Questions
OI-Vol relation,
Open Interest (OI) tells the total number of long contracts or short contracts on each day. It is
cumulative
Whereas, trade volume gives the number for a particular day
payoffs of futures vs options
BSM option valuation- black scholes 1 ques
Bsm - continuous model
Binomial - discrete model*
Nd1 is the probability that the spot price is more than strike price
Nd2 is the probability that at expiry, option ends up ITM
Nd2 is at expiry. I guess Nd1 is at a certain time point
For put, they just take N(-d1) & N(-d2)
Whats the imp of put call parity?
1) It shows that a synthetic stock position can be created using combinations of call, put & bond
2) It proves law of one price ie, call & put always moves in opposite directions
3) it can be used to verify the option price derived from other models
No not that exactly. What I meant was that suppose u get call & put price from BSM model. U can
verify if the call or put option is coming same using put-call parity. Its used for cross checking
Futures trading on premium?
It means that the futures price is more than the spot. It indicates that investors are willing to pay
more to gwtt hands on futures
Option payoff not linear?
Yes, because in options, max loss is premium paid & hence downside is limited unlike futures. Thus
payoff is not premium
Cash & carry arbitrage:
Fair price of futures is less than the actual price. Arbitrage opportunity exits & exploited by going
long in cash & short in futures
Reverse cash & carry:
Fair price is more than the actual. Arbitrage is exploited by going short in cash & long in futures
Relationship between intrinsic value and time value with premium
Idea of Black scholes model
Cash and carry arbitrage and reverse cash and carry arbitrage
Meaning of futures trading on premium
Why the return in options are not linear
What is call put ratio
What is the difference between black scholes and binomial model
Why do we prefer blackscholes
Bsm - continuous model, multiple period, complex
Binomial - discrete model, single period, simple/statistical*
Idea of Black scholes model : to model the random nature of the price movement of the
underlying asset
To determine the price of options
Idea of Black scholes model : to model the random nature of the price movement of the
underlying asset which will help in determining the price (under/over) of options
What is call put ratio: ratio b/w the nos of puts and calls options on an asset, used to gauge
market sentiments
if >1 more puts, if <1 more calls ( Put/Call)
fudiciary call: call + cash
protective put: stocks + put
long straddle
Taking both long call n short position at the same time with the same strike price and maturity
Optimum hedge ratio
It is the lot of futures to buy to hedge for a long cash position in a stock
intrinsic and time value?
• Initial Margin = SPAN* Margin + Exposure Margin
Marked to market
Futures contracts are monitored regularly by the authorities. Hence, Futures prices are marked to
market
• It means that every change in value to the investor is shown in the investor’s account at
the end of each trading day.
• The implication is that, if your futures position is in profits on a particular day, your
account is credited with that much of profits (which would be taken away, if the prices fall
on the next day). This process would keep going until you settle the contract.
• At the same time, if your position is in loss, the loss will be shown in your account on the
end of the trading day and if such loss is beyond your initial margin you’ve given, you will
have to pay the difference.
contango
In a normal market, futures price would be greater than the spot price due to the effect of cost of
carry. This situation is generally referred to as a ‘Contango’ market
Backwardation is just the opposite of Contango. In some special situations, the futures prices may
be decided by factors other than cost of carry. For example- When a stock market scam breaks out,
it’s possible that the stock market would be driven by negative sentiments rather than fundamentals
or technicals.
Explain carefully the difference between hedging, speculation and arbitrage.
A trader is hedging when S/he has an exposure to the price of an asset and takes a position in a
derivative to offset the exposure. In a speculation the trader has no exposure to offset. S/he is
betting on the future movements in the price of the asset. Arbitrage involves taking a position in
two or more different markets to lock in a profit.
Distinguish between the terms open interest and trading volume
The open interest of a futures contract at a particular time is the total number of long positions
outstanding. (Equivalently, it is the total number of short positions outstanding.) The trading volume
during a certain period of time is the number of contracts traded during this period.
Explain how margins protect investors against the possibility of default
A margin is a sum of money deposited by an investor with his or her broker. It acts as a guarantee
that the investor can cover any losses on the futures contract. The balance in the margin account is
adjusted daily to reflect gains and losses on the futures contract. If losses are above a certain level,
the investor is required to deposit a further margin.
This system makes it unlikely that the investor will default. A similar system of margins makes it
unlikely that the investor’s broker will default on the contract it has with the clearing house member
and unlikely that the clearing house member will default with the clearing house.
Cost of carry
Cost of carry is the difference between the futures and spot prices of a stock or index