Wk 11&12 sample practice questions updated June 18

Wk 11&12 sample practice questions updated June 18 -...

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Unformatted text preview: Some Q&A notes: Question: how many number should be after the comma when calculating.eg : how should i round the number of 2.3567513472 Answer: In terms of rounding it depends. E.g., d1 and d2 in the BS equation, 4 decimals would be adequate. However, when dealing with very small numbers, such as basis points, you may have to use as many as 8 decimals depending on whether you use 0.00123456 or 12.3456 basis points. The final answer has to be accurate up to 2 decimal points and in the case of basis, up to 6 decimal points. That is, the final answer has to be 0.001235 or 12.35 basis points. For all amounts that involve dollars and cents, the values have to be accurate to the nearest cent or 2 decimal points in terms of dollars. That is $12,000,000,000.56 or 1,200,000,000,056 cents. Question: in question 48-c (and some similar question): "If the call option is selling in the market at $15.71 while the put option is selling in the market at $2.86, calculate the arbitrage profit for each put option contract." -> as far as i see, the put price here is fairly priced, there will be no arbitrage profit for put contract, as the result, how can we answer question 48-d? Answer: In a put call parity arbitrage, either you would buy 1 put contract if you are selling 1 call contract or you would sell 1 put contract if you are buying 1 call contract. So, it doesnt matter whether the wording is arbitrage profit for each put contract or arbitrage profit for each call contract. It just means arbitrage profit for 1 options contract as compared to arbitrage profits for 1 options. Please see the answer in the excel file for Q48. Question: Do you provide formular sheet in the final exam? Answer: No. Formula sheet is NOT provided in the final examination, and no formula sheet is allowed. However, the basic BS call option pricing formula and N(d) table would be given if needed. Please see Week 11 Lecture Slide #38. Question: In Black-Scholes formula, we are confused to calculate N(d1) and N(d2) when the number is not exact the same with number in the table. In your answer, they are calculated by Excel. Thus, in the exam, when we find out d1 and d2 being different with number in given table (as you say the table will be given in the exam), how we can calculate them? Answer: To get N(0.293857) from the N(d) table, use N(0.293857)={(0.293857- 0.28)/0.02}*N(0.30)+[1-{(0.293857-0.28)/0.02}]*N(0.28). Question: Is one year viewed as 360 days or 365 days in the exam? Answer: For options pricing, there are 365 days in 1 year. Use 365 days in 1 year when T is given in days. Use 12 months in 1 year when T is given in months, which is equivalent to the 30/360 day- count convention. Please see my notes to Q1....
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Wk 11&12 sample practice questions updated June 18 -...

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