Profitable for the long party if s τ p k τ purpose

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profitable for the long party if: S τ + P < K τ purpose is to benefit from a decrease in prices. 35
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Profit from buying a European put option: option price = $7, strike price = $70 Options, Futures, and Other Derivatives 7 th Edition, Copyright © John C. Hull 2008 36 30 20 10 0 -7 70 60 50 40 80 90 100 Profit ($) Terminal stock price ($)
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Profit from writing a European put option: option price = $7, strike price = $70 Options, Futures, and Other Derivatives 7 th Edition, Copyright © John C. Hull 2008 37 -30 -20 -10 7 0 70 60 50 40 80 90 100 Profit ($) Terminal stock price ($)
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K = Strike price, S T = Price of asset at maturity Options, Futures, and Other Derivatives 7 th Edition, Copyright © John C. Hull 2008 38 Payoff Payoff S T S T K K Payoff Payoff S T S T K K
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A futures/forward contract gives the holder the obligation to buy or sell at a certain price. There is no price to enter in a forward contract. An option gives the holder the right to buy or sell at a certain price. 39
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40 Hedgers Speculators Arbitrageurs Some of the largest trading losses in derivatives have occurred because individuals who had a mandate to be hedgers or arbitrageurs switched to being speculators (See for example Barings Bank, Business Snapshot 1.2, page 15)
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A US company will pay £10 million for imports from Britain in 3 months and decides to hedge using a long position in a forward contract . An investor owns 1,000 Microsoft shares currently worth $28 per share. A two-month put with a strike price of $27.50 costs $1. The investor decides to hedge by buying 10 contracts 41
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42 20,000 25,000 30,000 35,000 40,000 20 25 30 35 40 Value of Holding ($) Stock Price ($) No Hedging Hedging
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A stock price is quoted as £100 in London and $200 in New York. The current exchange rate is 2.0300. What is the arbitrage opportunity? 43
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Suppose that: The spot price of gold is US$900 The 1-year forward price of gold is US$1,020 The 1-year US$ interest rate is 5% per annum Is there an arbitrage opportunity? 44
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Suppose that: - The spot price of gold is US$900 - The 1-year forward price of gold is US$900 - The 1-year US$ interest rate is 5% per annum Is there an arbitrage opportunity? 45
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Suppose that: - The spot price of oil is US$95 - The quoted 1-year futures price of oil is US$125 - The 1-year US$ interest rate is 5% per annum - The storage costs of oil are 2% per annum Is there an arbitrage opportunity? 46
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Suppose that: - The spot price of oil is US$95 - The quoted 1-year futures price of oil is US$80 - The 1-year US$ interest rate is 5% per annum - The storage costs of oil are 2% per annum Is there an arbitrage opportunity?
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  • Spring '12
  • D.S.G.Pollock
  • John C. Hull

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