SOLUTION1. exercise 1
|
|
- Valentine Armstrong
- 8 years ago
- Views:
Transcription
1 exercise 1 Stock BBB has a spot price equal to 80$ and a dividend equal to 10$ will be paid in 5 months. The on year interest rate is equal to 8% (c.c). 1. Calculate the 6 month forward price? 2. Calculate the value of the contract for the short position if after 3 months the spot price of the stock is equal to 75$, the interest rate is still at 8% SOLUTION1 1. I = 10* e 0,08*0, * e 0,08*0,4167 = 19,54 = ( S I) e r ( T t) = (80 19,54) e 0,08*0,5 = 62,93$ 2. I = 10* e 0,08*0,1667 = 9,87 = ( S I) e r( T t ) = (75 9,87) e 0,08*0,25 = 66,45$ f r ( T t) 0,08*0,25 = ( 0 ) e = (62,93 66,45) e = 3,45
2 EXERCISE 2 A stock trades at 10$ and will pay a 0.50$ dividend in 3 months. Risk-free rate is 6% cc for all maturities. 1) Determine the 2-month and 4-month forward prices of the stock 2) Now assume that you buy 100 stocks forward for the 4-month maturity at the price you just determined. the stock trades at 12 $, interest rates have dropped to 4.50% and the company has announced that the dividend will be of 1$ and not just Determine the market value of your deal (i.e. the original forward purchase of 100 stocks) SOLUTION 1) The 2-month forward is unaffected by the dividend, and is equal to: / 6 = 10 e = To calculate the 4-month forward we must take into consideration the dividend, the present value of which has to be subtracted from today's stock price 4 = ( e 0.06 / ) e 0.06 / = ( 10 0,4926) e 0.06 / = 9, 699 2) After 1 month the 3-month forward price is 3 = ( 12 1 e / ) e / = ( 12 0,9926) e / = 11, 132 The value of the purchase of 100 stock forward at t0 is: V = 100 (11,132 9,699) e 0,045 / 4 = 141,697
3 EXERCISE 3 It s December 1st 20xx. A stock trades at 400 $ and will pay a known dividend of 15$ on the 1st of May 20xx+1. The c.c. risk-free rate is 6% for all maturities. 1) Determine the fair price of a 1-year forward contract on the stock. 2) Now assume an intermediary quoted a 1-year forward price of 415 $. Explain how you would build an arbitrage transaction in order to exploit the differential, if any, between market and fair price. SOLUTION EXERCISE 3 1) To calculate the 6-month forward price we must take into consideration the dividend, the present value of which has to be subtracted from today's stock price = 0.06* ( e ) e = ( ,56) e = ) If the forward price is 415 there is an arbitrage opportunity. Since the forward price is higher then the spot prices the cash and carry should be applied. More specifically the strategy is : borrow for 6 months and for one year; buy the stock spot and sell forwards. T=0 T=6M T=12M dividend +15 Borrow 4 months Borrow Buy Spot Sell forward stock +415 stock 5.73
4 EXERCISE 4 The two-months c.c. interest rates in Switzerland and the United States are 3% and 8% respectively. The USD/SR rate (number of USD for 1 SR) is The futures price for a contract deliverable in 2 months is What arbitrage opportunities does this create (assume forward and futures prices are the same). Show how you would build the arbitrage transaction. 1) The forward equilibrium exchange rate is SOLUTION EXERCISE 4 = 0.65e (8% 3%)2 /12 = To exploit arbitrage opportunities we shoud T=0 T=2M Borrow USD +100 USD Repay USD Exchange USD and CH -100 USD CH Invest CH CH Receives CH BUY USD and sell Buy USD Chf at the market rate Sell profit 1.06
5 EXERCISE 5 A Swiss company is importing goods from the US and has to pay 500,000 USD in four months. The company s bank offers it the following exchange rates : Bid Ask Spot CH/USD (number of CH per one USD) orward 4 months CH/USD (number of CH per one USD) The 4 months CH interest rate is equal to 2.0% and the 4 months USD interest rate is equal to 5.4%. 1) Explain how the Swiss company could hedge its currency risk and how much (CH) will have to pay at the end of the 4 months; 2) Using the X bid rates only, determine whether the forward X rate is an equilibrium one or not; 3) If the forward market rate is not an equilibrium rate, state whether the Swiss company would be better off using this market rate or trying to get the equilibrium rate. SOLUTION 1) The swiss company can hedge the currency risk by buying forwards dollars. At the market forward rate of 1.31 the company will have to pay 500,000,000 USD * 1.33 chf/usd= 665,000,000CH 2) The equilibrium rate is 3) or the company it would be better try to use the equilibrium rate. The company should therefore borrow CH, exchange CH into dollars and invest in dollars
6 EXERCISE A one-year-long forward contract on a non-dividend-paying stock is entered into when the stock price is $ 40 and the risk-free rate of interest is 10% per annum with continuous compounding. a) What are the forward price and the initial value of the forward contract? b) Six months later, the price of the stock is $ 45 and the risk-free interest rate is still 10%. What are the forward price and the value of the forward contract? orward price = 12 = 40e 0. 1 = Initial value is zero, like for every forward entered at market conditions Six months later we need a six-month forward 6 = 45e = V = ( ) e = 2. 95
7 EXERCISE Suppose that you enter into a short futures contract to sell July silver for $ 5.20 per ounce on the New York Commodity Exchange. The size of the contract is 5,000 ounces. The initial margin is 4,000$ and the maintenance margin is 3,000$. What change in the futures price will lead to a margin call? What happens if you do not meet the margin call? Value of contract = 5,000*5.20 = 26,000 Since this is a short position, in order for my balance to drop 1,000$ the value of the contract must increase to 27,000. This happens when the price rises to 5.40$ If the margin call is not met the position is closed out
8 EXERCISE The sd of monthly changes in the spot price of live cattle is 1.2 cents per pound. The sd of monthly changes in the futures price of live cattle for the closest contract is 1.4. The correlation between the futures price change and the spot price change is 0.7. It is now Oct. 15. A beef producer is committed to purchasing 200,000 pounds of live cattle on Nov. 15. The producer wants to use the December live cattle futures contracts to hedge the risks. Each contract is for the delivery of 40,000 pounds of cattle. What strategy should the beef producer follow? 1.2 Hedge ratio = 0.7 = , ,000 Number of contracts = N = = 3
9 EXERCISE A company has a $ 10 million portfolio with a beta of 1.2. The S&P is currently 900 and one futures contract is on 250 times the index. How can the company use futures contracts on the S&P 500 to completely hedge its risk over the next 6 months? What position should it take to reduce the beta of the portfolio to 0.3? The company has a long equity position and should short the index 10,000, Number of contracts = N = The company should short 53 contracts If the company wants to achieve a beta of 0.3 (3/4 reduction of the original exposure) it should sell 3/4 of 53 = 40 contracts
10
2 Stock Price. Figure S1.1 Profit from long position in Problem 1.13
Problem 1.11. A cattle farmer expects to have 12, pounds of live cattle to sell in three months. The livecattle futures contract on the Chicago Mercantile Exchange is for the delivery of 4, pounds of cattle.
More informationFigure S9.1 Profit from long position in Problem 9.9
Problem 9.9 Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until maturity. Under what circumstances will the holder of the option make a profit? Under what circumstances
More informationDetermination of Forward and Futures Prices. Chapter 5
Determination of Forward and Futures Prices Chapter 5 Fundamentals of Futures and Options Markets, 8th Ed, Ch 5, Copyright John C. Hull 2013 1 Consumption vs Investment Assets Investment assets are assets
More informationFina4500 Spring 2015 Extra Practice Problems Instructions
Extra Practice Problems Instructions: The problems are similar to the ones on your previous problem sets. All interest rates and rates of inflation given in the problems are annualized (i.e., stated as
More informationDetermination of Forward and Futures Prices
Determination of Forward and Futures Prices Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 2012 Short selling A popular trading (arbitrage) strategy is the shortselling or
More informationSAMPLE MID-TERM QUESTIONS
SAMPLE MID-TERM QUESTIONS William L. Silber HOW TO PREPARE FOR THE MID- TERM: 1. Study in a group 2. Review the concept questions in the Before and After book 3. When you review the questions listed below,
More informationNotes for Lecture 2 (February 7)
CONTINUOUS COMPOUNDING Invest $1 for one year at interest rate r. Annual compounding: you get $(1+r). Semi-annual compounding: you get $(1 + (r/2)) 2. Continuous compounding: you get $e r. Invest $1 for
More informationFutures Price d,f $ 0.65 = (1.05) (1.04)
24 e. Currency Futures In a currency futures contract, you enter into a contract to buy a foreign currency at a price fixed today. To see how spot and futures currency prices are related, note that holding
More informationHedging Strategies Using Futures. Chapter 3
Hedging Strategies Using Futures Chapter 3 Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013 1 The Nature of Derivatives A derivative is an instrument whose value depends
More informationIntroduction, Forwards and Futures
Introduction, Forwards and Futures Liuren Wu Zicklin School of Business, Baruch College Fall, 2007 (Hull chapters: 1,2,3,5) Liuren Wu Introduction, Forwards & Futures Option Pricing, Fall, 2007 1 / 35
More informationAssumptions: No transaction cost, same rate for borrowing/lending, no default/counterparty risk
Derivatives Why? Allow easier methods to short sell a stock without a broker lending it. Facilitates hedging easily Allows the ability to take long/short position on less available commodities (Rice, Cotton,
More informationDerivative: a financial instrument whose value depends (or derives from) the values of other, more basic, underlying values (Hull, p. 1).
Introduction Options, Futures, and Other Derivatives, 7th Edition, Copyright John C. Hull 2008 1 Derivative: a financial instrument whose value depends (or derives from) the values of other, more basic,
More informationChapter 5 - Determination of Forward and Futures Prices
Chapter 5 - Determination of Forward and Futures Prices Investment assets vs. consumption assets Short selling Assumptions and notations Forward price for an investment asset that provides no income Forward
More informationTest 4 Created: 3:05:28 PM CDT 1. The buyer of a call option has the choice to exercise, but the writer of the call option has: A.
Test 4 Created: 3:05:28 PM CDT 1. The buyer of a call option has the choice to exercise, but the writer of the call option has: A. The choice to offset with a put option B. The obligation to deliver the
More informationCall and Put. Options. American and European Options. Option Terminology. Payoffs of European Options. Different Types of Options
Call and Put Options A call option gives its holder the right to purchase an asset for a specified price, called the strike price, on or before some specified expiration date. A put option gives its holder
More informationLecture 5: Forwards, Futures, and Futures Options
OPTIONS and FUTURES Lecture 5: Forwards, Futures, and Futures Options Philip H. Dybvig Washington University in Saint Louis Spot (cash) market Forward contract Futures contract Options on futures Copyright
More informationChapter 1 - Introduction
Chapter 1 - Introduction Derivative securities Futures contracts Forward contracts Futures and forward markets Comparison of futures and forward contracts Options contracts Options markets Comparison of
More informationChapter 21 Valuing Options
Chapter 21 Valuing Options Multiple Choice Questions 1. Relative to the underlying stock, a call option always has: A) A higher beta and a higher standard deviation of return B) A lower beta and a higher
More informationCHAPTER 22: FUTURES MARKETS
CHAPTER 22: FUTURES MARKETS PROBLEM SETS 1. There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support
More informationLecture 4: Properties of stock options
Lecture 4: Properties of stock options Reading: J.C.Hull, Chapter 9 An European call option is an agreement between two parties giving the holder the right to buy a certain asset (e.g. one stock unit)
More informationAssignment 10 (Chapter 11)
Assignment 10 (Chapter 11) 1. Which of the following tends to cause the U.S. dollar to appreciate in value? a) An increase in U.S. prices above foreign prices b) Rapid economic growth in foreign countries
More informationReading: Chapter 19. 7. Swaps
Reading: Chapter 19 Chap. 19. Commodities and Financial Futures 1. The mechanics of investing in futures 2. Leverage 3. Hedging 4. The selection of commodity futures contracts 5. The pricing of futures
More informationCHAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT
CHAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT PROBLEM SETS 1. In formulating a hedge position, a stock s beta and a bond s duration are used similarly to determine the expected percentage gain or loss
More informationSolutions: Sample Exam 2: FINA 5500
Short Questions / Problems Section: (88 points) Solutions: Sample Exam 2: INA 5500 Q1. (8 points) The following are direct quotes from the spot and forward markets for pounds, yens and francs, for two
More informationChapter 5 Financial Forwards and Futures
Chapter 5 Financial Forwards and Futures Question 5.1. Four different ways to sell a share of stock that has a price S(0) at time 0. Question 5.2. Description Get Paid at Lose Ownership of Receive Payment
More informationBUSM 411: Derivatives and Fixed Income
BUSM 411: Derivatives and Fixed Income 2. Forwards, Options, and Hedging This lecture covers the basic derivatives contracts: forwards (and futures), and call and put options. These basic contracts are
More informationCHAPTER 22: FUTURES MARKETS
CHAPTER 22: FUTURES MARKETS 1. a. The closing price for the spot index was 1329.78. The dollar value of stocks is thus $250 1329.78 = $332,445. The closing futures price for the March contract was 1364.00,
More informationPricing Forwards and Futures I: The Basic Theory
Chapter 3.1 Introduction 3 Pricing Forwards and Futures I: The Basic Theory This chapter and the next mark the begining of our exploration into the pricing of derivative securities. This chapter is mainly
More informationForwards and Futures
Prof. Alex Shapiro Lecture Notes 16 Forwards and Futures I. Readings and Suggested Practice Problems II. Forward Contracts III. Futures Contracts IV. Forward-Spot Parity V. Stock Index Forward-Spot Parity
More informationa. What is the sum of the prices of all the shares in the index before the stock split? The equation for computing the index is: N P i i 1
7 Stock Index Futures: Introduction 44 Answers to Questions and Problems 1. Assume that the DJIA stands at 8340.00 and the current divisor is 0.25. One of the stocks in the index is priced at $100.00 and
More informationLecture 12. Options Strategies
Lecture 12. Options Strategies Introduction to Options Strategies Options, Futures, Derivatives 10/15/07 back to start 1 Solutions Problem 6:23: Assume that a bank can borrow or lend money at the same
More informationFutures Contracts. Futures. Forward Contracts. Futures Contracts. Delivery or final cash settlement usually takes place
Futures 1 Futures Contracts Forward Contracts Futures Contracts Forwards Private contract between 2 parties Not standardized Usually one specified contract date Settled at end of contract Delivery or final
More informationForeign Exchange Market: Chapter 7. Chapter Objectives & Lecture Notes FINA 5500
Foreign Exchange Market: Chapter 7 Chapter Objectives & Lecture Notes FINA 5500 Chapter Objectives: FINA 5500 Chapter 7 / FX Markets 1. To be able to interpret direct and indirect quotes in the spot market
More informationIntroduction to Futures Contracts
Introduction to Futures Contracts September 2010 PREPARED BY Eric Przybylinski Research Analyst Gregory J. Leonberger, FSA Director of Research Abstract Futures contracts are widely utilized throughout
More informationLecture 7: Bounds on Options Prices Steven Skiena. http://www.cs.sunysb.edu/ skiena
Lecture 7: Bounds on Options Prices Steven Skiena Department of Computer Science State University of New York Stony Brook, NY 11794 4400 http://www.cs.sunysb.edu/ skiena Option Price Quotes Reading the
More informationLecture 3: Forward Contracts Steven Skiena. http://www.cs.sunysb.edu/ skiena
Lecture 3: Forward Contracts Steven Skiena Department of Computer Science State University of New York Stony Brook, NY 11794 4400 http://www.cs.sunysb.edu/ skiena Derivatives Derivatives are financial
More informationIntroduction to Options. Derivatives
Introduction to Options Econ 422: Investment, Capital & Finance University of Washington Summer 2010 August 18, 2010 Derivatives A derivative is a security whose payoff or value depends on (is derived
More informationSpot Exchange Markets. Quiz Questions
Chapter Spot Exchange Markets Quiz Questions Q. Using the following vocabulary, complete the following text: forward; market maker or broker; least cost dealing; spot; arbitrage; retail; wholesale. "When
More informationChapter 10 Forwards and Futures
Chapter 10 Forwards and Futures Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Part C Determination of risk-adjusted discount rate. Part D Introduction to derivatives.
More informationGeneral Forex Glossary
General Forex Glossary A ADR American Depository Receipt Arbitrage The simultaneous buying and selling of a security at two different prices in two different markets, with the aim of creating profits without
More informationOption Values. Determinants of Call Option Values. CHAPTER 16 Option Valuation. Figure 16.1 Call Option Value Before Expiration
CHAPTER 16 Option Valuation 16.1 OPTION VALUATION: INTRODUCTION Option Values Intrinsic value - profit that could be made if the option was immediately exercised Call: stock price - exercise price Put:
More informationCHAPTER 11 CURRENCY AND INTEREST RATE FUTURES
Answers to end-of-chapter exercises ARBITRAGE IN THE CURRENCY FUTURES MARKET 1. Consider the following: Spot Rate: $ 0.65/DM German 1-yr interest rate: 9% US 1-yr interest rate: 5% CHAPTER 11 CURRENCY
More informationMid-Term Spring 2003
Mid-Term Spring 2003 1. (1 point) You want to purchase XYZ stock at $60 from your broker using as little of your own money as possible. If initial margin is 50% and you have $3000 to invest, how many shares
More information1. HOW DOES FOREIGN EXCHANGE TRADING WORK?
XV. Important additional information on forex transactions / risks associated with foreign exchange transactions (also in the context of forward exchange transactions) The following information is given
More informationPractice Set and Solutions #1
Bo Sjö 2012-10-03 Practice Set and Solutions #1 What to do with this practice set? 1 Practice sets are handed out to help students master the material of the course and prepare for the final exam. These
More informationQuestions and Answers
MA3245 Financial Mathematics I Suggested Solutions of Tutorial 1 (Semester 2/03-04) Questions and Answers 1. What is the difference between entering into a long forward contract when the forward price
More informationPractice Set #1: Forward pricing & hedging.
Derivatives (3 credits) Professor Michel Robe What to do with this practice set? Practice Set #1: Forward pricing & hedging To help students with the material, eight practice sets with solutions shall
More informationChapter 15 - Options Markets
Chapter 15 - Options Markets Option contract Option trading Values of options at expiration Options vs. stock investments Option strategies Option-like securities Option contract Options are rights to
More informationMechanics of Options Markets
Mechanics of Options Markets Liuren Wu Zicklin School of Business, Baruch College Options Markets (Hull chapter: 8) Liuren Wu (Baruch) Options Markets Mechanics Options Markets 1 / 22 Outline 1 Definition
More informationOptions Pricing. This is sometimes referred to as the intrinsic value of the option.
Options Pricing We will use the example of a call option in discussing the pricing issue. Later, we will turn our attention to the Put-Call Parity Relationship. I. Preliminary Material Recall the payoff
More informationAmerican Options. An Undergraduate Introduction to Financial Mathematics. J. Robert Buchanan. J. Robert Buchanan American Options
American Options An Undergraduate Introduction to Financial Mathematics J. Robert Buchanan 2010 Early Exercise Since American style options give the holder the same rights as European style options plus
More information2. Discuss the implications of the interest rate parity for the exchange rate determination.
CHAPTER 6 INTERNATIONAL PARITY RELATIONSHIPS AND FORECASTING FOREIGN EXCHANGE RATES SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Give a full definition of arbitrage.
More informationAdvanced Futures Strategies
Advanced Futures Strategies 1. Suppose IBC stock is selling at $80 per share. Also, the T-bill rate with 180 days to maturity is 5%. Construct a synthetic futures contract with maturity in 180 days and
More informationPaper 2. Derivatives Investment Consultant Examination. Thailand Securities Institute November 2014
Derivatives Investment Consultant Examination Paper 2 Thailand Securities Institute November 2014 Copyright 2014, All right reserve Thailand Securities Institute (TSI) The Stock Exchange of Thailand Page
More informationFundamentals of Futures and Options (a summary)
Fundamentals of Futures and Options (a summary) Roger G. Clarke, Harindra de Silva, CFA, and Steven Thorley, CFA Published 2013 by the Research Foundation of CFA Institute Summary prepared by Roger G.
More informationInternational Equity Investing. Chap. 15 International Portfolio Investment. International Equity Investing. International Equity Investing
Chap. 15 International Portfolio Investment Benefits of International Bond Investing : the Addition of Currency Risk. Nov. 5, 00 by William Pugh 1. Offers more opportunities than a pure domestic portfolio:
More informationChapter 16: Financial Risk Management
Chapter 16: Financial Risk Management Introduction Overview of Financial Risk Management in Treasury Interest Rate Risk Foreign Exchange (FX) Risk Commodity Price Risk Managing Financial Risk The Benefits
More informationWeb. Chapter FINANCIAL INSTITUTIONS AND MARKETS
FINANCIAL INSTITUTIONS AND MARKETS T Chapter Summary Chapter Web he Web Chapter provides an overview of the various financial institutions and markets that serve managers of firms and investors who invest
More informationForeign Exchange Market INTERNATIONAL FINANCE. Function and Structure of FX Market. Market Characteristics. Market Attributes. Trading in Markets
Foreign Exchange Market INTERNATIONAL FINANCE Chapter 5 Encompasses: Conversion of purchasing power across currencies Bank deposits of foreign currency Credit denominated in foreign currency Foreign trade
More informationSOCIETY OF ACTUARIES FINANCIAL MATHEMATICS. EXAM FM SAMPLE QUESTIONS Financial Economics
SOCIETY OF ACTUARIES EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS Financial Economics June 2014 changes Questions 1-30 are from the prior version of this document. They have been edited to conform
More information11 Option. Payoffs and Option Strategies. Answers to Questions and Problems
11 Option Payoffs and Option Strategies Answers to Questions and Problems 1. Consider a call option with an exercise price of $80 and a cost of $5. Graph the profits and losses at expiration for various
More informationt = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3
MØA 155 PROBLEM SET: Summarizing Exercise 1. Present Value [3] You are given the following prices P t today for receiving risk free payments t periods from now. t = 1 2 3 P t = 0.95 0.9 0.85 1. Calculate
More informationINTEREST RATE SWAP (IRS)
INTEREST RATE SWAP (IRS) 1. Interest Rate Swap (IRS)... 4 1.1 Terminology... 4 1.2 Application... 11 1.3 EONIA Swap... 19 1.4 Pricing and Mark to Market Revaluation of IRS... 22 2. Cross Currency Swap...
More informationMBA 8230 Corporation Finance (Part II) Practice Final Exam #2
MBA 8230 Corporation Finance (Part II) Practice Final Exam #2 1. Which of the following input factors, if increased, would result in a decrease in the value of a call option? a. the volatility of the company's
More informationAn introduction to the foreign exchange market Moorad Choudhry September 2002
An introduction to the foreign exchange market Moorad Choudhry September 2002 The market in foreign exchange is an excellent example of a liquid, transparent and immediate global financial market. Rates
More informationa. What is the portfolio of the stock and the bond that replicates the option?
Practice problems for Lecture 2. Answers. 1. A Simple Option Pricing Problem in One Period Riskless bond (interest rate is 5%): 1 15 Stock: 5 125 5 Derivative security (call option with a strike of 8):?
More informationIntroduction to Binomial Trees
11 C H A P T E R Introduction to Binomial Trees A useful and very popular technique for pricing an option involves constructing a binomial tree. This is a diagram that represents di erent possible paths
More informationCHAPTER 8 MANAGEMENT OF TRANSACTION EXPOSURE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
CHAPTER 8 MANAGEMENT OF TRANSACTION EXPOSURE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. How would you define transaction exposure? How is it different from economic
More informationCorporate Finance: Final Exam
Corporate Finance: Final Exam Answer all questions and show necessary work. Please be brief. This is an open books, open notes exam. For partial credit, when discounting, please show the discount rate
More informationTwo-State Model of Option Pricing
Rendleman and Bartter [1] put forward a simple two-state model of option pricing. As in the Black-Scholes model, to buy the stock and to sell the call in the hedge ratio obtains a risk-free portfolio.
More informationInternational Financial Management. Prerequisites
International Financial Management Prerequisites 1. The quoted interest rate is 5% p.a. What is the effective interest rate for 6 months if the quoted interest rate is a) simple, b) annually compounded,
More information4. ANNEXURE 3 : PART 3 - FOREIGN EXCHANGE POSITION RISK
Annexure 3 (PRR) - Part 3, Clause 18 - Foreign Exchange Position Risk Amount 4 ANNEXURE 3 : PART 3 - FOREIGN EXCHANGE POSITION RISK (a) CLAUSE 18 - FOREIGN EXCHANGE POSITION RISK AMOUNT (i) Rule PART 3
More informationCHAPTER 7: PROPERTIES OF STOCK OPTION PRICES
CHAPER 7: PROPERIES OF SOCK OPION PRICES 7.1 Factors Affecting Option Prices able 7.1 Summary of the Effect on the Price of a Stock Option of Increasing One Variable While Keeping All Other Fixed Variable
More informationCFA Level -2 Derivatives - I
CFA Level -2 Derivatives - I EduPristine www.edupristine.com Agenda Forwards Markets and Contracts Future Markets and Contracts Option Markets and Contracts 1 Forwards Markets and Contracts 2 Pricing and
More informationCHAPTER 5 THE MARKET FOR FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
CHAPTER 5 THE MARKET FOR FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Give a full definition of the market for foreign exchange. Answer: Broadly
More informationHedging with Futures and Options: Supplementary Material. Global Financial Management
Hedging with Futures and Options: Supplementary Material Global Financial Management Fuqua School of Business Duke University 1 Hedging Stock Market Risk: S&P500 Futures Contract A futures contract on
More informationCHAPTER 21: OPTION VALUATION
CHAPTER 21: OPTION VALUATION 1. Put values also must increase as the volatility of the underlying stock increases. We see this from the parity relation as follows: P = C + PV(X) S 0 + PV(Dividends). Given
More informationForwards, Swaps and Futures
IEOR E4706: Financial Engineering: Discrete-Time Models c 2010 by Martin Haugh Forwards, Swaps and Futures These notes 1 introduce forwards, swaps and futures, and the basic mechanics of their associated
More informationFinance 350: Problem Set 6 Alternative Solutions
Finance 350: Problem Set 6 Alternative Solutions Note: Where appropriate, the final answer for each problem is given in bold italics for those not interested in the discussion of the solution. I. Formulas
More informationEC372 Bond and Derivatives Markets Topic #5: Options Markets I: fundamentals
EC372 Bond and Derivatives Markets Topic #5: Options Markets I: fundamentals R. E. Bailey Department of Economics University of Essex Outline Contents 1 Call options and put options 1 2 Payoffs on options
More informationHedging Using Forward Contracts
10 CHAPTER 1 Business Snapshot1.1 Hedge Funds Hedge funds have become major users of derivatives for hedging, speculation, and arbitrage. A hedge fund is similar to a mutual fund in that it invests funds
More informationSession IX: Lecturer: Dr. Jose Olmo. Module: Economics of Financial Markets. MSc. Financial Economics
Session IX: Stock Options: Properties, Mechanics and Valuation Lecturer: Dr. Jose Olmo Module: Economics of Financial Markets MSc. Financial Economics Department of Economics, City University, London Stock
More informationArbitrage. In London: USD/GBP 0.645 In New York: USD/GBP 0.625.
Arbitrage 1. Exchange rate arbitrage Exchange rate arbitrage is the practice of taking advantage of inconsistent exchange rates in different markets by selling in one market and simultaneously buying in
More informationLecture 15: Final Topics on CAPM
Lecture 15: Final Topics on CAPM Final topics on estimating and using beta: the market risk premium putting it all together Final topics on CAPM: Examples of firm and market risk Shorting Stocks and other
More informationor enters into a Futures contract (either on the IPE or the NYMEX) with delivery date September and pay every day up to maturity the margin
Cash-Futures arbitrage processes Cash futures arbitrage consisting in taking position between the cash and the futures markets to make an arbitrage. An arbitrage is a trade that gives in the future some
More informationMakeup Exam MØA 155 Financial Economics February 2010 Permitted Material: Calculator, Norwegian/English Dictionary
University of Stavanger (UiS) Stavanger Masters Program Makeup Exam MØA 155 Financial Economics February 2010 Permitted Material: Calculator, Norwegian/English Dictionary The number in brackets is the
More informationFinance 436 Futures and Options Review Notes for Final Exam. Chapter 9
Finance 436 Futures and Options Review Notes for Final Exam Chapter 9 1. Options: call options vs. put options, American options vs. European options 2. Characteristics: option premium, option type, underlying
More informationThis act of setting a price today for a transaction in the future, hedging. hedge currency exposure, short long long hedge short hedge Hedgers
Section 7.3 and Section 4.5 Oct. 7, 2002 William Pugh 7.3 Example of a forward contract: In May, a crude oil producer gets together with a refiner to agree on a price for crude oil. This price is for crude
More informationAdvanced forms of currency swaps
Advanced forms of currency swaps Basis swaps Basis swaps involve swapping one floating index rate for another. Banks may need to use basis swaps to arrange a currency swap for the customers. Example A
More informationCHAPTER 12 CHAPTER 12 FOREIGN EXCHANGE
CHAPTER 12 CHAPTER 12 FOREIGN EXCHANGE CHAPTER OVERVIEW This chapter discusses the nature and operation of the foreign exchange market. The chapter begins by describing the foreign exchange market and
More informationHedging Strategies Using
Chapter 4 Hedging Strategies Using Futures and Options 4.1 Basic Strategies Using Futures While the use of short and long hedges can reduce (or eliminate in some cases - as below) both downside and upside
More informationChapter 8 Financial Options and Applications in Corporate Finance ANSWERS TO END-OF-CHAPTER QUESTIONS
Chapter 8 Financial Options and Applications in Corporate Finance ANSWERS TO END-OF-CHAPTER QUESTIONS 8-1 a. An option is a contract which gives its holder the right to buy or sell an asset at some predetermined
More informationThe Market for Foreign Exchange
The Market for Foreign Exchange Chapter Objective: 5 Chapter Five This chapter introduces the institutional framework within which exchange rates are determined. It lays the foundation for much of the
More informationForeign Exchange Investments Discover the World of Currencies. Private Banking USA
Foreign Exchange Investments Discover the World of Currencies Credit Suisse Securities (USA) llc Private Banking USA 2 Foreign exchange: There s no ignoring the largest market in the world. Introduction
More informationNote: There are fewer problems in the actual Final Exam!
HEC Paris Practice Final Exam Questions Version with Solutions Financial Markets Fall 2013 Note: There are fewer problems in the actual Final Exam! Problem 1. Are the following statements True, False or
More informationChapter Review and Self-Test Problems
CHAPTER 22 International Corporate Finance 771 3. The fundamental relationships between international financial variables: a. Absolute and relative purchasing power parity, PPP b. Interest rate parity,
More informationBASKET A collection of securities. The underlying securities within an ETF are often collectively referred to as a basket
Glossary: The ETF Portfolio Challenge Glossary is designed to help familiarize our participants with concepts and terminology closely associated with Exchange- Traded Products. For more educational offerings,
More informationInterest Rate Futures. Chapter 6
Interest Rate Futures Chapter 6 1 Day Count Convention The day count convention defines: The period of time to which the interest rate applies. The period of time used to calculate accrued interest (relevant
More informationMargin Requirements & Margin Calls
Margin Requirements & Margin Calls Dr. Patrick Toche References : Zvi Bodie, Alex Kane, Alan J. Marcus. Essentials of Investment. McGraw- Hill Irwin. Chapter 3 of the Bodie-Kane-Marcus textbook will be
More informationCHAPTER 15 INTERNATIONAL PORTFOLIO INVESTMENT SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
CHAPTER 15 INTERNATIONAL PORTFOLIO INVESTMENT SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. What factors are responsible for the recent surge in international portfolio
More information