Options 1

Chapter 1: Introduction

  • Exam Details

    • In-class, in-person, paper exam.

    • Open-source exam; laptops allowed, but not for use at home.

    • Additional guidance on what materials can be brought will be provided.

Delta Calculation

  • Delta Definition

    • Measures the dollar change in portfolio value per dollar change in the underlying index.

  • Two Methods to Calculate Delta

    1. Long Method:

      • Formula: ( Delta = \frac{\text{Change in Portfolio Value}}{\text{Change in Index}} )

      • Example: If the S&P increases by 2% (index up by 65 points) and the portfolio beta is 0.8, the portfolio value change is -1.6%.

      • Dollar Amount Change: ( -30,000,000 \times -0.016 = -480,000 )

    2. Short Method:

      • Formula: ( Delta = \frac{\text{Beta} \times \text{Portfolio Value}}{\text{Index Value}} )

      • Same values yield the same delta value.

Long Futures vs. Short Futures Position

  • Long Futures Position

    • Commodity consumer hedges against rising prices with long futures.

    • Payoff = Selling price - Buying price.

Physical Exposure and Hedging

  • Hedging Strategies

    • If short on physical exposure (e.g., oil producer), prefer rising prices (long position).

    • If borrowing in foreign currency, prefer lower exchange rates to decrease liability.

Futures Contracts and Valuation

  • Example of Commodities:

    • For a futures contract at $55/unit, if the price drops to $50, the loss is -$500,000 on futures.

  • Value Calculation:

    • For 100,000 units at a higher price, how futures protect against price hikes and limit costs.

Delta Calculation for FX Contracts

  • Foreign Exchange Rate Risk

    • Calculate position delta by present value of currency position discounted at local rates (Canadian for CAD positions).

Expected Future Exchange Rates

  • Hedging Revenue in Forex

    • A US company with Euro revenue must short Euro futures to hedge against currency rate downturns.

    • Calculate expected future exchange rates using spot rates and direct comparisons.

General Strategies and Conclusions

  • Arbitrage Examples

    • Analyze cash and carry arbitrage opportunities in commodities and currencies, identifying potential profits amidst spot and futures discrepancies.

  • Need for Calculating Positions

    • Know when to calculate delta or trade direct positions depending on prevailing market conditions.

Summary

  • Practice questions dictate that there will be 20 questions on the exam, primarily reflecting the first 34 questions from the practice material.