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1 question on call and put options, the 2nd on futures contracts-(Answered)

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  • 1?question?on?call?and?put?options,?the?2nd?on?futures?contracts

It would help if you show your work for immediate calculations and the formulas used.


1.

 


 

Calculate the price of a call and a put option with exercise price $10 and two

 

periods on a stock whose initial price is $13. The stock can go up by 1.1 (u = 1.1), or

 

down by 0.8 (d = 0.8), the risk free rate is 0.2% per period.

 


 

2. Find the number of future contracts required to hedge a $ 2 MM face value of the

 

127?17 cash value, 5 yr bond with 7% coupon and CF 0.8317. You hedge using

 

the 6.5% coupon, 5 year bond with CF = 0.7488 and cash value of 121?07.

 

Use the face value hedge, the CF hedge, and the BPV hedge.

 


 

3. Calculate the gains or losses for the long and short position in a Eurodollar futures

 

contract if the initial settlement price is 98.355 and the final settlement price is

 

97.9350. Use the standard Eurodollar futures contract of 1 million dollars at 90

 

days.

 


 

4. Easy questions:

 

a. Explain the effect on the prices of call and put options of a change in the

 

risk free rate.

 

b. If a firm decides to increase dividends, what will happen to the price of the

 

call and put options whose underlying asset is the firm stock?

 


 

Binomial

 

q = (1 + r ? d)/(u ? d)

 

c = (Cu*q + Cd*(1-q))/(1+r)

 

p = (Pu*q + Pd*(1-q))/(1+r)

 

Black Scholes

 

With dividends

 

d1

 


 

ln(S / K ) (r 0.5 2 )T

 


 

T

 


 

d 2 d1 T

 


 

C Se T N (d1 ) Ke rT N (d 2 )

 


 

portfolio

 

r p w1 r1 w2 r2

 


 

2p w12 12 w22 22 2 12 w1 w2 1 2

 


 

or

 

2p w12 12 w22 22 2w1w2 cov(r1 , r2 )

 


 

 

Paper#9210871 | Written in 27-Jul-2016

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