
- 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?
- ST - F (gain if ST > F, loss if ST < F)
- What is the payoff of a short forward position at maturity?
- F - ST (gain if ST < F, loss if ST > F)
- Name three key differences between forward and futures contracts.
- Forwards: customized, OTC, settled at maturity, counterparty risk. Futures: standardized, exchange-traded, marked-to-market daily, minimal counterparty risk.
- What is a call option?
- 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?
- 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?
- 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?
- min(K - ST, 0) or -max(ST - K, 0), a loss if ST > K.
- What is the payoff of a long put at expiration?
- 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?
- 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?
- 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?
- In the money: K > ST. At the money: K = ST. Out of the money: K < ST.
- Define the intrinsic value of a call option.
- The value if exercised immediately, equal to max(ST - K, 0).
- Define the intrinsic value of a put option.
- The value if exercised immediately, equal to max(K - ST, 0).
- What is the time value of an option?
- The difference between the option's market price and its intrinsic value, representing the value of the right to wait.