Derivatives study information essay

1 ) Both ahead and options contracts contracts happen to be traded about exchanges.: Phony 2 . Futures and options contracts are standardized; frontward contracts aren’t.: True 3. The S&P500 index futures and options contract is actually a physical delivery contract. The pork bellies futures agreement is a cash-settled contract.: Phony

4. An American option can be exercised anytime during their life.: Authentic 5. A put alternative will always be practiced at maturity if the affect price is more than the root asset selling price.: True

6. The fact that the exchange is the counter-party to every futures contract issued is important because it gets rid of interest rate risk.

: False six. Index accommodement is a approach which exploits differences among actual index futures prices and their no-arbitrage values.: The case

8. Whom from the pursuing list will be considered a speculator by entering into a futures or options deal on items? (b) Hammer toe delivery truck driver 9. All of the positions listed can benefit from a cost decline, besides: (a) Brief 10. A technique consists of investing in a market index product by $830 and longing a put on the index using a strike of 0.

If the put premium can be $18. 00 and rates of interest are zero. 5% each month (monthly compounding), what is the profit or reduction at expiry (in six months) in case the market index is $810? (d) $43. 76 reduction

11. A strategy consists of yearning a put on the market index with a affect of 830 and shorting a call up option in the marketplace index with a strike price of 830. The set premium can be $18. 00 and the phone premium is $44. 00. Interest rates happen to be 0. five per cent per month (monthly compounding). Determine the net income or reduction if the index price in expiration is $830 (in 6 months). (c) $26. 79 gain

12. Which of the pursuing statements does NOT accurately echo the relationship between securities and synthetic ahead contracts? (c) Prepaid forward  forwards ” no coupon bond 13. (3points) If you anticipate a market downturn, one potential defensive approach would be to b) sell stock index options contracts 14. Fisher Corp. common stock is priced at $36. 50 per share. The company merely paid the $0. 50 quarterly gross. Interest rates will be 6. 0% per year (continuously compounded). A $35. 00 strike European call, maturing in six months, sells intended for $3. twenty. What is the cost of a 6- month, $35. 00 strike put choice? (b) $1. 64

12-15. Which of the following American options will never be exercised early on? (d) Call on a non-dividend paying share 16. Contact options with strikes of $30, 35 dollars, and $40 have option premiums of $2. 00, $1. 70, and $1. 50, respectively. Using affect price convexity, which choice premium, if perhaps any, is definitely not possible? (d) All are likely

17. Calculate  for the following phone option. The stock is selling pertaining to $23. 55. The affect price is $25. The likely stock rates at the end of 6 months are $27. 25 and $21. 75. (a) 0. 4091 18. (3points) A stock can be selling for $53. 20. Interest rates happen to be 6. 0% (continuously compounded) and the earnings on the stock have a standard deviation of 24. 0%. What is the forecasted up movement in the stock on the 6-month period? (a) $64. 96

1 ) An investor together sells 1 September phone option within the S&P 500 Index with an exercise price of 1400 and one September put alternative on the S&P 500 Index with an exercise cost of 1400.

a. Precisely what is the brand of this technique?

Response: This is a written straddle on the S&P500 index which has a strike price of 1, 400. b. Provided these positions, explain the investor’s perspective of the worth of the S&P index. Response: The buyer is having a nondirectional perspective of the S&P500 index. The investor features sold the same number of put and call alternatives. Thus, their view of volatility can be symmetric. The investor thinks will not be a lot of movement in the S&P500 index through Sept. 2010.

c. For what range of share prices will the position bring about a profit? Solution: The size of the net income will depend on the premiums. The bigger the monthly premiums the larger kids of the earnings. The profit selection will equal: 1, 4 hundred ” FV (call  put premiums) Stock cost 1400 FV(call put premiums) 2 . The required condition pertaining to early exercise is that we prefer to receive some thing sooner rather than later. With a dividend spending call and a non-dividend paying place, what do all of us receive? Solution: With the contact and the place we receive the dividend within the stock as well as the interest for the strike, correspondingly.

3. Gatwick United Corp. common stock is priced at $74. 20 per share. The company just paid out its $1. 10 quarterly dividend. Interest rates are 6. 0% (continuously compounded). A $70. 00 strike Western call, maturation in six months, sells to get $6. 60. How much accommodement profit/loss is done by shorting the corresponding Western european put, which is priced at $2. 50? Answer: No-arbitrage selling price of Place = C + Ke-r×T ” (S0 ” PV(D)) = six. 50 & 70 e(-0. 06/2) ” (74. 20 ” 1 ) 10 e(-0. 06/4) ” 1 . 12 e(-0. 06/2)) = installment payments on your 38

P/L = installment payments on your 50 ” 2 . 32 = zero. 12 profit

four. Suppose Western put rates are given by

What no-arbitrage property is violated? What spread position would you value to effect arbitrage? Demonstrate which the spread position is an arbitrage. Response: The difference in put payments is higher than the difference in strike prices. We could participate in arbitrage selling off the 55-strike put and buying the 50-strike put, the bull spread.

5. (10 points) Allow S=40, K=40, r=8% (continuously compounded), σ=30%, =0, T=0. 5 years, and volume of binomial periods=2. Compute the values of American call and put alternatives.

Payoff to get

Long ahead = Area price at expiration ” Forward selling price ï‚® Brief forward = Forward value ” Location price for expiration A call option gives the owner the right although not the obligation to acquire the underlying asset by a established price throughout a predetermined time frame

¢ Strike (or exercise) cost: the amount paid by the option buyer pertaining to the advantage if he/she decides to exercise

¢ Physical exercise: the act of paying the strike selling price to buy the asset ¢ Expiration: the date through which the option has to be exercised or become worthless

¢ Exercise design: specifies if the option could be exercised

¢ Payoff = Max [0, area price at expiration ” strike price] ¢ Profit sama dengan Payoff ” future value of alternative premium

Payoff/profit of your purchased (i. e., long) putSynthetic reliability creation applying parity

Option price boundaries

Call cost cannot

¢ be negative

¢ go beyond stock selling price

¢ be less than price intended by put-call parity applying zero intended for put selling price:

Put price simply cannot

¢ be more than the strike price

¢ be below price implied by put-call parity using zero to get call value:

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