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35 Cards in this Set
- Front
- Back
- 3rd side (hint)
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Two important properties of lognormal |
Cannot be negative The product of two lognormals is a lognormal |
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When is it optimal to early exercise an American call with no dividends |
It is never optimal to early exercise an American call with no dividends. |
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When is it optimal to early exercise an American call option with dividends? |
If PV(divs) > PV(interest on strike) + implicit put |
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When may it be rational to early exercise an American call with dividends? |
If PV(divs) > PV(interest on strike) |
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When is it rational to early exercise an American Put? |
If PV(interest on strike) > PV(divs) + implicit call |
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When may it be rational to early exercise an American put? |
If PV(interest on strike) > PV(divs) |
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Bounds of American Calls (includes both American and European calls) |
S>C(American)> C(European) >max(0, Fp(s)- ke-rt) |
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What are the bounds of put options? (includes both American and European) |
K>American put> American call > ke-rt - Fp(s) |
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What are the bounds for European calls? |
FP(s) > European call > max(0, FP(s)- ke-rt) |
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What are the bounds for American calls? |
S> American call > max(0, S-K) |
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What are the bounds for European puts? |
PV(strike price)> European put > max(0, PV( strike price) - prepaid forward price) |
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What are the bounds for an American put? |
K> American put > max(0, K-S) |
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BS formula assumptions |
Continuously compounded returns on the stock are normally distributed and independent over time, no sudden jumps in the stock price Volatility is known and constant Future dividends are known The risk free rate is known and constant (the yield curve is flat) No taxes or transaction costs Short selling is allowed at no cost Investors can borrow and lend at the risk free rate |
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What is the sign of Delta for a long call? |
Positive |
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Out of all the Greeks for long positions, all are positive except for which two? |
Theta and psi |
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Out of all the Greeks for long puts, all are positive except for which three? |
Delta, theta, and rho |
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What type of embedded option guarantees a minimum amount will be paid to a beneficiary when the policyholder dies? |
GMDB |
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What type of embedded option guarantees a minimum value for the underlying account after some period of time, even if the account value is less? |
GMAB |
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What type of embedded option guarantees that upon the policyholder reaching a certain age, a minimum withdrawal amount over a specified period will be provided? |
GMWB |
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What type of embedded option guarantees the purchase price of a traditional annuity at a future time? |
GMIB |
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What type of embedded option is a guarantee which returns the greater of the account value and the original amount invested? |
GMDB with a Return of Premium Guarantee |
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What is the payoff for a GMDB with a return of premium guarantee? |
Max(S(T), K) = S(t) + max(k-s(t),0) |
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What type of option is a GMDB with a return of premium guarantee? |
Put |
Call or put |
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What type of embedded option pays the beneficiary an amount based on the increase in the account value over the original amount invested, e.g, 40% |
Earnings Enhanced Death Benefit |
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An earnings enhanced death benefit is what type of option? |
Call |
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What type of embedded option is similar to a GMDB with ROP guarantee, but the benefit is contingent on the policyholder surviving to the end of the guarantee period? |
GMAB with an ROP guarantee |
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Under the first BS assumption, continuously compounded returns on the stock are bank distributed and blank over time. |
Normally, independent |
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According to one BS assumption, there are no what in the stock price? |
Sudden jumps |
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Under a BS assumption, volatility is what? |
Known and a constant |
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Under a BS assumption, what are known? |
Future dividends |
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Under a BS assumption, the risk free rate is what? |
Known and constant |
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Under a BS assumption, the yield curve is what? |
Flat |
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Under a BS assumption, there are no taxes or what? |
Transaction costs |
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According to a BS assumption, short selling is what? |
Short selling is allowed and at no cost |
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Under a BS assumption, investors can borrow and lend at what rate? |
The risk free rate |
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