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# Category: Level II

## Valuing Risky Bonds

In this context, a risky bond is one for which there is a nonzero probability of default. Conceptually, valuing such a bond is child’s play: you calculate the (present) value of the bond assuming no default (which the curriculum abbreviates VND: Value, No Default), then subtract the (present) value of the expected credit losses (i.e.,…

## Short Butterfly Spread

If you haven’t read the article on option strategies in general, that’s a good place to start, then return here. In particular, if you haven’t read the warning about calculating profit that appears at the end of that article, you should go read it now; the way I’m calculating the profit here is correct, but…

## Short Strangle

If you haven’t read the article on option strategies in general, that’s a good place to start, then return here. In particular, if you haven’t read the warning about calculating profit that appears at the end of that article, you should go read it now; the way I’m calculating the profit here is correct, but…

## Inverse (Short) Straddle

If you haven’t read the article on option strategies in general, that’s a good place to start, then return here. In particular, if you haven’t read the warning about calculating profit that appears at the end of that article, you should go read it now; the way I’m calculating the profit here is correct, but…

## Inter-Temporal Rate of Substitution

I know: it sounds like something out of a science fiction movie. Sometimes it looks that way. However, once it’s explained well, at least it should be easy to follow and understand. I’ll do my best to explain it well. Also, I’ll abbreviate inter-temporal rate of substitution as ITRS; it’ll save me a lot of…

## Correlation . . . of, What, Exactly?

I already wrote an article on the tendency of people in finance to be sloppy in the language they use; you’ll find it here. The purpose of this article is to expand on one specific area in which the language of finance people is particularly sloppy: correlation. The problem, as I see it, is that…

## Option Greeks

The option Greeks – delta, gamma, theta, vega, and rho – refer to sensitivities of the price of an option to various underlying variables. Here, we’ll be talking about options on stocks, though the discussion would be equally appropriate for options on, say, commodities. It would not be appropriate for a discussion of options on…

## Covered Call

## Protective Put

## Delta Hedging

There are two applications of delta hedging presented in the CFA curriculum: You have an existing position in the underlying security and you want to hedge that position with options. You have an existing position in options and you want to hedge that position either with the underlying security or with options. I’ll cover both…