FM Derivatives and Options Flashcards

A forward contract on the FM exam obligates the buyer to:

Answer: Purchase an asset at a predetermined price on a specified future date

A forward contract locks in a purchase price (the forward price) for delivery of the asset at a future date.

The no-arbitrage forward price F₀ for a non-dividend-paying stock with current price S₀ at effective annual rate i over T years is:

Answer: F₀ = S₀ × (1 + i)^T

The no-arbitrage forward price equals the future value of the current spot price: F₀ = S₀(1 + i)^T.

A call option gives the holder the right to:

Answer: Buy the underlying asset at the strike price before or at expiration

A call option grants the holder the right (but not the obligation) to buy the underlying asset at the strike price.

Put-call parity for European options states:

Answer: C − P = S₀ − K·v^T

Put-call parity: C − P = S₀ − K·v^T, where C and P are call and put prices, S₀ is spot, K is strike, and v = 1/(1+i).

On the FM exam, the payoff of a long call option at expiration with strike K and terminal asset price S_T is:

Answer: max(S_T − K, 0)

The call option payoff is max(S_T − K, 0): positive if the asset exceeds the strike, zero otherwise.

Which strategy involves buying a call and selling a call at a higher strike, both with the same expiration?

Answer: Bull call spread

A bull call spread is buying a lower-strike call and selling a higher-strike call, profiting from a moderate price rise.