Questions


1) What are Derivatives and why are they used ?
Derivatives are instruments that are derived from one or more underlying asset classes.
They are used to reduce risk, transfer risk or to create leverage.


2) What is Delta ?
This is the 'change in the price of the derivative' with respect to the 'change in the price of the underlying'.
For example if a stock option has a delta of 0.6 this means that if the price of the underlying equity increases by $1, the price of the option will increase by $0.6 (all else being equal).
Call options have a positive delta.
Put options have a negative delta.


3) What is Gamma ?
This is a second order derivative with respect to the 'price of the underlying'.
This tells us how fast the delta is changing with respect to a 'change in the price of the underlying'.


4) What is Vega ?
This is how the price of a derivative changes with volatility.


5) What is Rho ?
This is how the price of a derivative changes with interest rates.


6) What is Theta ?
This is how the price of a derivative changes with time.


7) Can you describe a Total Return Swap ?
This is a type of credit derivative.
An agreement between two parties to swap the total return from an underlying asset for a regular fixed or floating cash flow.
This involves owning (or buying) an underlying asset and then selling the total returns.
This instrument lets you get exposure to and benefit from an underlying asset without actually owning it or having it on your balance sheet.
Equity - single stock, index (dividends, capital gains)
Bond - (coupons)
Loan -
Commodity -


8) Can you describe a Partial Return Swap ?
This is a type of credit derivative.
Exactly the same as a total return swap except it only gives exposure to a percentage of the total return.


9) Can you describe a Reverse Total Return Swap ?
This is a type of credit derivative.
This involves selling the underlying asset and buying the total returns.
Typically for equities.




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