FINC306 LATEST EXAMINATION SET QUESTIONS AND
ANSWERS GUARANTEE A+
✔✔What is the No Arbitrage Principle? - ✔✔The No Arbitrage Principal is the
fundamental law in finance which states that their is no arbitrage in financial markets
Equivalent to "no free lunch"
It is used to prove pricing formulas
✔✔Whats theorem 1 of the NAP? - ✔✔If two portfolios have the same payoff at a
certain time T, they must have the same value at any time, t, before T.
✔✔What are the perfect market assumptions? - ✔✔1. No bid/ask spread
2. No transaction costs
3. Borrowing and lending rates are the same
✔✔What is the return of the forward contract? (from 0 to T) - ✔✔1. If ST>K
= (VT-V0)/V0= infinity
2. If ST<K
= (VT-V0)/V0= -infinity
✔✔What is the return of the forward contract? (from 0 to t) - ✔✔Return is unknown
=(Vt-V0)/V0 = positive or negative depending on how the forward price of underlying
has changed since inception
✔✔What is the return of the forward contract? (from t to T - ✔✔Return is unknown
=(VT-Vt)/Vt = positive or negative depending on how the forward price of underlying has
changed since inception
✔✔What is a future contract and what are the standard features? - ✔✔Exchange-traded
"forward contracts"
Typical features
→ Standardized, with specified delivery dates, locations, procedures
→ A clearing house
→ Matches buy and sell orders
→ Keeps track of members' obligations and payments
→ After matching the trades, becomes the counterparty.
✔✔What is the main use of currency contracts? - ✔✔To hedge against exchange rate
changes
, ✔✔What are the different types of futures? - ✔✔Margin and Mark to Market
- Focused in multiplier, initial margin, maintenance margin and margin calls
Currency
- Used for hedging against interest rate changes
Other
- Index
- Commodity
- Interest rates (FRA and Swaps)
✔✔What is a bill vs a note vs a bond vs a STRIP? - ✔✔US treasury instruments
- Bills: <1 year, no coupon
- Notes: 1-10 years, coupons and sold at par
- Bond: 10-30 years, coupons and sold at par
- STRIPS: Zero Coupon
✔✔What is the meaning of rt(t<T) - ✔✔The yield to maturity which is annually
compounded rate of return on a ZCB at time t w/ maturity T
✔✔What is the term structure of yield? - ✔✔The YTM, rt (t, T), as a function of time to
maturity, T − t
✔✔What is the 3 month LIBOR? What is the SOFR? How does it affect FR and FRA
calculations? - ✔✔LIBOR: London Interbank Offering Rate - it is what banks estimate
the interest rate for borrowing and lending between banks to be
SOFR: Calculated by FED in NY. Futures are written on the SOFR e.g. CMOE
- Why 3 months: Makes it liquid and calculations easier
Ensure rates are adjusted for quarterly compounding
✔✔What is an FRA? - ✔✔An OTC contract that guarantees a borrowing or lending rate
on a given notional principal amount
✔✔What's the approximate ratio between the FRA market and Global GDP? - ✔✔They
are approximately equal - FRA market is slightly smaller.
✔✔What is a swap? What is it used for? What is a single payment swap equivalent to? -
✔✔→ A swap is an agreement between two parties to exchange one or multiple
payments, on one or more dates, determined by the difference between two prices.
→ A swap provides a way of hedging a stream of risky payments
→ A single-payment swap is the same as a cash-settled forward contract
ANSWERS GUARANTEE A+
✔✔What is the No Arbitrage Principle? - ✔✔The No Arbitrage Principal is the
fundamental law in finance which states that their is no arbitrage in financial markets
Equivalent to "no free lunch"
It is used to prove pricing formulas
✔✔Whats theorem 1 of the NAP? - ✔✔If two portfolios have the same payoff at a
certain time T, they must have the same value at any time, t, before T.
✔✔What are the perfect market assumptions? - ✔✔1. No bid/ask spread
2. No transaction costs
3. Borrowing and lending rates are the same
✔✔What is the return of the forward contract? (from 0 to T) - ✔✔1. If ST>K
= (VT-V0)/V0= infinity
2. If ST<K
= (VT-V0)/V0= -infinity
✔✔What is the return of the forward contract? (from 0 to t) - ✔✔Return is unknown
=(Vt-V0)/V0 = positive or negative depending on how the forward price of underlying
has changed since inception
✔✔What is the return of the forward contract? (from t to T - ✔✔Return is unknown
=(VT-Vt)/Vt = positive or negative depending on how the forward price of underlying has
changed since inception
✔✔What is a future contract and what are the standard features? - ✔✔Exchange-traded
"forward contracts"
Typical features
→ Standardized, with specified delivery dates, locations, procedures
→ A clearing house
→ Matches buy and sell orders
→ Keeps track of members' obligations and payments
→ After matching the trades, becomes the counterparty.
✔✔What is the main use of currency contracts? - ✔✔To hedge against exchange rate
changes
, ✔✔What are the different types of futures? - ✔✔Margin and Mark to Market
- Focused in multiplier, initial margin, maintenance margin and margin calls
Currency
- Used for hedging against interest rate changes
Other
- Index
- Commodity
- Interest rates (FRA and Swaps)
✔✔What is a bill vs a note vs a bond vs a STRIP? - ✔✔US treasury instruments
- Bills: <1 year, no coupon
- Notes: 1-10 years, coupons and sold at par
- Bond: 10-30 years, coupons and sold at par
- STRIPS: Zero Coupon
✔✔What is the meaning of rt(t<T) - ✔✔The yield to maturity which is annually
compounded rate of return on a ZCB at time t w/ maturity T
✔✔What is the term structure of yield? - ✔✔The YTM, rt (t, T), as a function of time to
maturity, T − t
✔✔What is the 3 month LIBOR? What is the SOFR? How does it affect FR and FRA
calculations? - ✔✔LIBOR: London Interbank Offering Rate - it is what banks estimate
the interest rate for borrowing and lending between banks to be
SOFR: Calculated by FED in NY. Futures are written on the SOFR e.g. CMOE
- Why 3 months: Makes it liquid and calculations easier
Ensure rates are adjusted for quarterly compounding
✔✔What is an FRA? - ✔✔An OTC contract that guarantees a borrowing or lending rate
on a given notional principal amount
✔✔What's the approximate ratio between the FRA market and Global GDP? - ✔✔They
are approximately equal - FRA market is slightly smaller.
✔✔What is a swap? What is it used for? What is a single payment swap equivalent to? -
✔✔→ A swap is an agreement between two parties to exchange one or multiple
payments, on one or more dates, determined by the difference between two prices.
→ A swap provides a way of hedging a stream of risky payments
→ A single-payment swap is the same as a cash-settled forward contract
