Term
| Floating Rate Agreement Payoff |
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Definition
| [Floating rate at expiration–FRA rate*(days in floating rate/360)] / [1+[Floating rate at expiration*(days in floating rate/360)] |
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Term
| Numerator in FRA Payoff formula |
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Definition
Interest savings on the hypothetical loan
Positive when the floating rate is greater than the forward rate - Long benefits and recieves payment from the short
Negative when the floating rate is lower than the forward rate - Short benefits and expects to receive a payment from the long |
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Term
| Denominator in FRA Payoff formula |
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Definition
| Discount factor for calculating the present value of the interest savings |
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Term
| Call Option Holder Payoffs |
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Definition
Choice to buy underlying asset for X
ST > X - Option holder will exercise; payoff of (ST - X)
ST < X - Option holder does not exercise; payoff of 0 |
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Term
| Call Option Writer Payofs |
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Definition
obligation to sell underlying asset for X
ST > X - option holder exercises the option, -(ST - X)
ST < X - Option holder oes not exercise, payoff of 0 |
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Term
| Intrinsic Value of a Call Option |
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Definition
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Term
| Put Option Holder Payoffs |
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Definition
Choice to sell the underlying asset for X
ST < X - holder exercises; payoff of X - ST
ST > X - option holder does not exercise; payoff of 0 |
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Term
| Put Option Writer Payoffs |
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Definition
Obligation to buy the underlying asset for X
ST < X - holder exercises; payoff of -(X - ST)
ST > X - Option holder does not exercise; payoff of 0 |
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Term
| Moneyness of a Put Option |
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Definition
In the Money: ST < X
At the Money: ST = X
Out of the Money: ST > X |
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Term
| Intrinsic Value of a Put Option |
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Definition
ST < X: X - ST
ST = X: 0
ST > X: 0 |
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Term
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Definition
| Intrinsic Value + Time Value |
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Term
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Definition
| C0 + [X / (1+RF)T] = P0 + S0 |
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Term
| Synthetic Derivative Securities |
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Definition
Fiduciary call
Long call
Long put
Long underlying asset
Long Bond
Protective Put
Synthetic call
Synthetic Put
Synthetic Underlying Asset
Synthetic Bond |
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Term
| Fiduciary Call, Consists of & Value |
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Definition
Consists of: Long call + Long Bond
Value: C0 + [X / (1+RF)T] |
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Term
| Fiduciary Call Equals Strategy |
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Definition
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Term
| Long Call, Consists of & Value |
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Definition
Consists of: Long call
Value: C0 |
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Term
| Long Call Equals Strategy |
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Definition
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Term
| Long Put, Consists of & Value |
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Definition
Consists of: Long Put
Value: P0 |
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Term
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Definition
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Term
| Long Underlying Asset, Consists of & Value |
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Definition
Consists of: Long underlying asset
Value: S0 |
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Term
| Long Underlying Asset Equals Strategy |
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Definition
| Synthetic Underlying Asset |
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Term
| Long Bond, Consists of & Value |
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Definition
Consists of: Long Bond
Value: X / (1+RF)T |
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Term
| Long Bond Equals Strategy |
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Definition
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Term
| Protective Put, Consists of & Value |
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Definition
Consists of: Long put + Long underlying asset
Value: P0 + S0 |
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Term
| Protective Put Equals Strategy |
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Definition
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Term
| Synthetic Call, Consists of & Value |
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Definition
Consists of: long put + long underlying asset + short bond
Value: P0 + S0 - [X / (1+RF)T] |
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Term
| Synthetic Call Strategy Equals |
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Definition
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Term
| Synthetic Put, Consists of & Value |
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Definition
Consists of: Long call + Short underlying asset + Long Bond
Value: C0 - S0 + [X / (1+RF)T] |
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Term
| Synthetic Put Strategy Equals |
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Definition
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Term
| Synthetic Underlying Asset, Consists of & Value |
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Definition
Consists Of: Long call + long bond + short put
Value: C0 + [X / (1+RF)T] - P0 |
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Term
| Synthetic Underlying Asset Strategy Equals |
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Definition
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Term
| Synthetic Bond, Consists of & Value |
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Definition
Consists of: Long Put + Long underling Asset + Short Call
Value: P0 + S0 - C0 |
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Term
| Synthetic Bond Strategy Equals |
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Definition
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Term
| European Call Option Value Limits |
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Definition
Minimum: ECT ≥ 0
Maximum: ECT ≤ ST |
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Term
| American Call Option Value Limits |
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Definition
Minimum: ACT ≥ 0
Maximum: ACT ≤ ST |
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Term
| European Put Option Value Limits |
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Definition
Minimum: EPT ≥ 0
Maximum: EPT ≤ [X / (1+RFR)T |
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Term
| American Put Option Value Limits |
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Definition
Minimum: APT ≥ 0
Maximum: APT ≤ X |
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Term
| European Call Option Value Bounds |
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Definition
Minimum: Max [0, ST - [X / (1+RFR)T]
Maximum: ST |
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Term
| American Call Option Value Bounds |
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Definition
Minimum: Max [0, ST - [X / (1+RFR)T]
Maximum: ST |
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Term
| European Put Option Value Bounds |
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Definition
Minimum: Max [0, [X / (1+RFR)T] - ST]
Maximum: X / (1+RFR)T |
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Term
| American Put Option Value Bounds |
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Definition
Minimum: Max [0, X - ST]
Maximum: X |
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Term
| Interest Rate Call Holder's Payof |
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Definition
Max (0, Underlying rate at expiration - Exercise Rate) * [(Days in underlying rate*NP) / 360]
where:
NP = Notional Principal |
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Term
| Interest Rate Put Holder's Payoff |
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Definition
Max (0, Exercise rate - Underlying Rate at Expiration) * [(Days in underlying rate*NP) / 360]
where:
NP = Notional Principal |
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Term
| Net Payment for a Fixed-Rate-Payer |
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Definition
(Swap fixed rate - LIBORt-1 ) * (No. of days/360) * (NP)
where:
NP = Notional Principal |
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Term
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Definition
Value at expiration: VT = ST - max(0, ST- X)
Profit: Π = VT - S0 + C0
Maximum profit = X - S0 + C0
Maximum loss = S0- C0
Breakeven: ST* = S0- C0 |
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Term
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Definition
Value at expiration: VT = ST + max(0,X - ST)
Profit: Π = VT - S0- P0
Maximum profit = ∞
Maximum loss = S0 + P0- X
Breakeven: ST* = S0 + P0 |
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