Weekly Email Sent 28 Jan 2010

Weekly Email Sent 28 Jan 2010 - Ramaswamy, Krishna From:...

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Unformatted text preview: Ramaswamy, Krishna From: Sent: To: Subject: Importance: FINANCIAL DERIVATIVES [[email protected]] on behalf of Ramaswamy, Krishna [[email protected]] Thursday, January 28, 2010 5:35 PM [email protected] FINDERIVS!! Weekly E-mail sent 28 Jan 2010 High Dear All: 1. This week's lecture dealt with the pricing of forward and futures for financial assets; we covered some applications along the way. You will find relevant material in Chapter 2 and 5 of Hull (esp in Sections 5.1 to 5.10) and of course in my NotestoLectures file named "NLJan2529" in the web caf, which you must now read hard. Some of you might benefit from reading the very cursory discussion of Stock Indices in Section 3.5. 2. In Hull's text, you should attempt Questions 5.15.4, and the problem I pose in item 7 below! 3. I've started to place Problems you should work on in the web caf folders... they deal w Forward and Futures market mechanisms, and by this weekend I will post problems on Financial Futures Pricing 4. FOR NEXT WEEK: We will cover the pricing of commodity futures and futures hedging. I will bring a paper copy of the lecture notes LNFeb15.pdf to class but they are already availabl eon the webcaf. 5. FOR NEXT WEEK: Please read the first set of 3 articles in the READINGS available on StudyNet (I will also place this particular reading in the web caf) they are titled HEDGING FOR FARMERS< HEDGING YIELD RISK, & the SOYBEAN AFFAIR they are excerpts from the Wall Street Journal. I will discuss these readings for 30 mins in class on Monday (and Tuesday for the TTh crowd!). FOR NEXT WEEK: Also read Chapter 5, Sections 5.115.14; and skim Chapter 3. 6. Office Hours use them mercilessly, my TAs are bored stiff: Monday Feb 1 12 to 1:20pm Darshak Shah 2400 SHDH Cubicle Tuesday Feb 2 11am to 12 noon Krishna 3259 SHDH Tuesday Feb 2 3 to 4:20pm Ashwin Pandith 2400 SHDH Cubicle Wednesday Feb 3 12 to 1:20pm Artem Mariychin 2400 SHDH Cubicle Thursday Feb 4 12 to 1:20pm Darshak Shah 2400 SHDH Cubicle Friday Jan 29 11am to 12noon Krishna (*) 3259 SHDH Friday Feb 5 1:30 to 3pm Krishna (*) 3259 SHDH (*) Call me 215 898 6206 before you come in the afternoon. 7. Try the following problem: a. Take the current share (date t) price of the ZYX Corp as $100 per share; there is a forward (or futures since we agreed to treat them as equivalent!) contract maturing in 180 days; the rate of interest is constant at 5% per annum. Use the simple method to find the 180day rate (2.5%) I used in class. ZYX does not pay a dividend. Find the fair value of the futures price. Ignore Txaction costs and credit risk. b. Now assume that ZYX pays $2 dividend per share in 90 days. Find the fair value of the futures price in this case with this added assumption. c. Your colleague, Matt, asks if you can work out the outcome of a twolegged strategy where (leg i) you lend $100 for 180 days at 5%, and simultaneously (leg ii) buy a fairly priced futures contract on ZYX, and hold it until the end. He wonders, what will be the final value of this twolegged portfolio if the share price of ZYX rose to $120 after 180 days, using the assumption of part (a)? What if it fell to $80? Draw a payoff table in each case, using the numbers! d. Repeat part (c), only now pretend ZYX pays the dividend as in part (b), for both the share price outcomes of $80 and $120. e. Is the dollar value of the portfolio equal to the strategy of owning the stock? Why or Why not? Have a good weekend, best \kr 1 Krishna Ramaswamy || Professor of Finance || The Wharton School || Phila., PA 19104 || Tel 215 898 6206 || Fax 215 573 8084 2 ...
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This note was uploaded on 03/27/2012 for the course FNCE 235 taught by Professor Roussanov during the Spring '09 term at UPenn.

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