Advanced Futures Strategies
|
|
- Camilla Greene
- 8 years ago
- Views:
Transcription
1 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 futures price of $82. In equilibrium, what should be the price of this futures contract? What does that tell us about the expected return from holding the stock? What difference would it make if the stock were expected to pay dividends? 2. Again, suppose IBC stock is selling at $80 per share, and the T-bill rate with 180 days to maturity is 5%. In the previous problem, you constructed a synthetic futures contract with maturity in 180 days and futures price of $82. Now, create a portfolio of put and call options that is equivalent to the futures contract. Suppose the standard deviation for the stock s return is 25% over the period involved here. Use the options calculator to compute the value of the put and the call in your equivalent portfolio. 3. Again, suppose IBC stock is selling at $80 per share, the standard deviation for the stock is 25%, and the T-bill rate with 180 days to maturity is 5%. Construct a synthetic put option with 180 days to expiration and exercise price of $40. Suppose you wanted to use this in a manner equivalent to having an insurance policy to protect against the stock price falling below $40. Explain how you would maintain the protection with a $40 floor as the stock price moves. Repeat with a floor of $ Refer again to problem 3. Could you establish insurance with a floating protection level, so that the present value of the exercise price is always exactly half the current stock price? Would this be harder or easier to maintain than the insurance strategy described in problem 3? 5. Attached is an article from the Wall Street Journal (3/27/01: C5) about a proposal to offer futures contracts on individual stocks. These so-called Universal Stock Futures (USFs) are described as providing a useful new tool for investors, particularly for individual investors who might find it difficult to sell stocks short. Theoretically, one could replicate these futures contracts synthetically (refer to problem 1) or with option spreads (see problem 2). Discuss the practical difficulties of each of these alternatives. 6. Explain how the repurchase agreement plays a role in the pricing of futures contracts. What is the implied repo rate? 7. On January 28, the T-bill futures contract expiring on March 17 (not a leap year) was priced at 93 (IMM Index). The T-bill maturing at that time was priced at a discount of 7.10 and the T-bill maturing on June 16 at a discount of Determine the implied repo rate. Is there an arbitrage opportunity? 8. Suppose you are managing a diversified stock portfolio with beta of Describe how you could use index futures contracts to change the beta of your position to Prof. Kensinger page 1
2 9. Suppose you are managing a stock portfolio worth $12,500,000. It has a beta of During the next three months, you fear there might be a correction in the market that could take the market down about 5%. To reduce the risk of loss if this happens, you would like to reduce the beta of your portfolio to 1. A stock index futures contract with the appropriate expiration is priced at 1250 with a multiplier of 250. a) Should you buy or sell futures? How many contracts should you use? b) Suppose that after a while a correction similar to the one you feared actually occurs. Your portfolio has fallen in value to $11,750,000. The price in the market index future you sold has fallen to , and you unwind the hedge. Determine the profit on the futures contract and the overall portfolio return over the life of the hedge. How close did you come to the desired result? 10. Suppose you are a multi-national company with supplies of crude oil stored in several nations. You observe the following prices: Euro per Dollar exchange rate is 0.60 spot and 0.62 for 180-day forward. German interest rate is 5% compounded daily. U.S. interest rate is 3% compounded daily. Explain how you could take advantage of this situation using just your oil inventories, without changing the total amount of oil you own worldwide. You won t need to borrow money or invest in bonds in either country. Just assume that oil futures markets are in equilibrium in both countries. Prof. Kensinger page 2
3 Nasdaq, Liffe Plan Stock-Futures Venture By SILVIA ASCARELLI Staff Reporter of THE WALL STREET JOURNAL March 27, 2001 Page C5 LONDON-The Nasdaq Stock Market and the London International Financial Futures and Options Exchange, or Liffe, said they will jointly introduce single-stock futures in the U.S. later this year. The rare trans-atlantic partnership depends on an anticipated change in U.S. regulations, which is expected by year end. U.S. investors have been barred from investing in single-stock futures, known at Liffe as Universal Stock Futures, or USFs, because of fears of market manipulation. With such contracts, investors commit themselves to buying or selling a security at a set price on a certain date. Among other things, investors can use singlestock futures for short sales. In a short sale, an investor borrows a security, sells it and hopes to buy it back later at a lower price, pocketing the difference. Attracting Nasdaq is a coup for Liffe, which only three years ago was in disarray after the bulk of trading in futures on German government bonds, Liffe's biggest product, shifted to the rival Swiss-German Eurex exchange. The accord with Nasdaq gives Liffe access to a huge new group of potential investors in single-stock futures, which were introduced by Liffe in London two months ago. Trading currently averages about 200 contracts a day in each of 30 USFs currently listed on Liffe, or about half the average daily volume in each of the 98 individual equity options contracts now traded on the exchange. That is small stuff for Liffe, which trades nearly 750,000 contracts every day, mostly tied to bonds and money markets, but Which is trying to boost its stock-reiated business. It also represents a new foothold in Europe for Nasdaq, which is expected to announce its intent to take a majority stake in Easdaq, a floundering pan-european market patterned after Nasdaq, later this week. But Nasdaq has otherwise struggled to establish itself in Europe, and securities firms refused to back an earlier plan to launch a new pan-european exchange that would have been known as Nasdaq Europe. Executives from the two exchanges said they could eventually take their partnership to Asia, where Nasdaq is already operating a stock market with the Osaka Stock Exchange. The UPS currently traded on Liffe are based on some of the biggest stocks in Britain, continental Europe and the U.S., including Nasdaq-listed stocks like Microsoft Corp. and Cisco Systems Inc. The exchange plans to add an additional 10 next month. Liffe Chairman Brian Williamson said the exchange is aiming for about 100 USFs by year end. UPS are aimed at individual investors, who generally can't short stocks, as well as at institutional investors. The partnership will use Liffe's Connect electronic trading system and will trade during the U.S. business day. Executives declined to disclose other terms of the deal. While Mr. Williamson confidently predicted that USFs mark a revolution in equity trading, other exchanges have struggled with similar concepts. Eurex, the world's biggest Prof. Kensinger page 3
4 derivatives market, lists about 90 "Lepos," or low exercise price options, which it says function in the same way as USFs. Originally launched in Switzerland as a way to avoid stamp duty, the options have attracted no trading for a few years, a spokesman said. Prof. Kensinger page 4
5 Financial Derivatives Solutions: Problem Set 2 Spring We can use the put-call parity relationship to reason our way through this question. First, recognize that a long futures contract is equivalent to a long call and a short put with exercise prices the same as the futures price. We start with the put-call parity relationship: C(S,X,t) + B(X,t) = S + P(S,X,t) This rearranges to the following: C(S,X,t) P(S,X,t) = S B(X,t) We can calculate the present value of $82 to be received in 180 days, finding it to be $80. Then, substituting the known values we find: C(S,X,t) P(S,X,t) = = 0 If the futures price is an accurate predictor of what the spot price will be at expiration, the conclusion is that the expected return from holding the stock is the risk-free rate. If the stock were expected to pay dividends, then the storage cost would in fact be a benefit to the holder. Expected dividends would be included in the normal cost-of-carry basis. Any risk-adjustment done in the discounting would be applied to the dividend portion only. 2. We have already done the equivalent portfolio (a long futures contract equals a long call with a short put). The values of the put and call are almost identical (approximately $5.59 for each). The difference between the two is less than 3/10ths of a penny, which equals the difference between the current stock price and the exact present value of the exercise price. You can try different volatilities, but will find exactly the same result. Conclusion: In a normal cost-of-carry situation, the equilibrium futures price is the present value of the futures price (discounted at the risk-free rate) minus the spot price adjusted for storage costs. 3. Once again we can use the put-call parity relationship to reason our way through this question. We start with the put-call parity relationship: C(S,X,t) + B(X,t) = S + P(S,X,t) This rearranges to the following: C(S,X,t) + B(X,t) S = P(S,X,t) Now, we also know that: C(S,X,t) = S * N(d 1 ) B(X,t) * N(d 2 ) Substituting this into the put-call parity relationship, we find: P(S,X,t) = S * N(d 1 ) B(X,t) * N(d 2 ) + B(X,t) S This simplifies as follows: P(S,X,t) = S * (N(d 1 ) 1) + B(X,t) * (1 N(d 2 )) Therefore, the synthetic put can be constructed with the right combination of selling stock and purchasing bonds. The amounts are defined by N(d 1 ) and N(d2). With stock price of $80 and exercise price of $40, N(d 1 ) and N(d 2 ) both approach 1. The put is nearly without value, and need not be synthesized. If the exercise price were $60, N(d 1 ) would be.9690 and N(d 2 ) would be Then for each put to be synthesized, you would sell.031 shares of stock and buy.0454 bonds. 4. Such a policy would be easier to maintain because the prime input into calculating N(d 1 ) and N(d 2 ) would be held constant. This prime ingredient is the ratio of the stock price to the present value of the exercise price. 5. For class discussion. 6. The implied repo rate for a given term is the futures price minus the spot price Prof. Kensinger
6 Financial Derivatives Solutions: Problem Set 2 Spring 2015 divided by the spot price. In equilibrium, this is the internal rate of return from a repo agreement. If equilibrium were not maintained, one could arbitrage repo agreements against futures contracts. 7. With IMM Index of 93, the futures price is the following: f = 100 (100 93) (90/360) = For a million-dollar contract, then, the futures price would be $982,500 (this contract is for delivery of a specified contract on the expiration date). If the delivery in the futures contract is for a T-bill with 90 days to maturity, an arbitrage might be available. There are 48 days from Jan 28 to Mar 17, and 91 days between Mar 17 and June 16 (assuming it isn t a leap year). From Jan 28 to June 16 there are 139 days. Let us consider selling bills maturing March 17, selling the futures contract, and buying the bills maturing June 16 (which would provide the deliverable instrument in the futures contract). Then for each $1,000,000 of face value, the price paid for the June bills would be $973, on Jan 28. We can borrow against the $982,500 to be received March 17 by selling March bills short, providing $973,370 on Jan 28. This leaves an immediate profit of $303. The implied repo rate is the rate earned from buying at the spot price and selling at the futures price. On January 28 the futures price is 982,500 and the spot price is 973,067 with 48 days to expiration of the futures contract. We have FV, PV, and N, so we can use the financial calculator to measure the implicit interest rate. It comes out as an APR of 7.34% with daily compounding. This is out of equilibrium with the other quoted discounts. 8. The desired beta is half the beta for the portfolio. If the beta for the futures contract is one, the amount involved in the futures position would be half the value of the portfolio. The beta of the futures contract may not be exactly one, so to be precise in that event, multiply 0.5 times the beta of the futures contract The beta of the futures contract on the stock market index is e (r-d)t 9. Part a: This is a specific application of the principal you developed in the previous problem. Here the desired beta divided by the portfolio beta is 1/1.25. Let s keep it simple and say the beta for the futures contract is one, so the amount of the futures position would be ((1/1.25) 1)12,500,000 = 2,500,000 Divide this by the index and then by the multiplier in order to translate the amount involved into the number of contracts needed. The answer is 8 contracts. Part b: The index has dropped 5.5%, and the portfolio has dropped 5.5% from their original values (6/5.5 is only 1.09, so the drop in the portfolio was not as great as its beta would predict, and so there may have been some alpha capture). Profit from the futures position would be the number of contracts times the multiplier times So, the profit would be $137,500. Added to the new value of the portfolio, you would have $11,887,500, reducing the loss to 4.9% of the original value of the portfolio. This is a bit less than the 5.5% drop on the index, which is consistent with a beta of 1 combined with some alpha capture. Prof. Kensinger
7 Financial Derivatives Solutions: Problem Set 2 Spring Here you could convert the strategy from Set 1, problem 13. An arbitrage to take advantage of this involves the following steps: a. Sell oil worth 600,000 in Germany and buy futures contracts to replace the oil. b. Convert the Euros to Dollars and buy $1,000,000 worth of oil in the U.S. Sell futures contracts to reduce the price risk of selling the oil again in 180 days. c. Contract to exchange the future value of your Dollars for Euros at $1 = 0.62 in 180 days. Assuming that the basis reflects the interest rates and storage costs in the country where delivery will occur, you can expect the same profit from this strategy as you would have from the bond-based arbitrage in problem 13 of the first problem set. Prof. Kensinger
Use the option quote information shown below to answer the following questions. The underlying stock is currently selling for $83.
Problems on the Basics of Options used in Finance 2. Understanding Option Quotes Use the option quote information shown below to answer the following questions. The underlying stock is currently selling
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 informationChapter 20 Understanding Options
Chapter 20 Understanding Options Multiple Choice Questions 1. Firms regularly use the following to reduce risk: (I) Currency options (II) Interest-rate options (III) Commodity options D) I, II, and III
More informationOptions/1. Prof. Ian Giddy
Options/1 New York University Stern School of Business Options Prof. Ian Giddy New York University Options Puts and Calls Put-Call Parity Combinations and Trading Strategies Valuation Hedging Options2
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 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 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 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 informationOverview. Option Basics. Options and Derivatives. Professor Lasse H. Pedersen. Option basics and option strategies
Options and Derivatives Professor Lasse H. Pedersen Prof. Lasse H. Pedersen 1 Overview Option basics and option strategies No-arbitrage bounds on option prices Binomial option pricing Black-Scholes-Merton
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 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 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 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 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 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 informationOptions: Valuation and (No) Arbitrage
Prof. Alex Shapiro Lecture Notes 15 Options: Valuation and (No) Arbitrage I. Readings and Suggested Practice Problems II. Introduction: Objectives and Notation III. No Arbitrage Pricing Bound IV. The Binomial
More informationPractice Questions for Midterm II
Finance 333 Investments Practice Questions for Midterm II Winter 2004 Professor Yan 1. The market portfolio has a beta of a. 0. *b. 1. c. -1. d. 0.5. By definition, the beta of the market portfolio is
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 informationCHAPTER 22 Options and Corporate Finance
CHAPTER 22 Options and Corporate Finance Multiple Choice Questions: I. DEFINITIONS OPTIONS a 1. A financial contract that gives its owner the right, but not the obligation, to buy or sell a specified asset
More informationSOLUTION1. exercise 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
More informationOption Payoffs. Problems 11 through 16: Describe (as I have in 1-10) the strategy depicted by each payoff diagram. #11 #12 #13 #14 #15 #16
Option s Problems 1 through 1: Assume that the stock is currently trading at $2 per share and options and bonds have the prices given in the table below. Depending on the strike price (X) of the option
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 information2. How is a fund manager motivated to behave with this type of renumeration package?
MØA 155 PROBLEM SET: Options Exercise 1. Arbitrage [2] In the discussions of some of the models in this course, we relied on the following type of argument: If two investment strategies have the same payoff
More informationFactors Affecting Option Prices
Factors Affecting Option Prices 1. The current stock price S 0. 2. The option strike price K. 3. The time to expiration T. 4. The volatility of the stock price σ. 5. The risk-free interest rate r. 6. The
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 informationCHAPTER 21: OPTION VALUATION
CHAPTER 21: OPTION VALUATION PROBLEM SETS 1. The value of a put option also increases with the volatility of the stock. We see this from the put-call parity theorem as follows: P = C S + PV(X) + PV(Dividends)
More informationAnswers to Chapter Review and Self-Test Problems
CHAPTER 14 Options and Corporate Finance 483 minimum value of a convertible bond is given by its straight bond value or its conversion value, whichever is greater. 6. Many other corporate securities have
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 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 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 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 informationOption Valuation. Chapter 21
Option Valuation Chapter 21 Intrinsic and Time Value intrinsic value of in-the-money options = the payoff that could be obtained from the immediate exercise of the option for a call option: stock price
More informationCHAPTER 20. Financial Options. Chapter Synopsis
CHAPTER 20 Financial Options Chapter Synopsis 20.1 Option Basics A financial option gives its owner the right, but not the obligation, to buy or sell a financial asset at a fixed price on or until a specified
More informationA) 1.8% B) 1.9% C) 2.0% D) 2.1% E) 2.2%
1 Exam FM Questions Practice Exam 1 1. Consider the following yield curve: Year Spot Rate 1 5.5% 2 5.0% 3 5.0% 4 4.5% 5 4.0% Find the four year forward rate. A) 1.8% B) 1.9% C) 2.0% D) 2.1% E) 2.2% 2.
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 informationINTRODUCTION TO OPTIONS MARKETS QUESTIONS
INTRODUCTION TO OPTIONS MARKETS QUESTIONS 1. What is the difference between a put option and a call option? 2. What is the difference between an American option and a European option? 3. Why does an option
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 informationHow To Invest In Stocks And Bonds
Review for Exam 1 Instructions: Please read carefully The exam will have 21 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation
More informationEXP 481 -- Capital Markets Option Pricing. Options: Definitions. Arbitrage Restrictions on Call Prices. Arbitrage Restrictions on Call Prices 1) C > 0
EXP 481 -- Capital Markets Option Pricing imple arbitrage relations Payoffs to call options Black-choles model Put-Call Parity Implied Volatility Options: Definitions A call option gives the buyer the
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 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 informationChapter 11 Options. Main Issues. Introduction to Options. Use of Options. Properties of Option Prices. Valuation Models of Options.
Chapter 11 Options 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. Forwards
More informationFinal Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator
University of Stavanger (UiS) Stavanger Masters Program Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator The number in brackets is the weight for each problem. The weights
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 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 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 informationFixed Income: Practice Problems with Solutions
Fixed Income: Practice Problems with Solutions Directions: Unless otherwise stated, assume semi-annual payment on bonds.. A 6.0 percent bond matures in exactly 8 years and has a par value of 000 dollars.
More informationFIN 3710. Final (Practice) Exam 05/23/06
FIN 3710 Investment Analysis Spring 2006 Zicklin School of Business Baruch College Professor Rui Yao FIN 3710 Final (Practice) Exam 05/23/06 NAME: (Please print your name here) PLEDGE: (Sign your name
More informationOptions (1) Class 19 Financial Management, 15.414
Options (1) Class 19 Financial Management, 15.414 Today Options Risk management: Why, how, and what? Option payoffs Reading Brealey and Myers, Chapter 2, 21 Sally Jameson 2 Types of questions Your company,
More informationTrading Strategies Involving Options. Chapter 11
Trading Strategies Involving Options Chapter 11 1 Strategies to be Considered A risk-free bond and an option to create a principal-protected note A stock and an option Two or more options of the same type
More informationFIN 411 -- Investments Option Pricing. Options: Definitions. Arbitrage Restrictions on Call Prices. Arbitrage Restrictions on Call Prices
FIN 411 -- Investments Option Pricing imple arbitrage relations s to call options Black-choles model Put-Call Parity Implied Volatility Options: Definitions A call option gives the buyer the right, but
More informationCHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS
1 CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS (f) 1 The three step valuation process consists of 1) analysis of alternative economies and markets, 2) analysis of alternative industries
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 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 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 informationChapter 6 The Tradeoff Between Risk and Return
Chapter 6 The Tradeoff Between Risk and Return MULTIPLE CHOICE 1. Which of the following is an example of systematic risk? a. IBM posts lower than expected earnings. b. Intel announces record earnings.
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 informationConvenient Conventions
C: call value. P : put value. X: strike price. S: stock price. D: dividend. Convenient Conventions c 2015 Prof. Yuh-Dauh Lyuu, National Taiwan University Page 168 Payoff, Mathematically Speaking The payoff
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 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 information3. If an individual investor buys or sells a currently owned stock through a broker, this is a primary market transaction.
Spring 2012 Finance 3130 Sample Exam 1A Questions for Review 1. The form of organization for a business is an important issue, as this decision has very significant effect on the income and wealth of the
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 informationInvestments, Chapter 4
Investments, Chapter 4 Answers to Selected Problems 2. An open-end fund has a net asset value of $10.70 per share. It is sold with a front-end load of 6 percent. What is the offering price? Answer: When
More informationOption Premium = Intrinsic. Speculative Value. Value
Chapters 4/ Part Options: Basic Concepts Options Call Options Put Options Selling Options Reading The Wall Street Journal Combinations of Options Valuing Options An Option-Pricing Formula Investment in
More informationChapter 11, Risk and Return
Chapter 11, Risk and Return 1. A portfolio is. A) a group of assets, such as stocks and bonds, held as a collective unit by an investor B) the expected return on a risky asset C) the expected return on
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 informationPart A: The put call parity relation is: call + present value of exercise price = put + stock price.
Corporate Finance Mod 20: Options, put call parity relation, Practice Problem s ** Exercise 20.1: Put Call Parity Relation! One year European put and call options trade on a stock with strike prices of
More informationPayoff (Riskless bond) Payoff(Call) Combined
Short-Answer 1. Is the payoff to stockholders most similar to the payoff on a long put, a long call, a short put, a short call or some combination of these options? Long call 2. ebay s current stock price
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 information2 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 informationThe Binomial Option Pricing Model André Farber
1 Solvay Business School Université Libre de Bruxelles The Binomial Option Pricing Model André Farber January 2002 Consider a non-dividend paying stock whose price is initially S 0. Divide time into small
More informationSummary of Interview Questions. 1. Does it matter if a company uses forwards, futures or other derivatives when hedging FX risk?
Summary of Interview Questions 1. Does it matter if a company uses forwards, futures or other derivatives when hedging FX risk? 2. Give me an example of how a company can use derivative instruments to
More informationLecture 5: Put - Call Parity
Lecture 5: Put - Call Parity Reading: J.C.Hull, Chapter 9 Reminder: basic assumptions 1. There are no arbitrage opportunities, i.e. no party can get a riskless profit. 2. Borrowing and lending are possible
More informationCHAPTER 10 RISK AND RETURN: THE CAPITAL ASSET PRICING MODEL (CAPM)
CHAPTER 10 RISK AND RETURN: THE CAPITAL ASSET PRICING MODEL (CAPM) Answers to Concepts Review and Critical Thinking Questions 1. Some of the risk in holding any asset is unique to the asset in question.
More information2. Exercising the option - buying or selling asset by using option. 3. Strike (or exercise) price - price at which asset may be bought or sold
Chapter 21 : Options-1 CHAPTER 21. OPTIONS Contents I. INTRODUCTION BASIC TERMS II. VALUATION OF OPTIONS A. Minimum Values of Options B. Maximum Values of Options C. Determinants of Call Value D. Black-Scholes
More informationCHAPTER 15. Option Valuation
CHAPTER 15 Option Valuation Just what is an option worth? Actually, this is one of the more difficult questions in finance. Option valuation is an esoteric area of finance since it often involves complex
More informationwww.optionseducation.org OIC Options on ETFs
www.optionseducation.org Options on ETFs 1 The Options Industry Council For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations,
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 informationUsing The Stock Market Game (SMG)
Using The Stock Market Game (SMG) Created by Amy Cornelisen, Garin College What is a Company? A is a person or group of persons that create a product for others to buy. The product may be something that
More informationChapter 21: Options and Corporate Finance
Chapter 21: Options and Corporate Finance 21.1 a. An option is a contract which gives its owner the right to buy or sell an underlying asset at a fixed price on or before a given date. b. Exercise is the
More informationPurpose of Selling Stocks Short JANUARY 2007 NUMBER 5
An Overview of Short Stock Selling An effective short stock selling strategy provides an important hedge to a long portfolio and allows hedge fund managers to reduce sector and portfolio beta. Short selling
More informationTPPE17 Corporate Finance 1(5) SOLUTIONS RE-EXAMS 2014 II + III
TPPE17 Corporate Finance 1(5) SOLUTIONS RE-EXAMS 2014 II III Instructions 1. Only one problem should be treated on each sheet of paper and only one side of the sheet should be used. 2. The solutions folder
More informationOne Period Binomial Model
FIN-40008 FINANCIAL INSTRUMENTS SPRING 2008 One Period Binomial Model These notes consider the one period binomial model to exactly price an option. We will consider three different methods of pricing
More informationLecture 09: Multi-period Model Fixed Income, Futures, Swaps
Lecture 09: Multi-period Model Fixed Income, Futures, Swaps Prof. Markus K. Brunnermeier Slide 09-1 Overview 1. Bond basics 2. Duration 3. Term structure of the real interest rate 4. Forwards and futures
More informationINVESTMENT DICTIONARY
INVESTMENT DICTIONARY Annual Report An annual report is a document that offers information about the company s activities and operations and contains financial details, cash flow statement, profit and
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 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 informationOption Values. Option Valuation. Call Option Value before Expiration. Determinants of Call Option Values
Option Values Option Valuation Intrinsic value profit that could be made if the option was immediately exercised Call: stock price exercise price : S T X i i k i X S Put: exercise price stock price : X
More information9 Basics of options, including trading strategies
ECG590I Asset Pricing. Lecture 9: Basics of options, including trading strategies 1 9 Basics of options, including trading strategies Option: The option of buying (call) or selling (put) an asset. European
More informationSingle-Stock Futures. Remarks by CBOE Chairman and CEO William J. Brodsky to the Investment Analysts Society of Chicago on March 1, 2001
Single-Stock Futures Remarks by CBOE Chairman and CEO William J. Brodsky to the Investment Analysts Society of Chicago on March 1, 2001 I want to begin by telling you that later this year investors will
More informationINSTALMENT WARRANT MECHANICS
INSTALMENT WARRANT MECHANICS Antonie A. Kotzé Financial Chaos Theory consultant@quantonline.co.za Abstract Instalment warrants are very popular in Australia and these instruments have been listed by Nedbank
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 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 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 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 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 informationb. June expiration: 95-23 = 95 + 23/32 % = 95.71875% or.9571875.9571875 X $100,000 = $95,718.75.
ANSWERS FOR FINANCIAL RISK MANAGEMENT A. 2-4 Value of T-bond Futures Contracts a. March expiration: The settle price is stated as a percentage of the face value of the bond with the final "27" being read
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 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 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 information