Download Analysis of Derivatives for the CFA Program by Don M. Chance PDF

By Don M. Chance

Research of Derivatives for the CFA® software introduces scholars and practitioners to a realistic danger administration method of derivatives. The textbook captures present perform and displays what the overall funding practitioner must find out about derivatives. It doesn't easily bring a proof of assorted derivatives tools and positions yet offers motivation for each derivatives place by means of explaining what the chief desires to accomplish ahead of addressing the main points of the placement.

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K. stock market, and accordingly, she decides that selling a forward contract on the FTSE 100 would be a good way to manage the risk. Assume that the portfolio manager decides to protect £15,000,000 of stock. The dealer quotes a price of £6,000 on a forward contract covering £15,000,000. We assume that the contract will be cash settled because such index contracts are nearly always done that way. 25 percent from the forward price. Because the manager is short the contract and its price went down, the transaction makes money.

C Unlike a contingent claim, a forward commitment typically requires no premium to be paid up front. An intuitive way to look at this is to realize that a forward commitment is binding on both parties, so any up-front fees would cancel, while a contingent claim is binding only on the party in the short position. For this, the party in the short position demands (and receives) compensation. 7. C Because the holder of a contingent claim (the party in the long position) has a right but not an obligation, she will only exercise when it is in her best interest to do so and not otherwise.

00. B. 00. C. 00. D. 00. Solutions SOLUTIONS 1. B A call option is not binding on both parties in the same sense that the other financial instruments are. The call option gives the holder a right but does not impose an obligation. 2. B If the market falls, the buyer of a forward contract could pay more for the index, as determined by the price that was contracted for at the inception of the contract, than the index is worth when the contract matures. Although it is possible that a rise in interest rates could cause the market to fall, this might not always happen and thus is a secondary consideration.

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