CFA Derivatives_Alternatives.txt

  1. Forwards vs Futures
    • Forwards: private contracts, unique contracts, default risk, little or no regulation
    • Futures: exchange traded, standardized contracts, guaranteed by clearinghouse, regulated, daily settlement of gains/losses
  2. Forward rate agreement
    • Agreement to borrow/lend money in the future
    • Formula for payment to the long is:
    • principal*(floating rate - forward rate)*(days/360)/(1 + floating rate*days/360)
  3. Put-Call Parity
    Call + X/(1+Rfr)^t = Stock + Put
  4. ETFs, advantages, disadvantages
    • ETFs: invests in a portfolio of stocks or bonds, designed to mimic a specific index
    • Advantages: efficient method of diversification, trade similar to equities, risk management, efficient operating expense ratios, decrease capital gains tax liabilities
    • Disadvantages: foreign countries have few indexes to track, intraday trading may be insignificant to long-term investors, low trading volume can create large bid-ask spreads
  5. Real estate investments
    • NOI = gross operating income - estimated vacancy, collections, and other operating expenses including property taxes. Does not include depreciation or finance costs
    • Value = NOI/market cap
  6. Currency swap
    • A wants AUD, B wants USD
    • Notional principal initially changes hands: A gives B USD, B gives A AUD
    • Interest payments are made without netting due to different currencies: A pays interest on AUD, B pays interest on USD
    • Notional amounts returned: same as initially swapped, regardless of how exchange rates have changed
Card Set
CFA Derivatives_Alternatives.txt
CFA Deriv/AI