MFIN6003 Derivative Securities
Dr. Huiyan Qiu
1
Individual Assignment #1
Due:
September 23, Friday
1.
Suppose you desire to shortsell 400 shares of JKI stock, which has a bid price of $25.12
and an ask price of $25.31. You cover the short position 180 days later when the bid
price is $22.87 and the ask price is $23.06.
(a)
Taking into account only the bid and ask prices (ignoring commissions and interest),
what profit did you earn?
(b)
Suppose that there is a 0.3% commission to engage in the shortsale (this is the
commission to sell the stock) and a 0.3% commission to close the shortsale (this is
the commission to buy the stock back). How do these commissions change the profit
in the previous answer?
(c)
Suppose the
effective
6month interest rate is 3% and that you are paid nothing on
the shortsale proceeds. How much interest do you lose during the 6 months in
which you have the short position?
2.
(a)
Suppose you enter into a long 6month forward position at a forward price of $50.
What is the payoff in 6 months for prices of $40, $45, $50, $55, and $60?
(b)
Suppose you buy a 6month call option with a strike price of $50. What is the payoff
in 6 months at the same prices for the underlying asset?
(c)
Comparing the payoffs of parts
(a)
and
(b)
, which contract should be more
expensive (i.e. the long call or long forward)? Why?
3.
Suppose XYZ stock pays no dividends and has a current price of $50. The forward price
for delivery in 1 year is $55. Suppose the 1year
effective annual interest rate
is 10%.
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 Fall '08
 Kong,L
 Math, Derivative, Forward price, Dr. Huiyan Qiu

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