MA373 S09 Final

MA373 S09 Final - Math 373 Final May 5, 2009 l. (2 points)...

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Unformatted text preview: Math 373 Final May 5, 2009 l. (2 points) List the four uses of Derivatives. 2. (1 point) A written strangle is a bet that volatility Will be high. True or False 3. (8 points) You are given: Time Spot Interest Forward Price of Rate an Ounce of Gold 0-0400 0 0450 0-0525 Hennessy Corporation manufactures gold wedding rings. Hennessy will buy 100 ounces of gold at the end of each year for the next three years. Hennessy wants to purchase a swap to fix the cost of gold for this three year period. Determine the Swap Price for each ounce of gold. 4. (4 points) Julie sells 200 shares of Snuffer Industries at the same time that Andrew purchases 200 shares. The Bid Price for the shares of Snuffer was 9.75. Julie paid a commission of 60. Andrew paid a commission of 2%. The total transaction costs were $150. Determine the Ask Price for Snuffer. 5. (5 points) An Index has a current price of 1200. The risk free interest rate is 3% compounded continuously. The Index pays at a dividend rate of 5%. Determine the forward price of the index to be delivered in 18 months. ! 6. (3 points)List three of the five ways that a Futures Contract differs from a Forward Contract. 7. (1 point) A Collar is created by selling a call and buying a put with a lower strike price. True or False (4 points) You are given the following premiums for a one year put and a one year call: Strike Price Call Premium Put Premium 1000 The annual effective interest rate is 7%. If the spot price of the stock is 100 in one year, calculate the payoff and profit on a long one year call. (5 points) You are given the following premiums for a one year put and a one year call: Call Premium 10-00 The annual effective interest rate is 7%. Determine the maximum profit that can be earned on along one year put. 10. (5 points) You are given the following premiums for a one year put and a one year call: Strike Price Call Premium Put Premium 70 10.00 The annual effective interest rate is 7%. You enter into a synthetic forward with a strike price of 70. At the end of one year, your profit is zero. Determine the spot price of the underlying stock at the end of one year. ll. 12. (1 point) A Bull Spread is created by buying a low strike put and selling a high strike call. True or False (2 points) Circle each position that has the profit graph shown below. Profit Stock Price Covered Put Floor Short Call Short Put 13. (5 points) Bob’s Bakery specializes in corn bread muffins. One year ago Bob entered into a swap. The swap allows Bob to purchase 100 bushels of corn one year from now and another 100 bushels of corn two years from now for a fixed price of 3.50 per bushel. The following table lists the current spot interest rates and forward price of corn: Time Spot Interest Forward Price of Rate a Bushel of Corn Determine market value of this swap if Bob sold it today. 14. (8 points) You are given the following premiums for a one year put and a one year call: Strike Price Call Premium 70 12.00 7.42 The annual effective interest rate is 7%. The current spot price of the underlying stock is 70. You enter into a Cap. Determine the profit for a spot price of 50 in one year and the profit for a spot price of 90 in one year. 15. 16. (1 point) The payoff for a long forward is equal to the payoff on a long stock. True or False (1 point) A Bermuda option can be exercised at anytime prior to the expiration date. True or False l7. (7 points) You are given: Cost of Zero Cou n on Bond Jones Realty has a three year floating rate loan. Jones wants to swap the floating rate for a fixed rate. The terms of the loan provide Jones with the following loan amount during each of the next three years: 1 million 2 million 3 million Determine the fixed interest rate that would result if Jones entered into a 3 year swap. 18. (4 points) The current spot price for a stock is 200. The annual effective risk free interest rate is 8%. You enter into a short forward on the stock with an expiration date of 1 year. Complete the following table: -- Spot Price at Payoff FV 0f the Cost Profit Ex I iration 19. (2 points) Draw the profit graph for a butterfly. f t Profit Stock Price 20. (1 point) The disadvantage of a straddle is that it has a high premium because it requires the purchase of two options. True or False 21. The one year forward price for Tan Corporation is 42. The current spot price of Tan stock is 40. The annual effective risk free interest rate is 4%. Assume that there are no transaction costs. a. (4 points) State What actions Yvonne should take to take advantage of the arbitrage that exists. b. (2 points) State the amount that Yvonne would make per share of stock. 22. (3 points) What are the three conditions that must exist for there to be arbitrage? 23. (6 points) Matt purchases eight S&P 500 Futures Contracts with a futures price of 1000. Matt’s margin requirement is 8%. His maintenance margin is 75%. The margin account earns 6% compounded continuously. The margin account is marked to market weekly. At the end of one week after the purchase, the S&P futures price has fallen to 975. Calculate Matt’s margin call. i, l: l l l: lé ‘( ia 24. 25. (1 point) One of the reasons for a concave profit curve is taxes. True or False (4 points) You are given the following premiums for a one year put and a one year call: Call Premium m Determine the annual effective risk free interest rate. 26. (6 points) Davis Diamond Mines produces diamonds. During the next year, Davis intends to mine 100 carats of diamonds. The diamonds will be sold at the end of the year. It costs Davis a fixed cost of $50 per carat and a variable cost is $80 per carat to mine diamonds. Davis purchases a put option With a strike price of 300. The premium for the put is $30 per carat. The annual effective risk free interest rate is 8%. If the spot price of diamonds in one year is $280 per carat, calculate the hedged profit per carat on the diamonds sold at the end of the year. 27. (4 points) The stock of Cunningham Corporation has a current spot price of 40. Cunningham Will pay a dividend of 1 at the end of each quarter. The next dividend will be paid in 3 months. The risk free interest rate is 4% compounded continuously. Calculate the prepaid forward price for the Cunningham stock to be delivered in 9 months, right after the dividend. ...
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MA373 S09 Final - Math 373 Final May 5, 2009 l. (2 points)...

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