550.427: Homework 3
Outline of Solutions
This homework is due at the beginning of class on Wednesday, October 12, 2016. You are free to talk
with each other and get help. However, you should write up your own answers and understand everything
you write. Y
550.427: Homework 4
Outline of Solutions
This homework is due at the beginning of class on Wednesday, October 12, 2016. You are free to talk
with each other and get help. However, you should write up your own answers and understand everything
you write. Y
550.427, Fall 2016: Homework 5
Outline of Solutions
This homework is due at the beginning of class on Friday, October 28, 2016. You are free to talk with each
other and get help. However, you should write up your own answers and understand everything you
550.427, Fall 2016: Homework 1
Outline of Solutions
The homework is due at the beginning of class on Friday September 16, 2016. You are free to talk with
each other and get help. However, you should write up your own answers and understand everything you
550.427, Fall 2016: Homework 6
Outline of solutions
This homework is due at the beginning of class on Monday, November 7, 2016. You are free to discuss
these problems with others. However, your final write-up should be your own, and you should understand
550.427
Outline of Solutions for Homework 2
This homework is due at the beginning of class on Friday, September 23, 2016. An outline of the solutions
is given below.
Problem 1. (No arbitrage in one-period binomial asset pricing model) Assume in the one-pe
550.427, Fall 2016: Homework 6
This homework is due at the beginning of class on Monday, November 7, 2016. You are free to discuss
these problems with others. However, your final write-up should be your own, and you should understand
everything you write.
550.427, Fall 2016: Homework 7
This homework is due at the beginning of class on Monday, November 14, 2016. You are free to discuss
these problems with others. However, your final write-up should be your own, and you should understand
everything you write
550.427, Fall 2016: Homework 1
The homework is due at the beginning of class on Friday September 16, 2016. You are free to talk with
each other and get help. However, you should write up your own answers and understand everything you
write. You must show
550.427: Homework 4
This homework is due at the beginning of class on Wednesday, October 12, 2016. You are free to talk
with each other and get help. However, you should write up your own answers and understand everything
you write. You must show ALL YOUR
Where we are
550.444 Introduction to Financial Derivatives
o Previously: Up through Interest Rate Futures and
FRAs (Chapters 1 - 6, OFOD)
o Now: Swaps (Chapter 7, OFOD)
o Next: Mid Term: (October 25th, Wednesday)
Swaps (M6)
o Fall Break: No Classes Octobe
550.444 Introduction to Financial Derivatives
Where we are
Previously: Modeling the Stochastic Process for
Derivative Analysis (Chapter 14, OFOD)
Now: Black-Scholes-Merton Model for Options
(Chapter 15, 17-18, OFOD)
Next: Hedging & The Greeks (Chapter
550.444 Introduction to Financial Derivatives
Where we are
o Previously: Fundamentals of Forward and
Futures Contracts (Chapters 2-3, OFOD)
Interest Rates (M3)
o Finish up Hedging with Futures today
o Now: Introduction to Interest Rates and the
Value of F
555.444 Introduction to Financial Derivatives
Where we are
o Previously: Introduction to Interest Rates,
Future Value, Present Value and FRAs
(Chapter 4, OFOD)
o Now: Revisit FRAs and then we look at the
Determination of Forward and Futures Prices
- Value
550.444 Introduction to Financial Derivatives
Where we are
Options (M7)
Previously: Swaps (Chapter 7, OFOD)
Now: Option Markets and Stock Options (Chapter
10 11, OFOD)
Next: Binomial Tree Approach to Option Valuation
(Chapter 13, OFOD)
Then:
o
o
o
o
o
550.444 Introduction to Financial Derivatives
Where we are
Previously: Options, Analysis & Modeling: Binomial
Tree Model (Chapter 9-10,13 OFOD)
Now: Modeling the Stochastic Process for
Derivative Analysis (Chapter 14, OFOD)
Next: Black-Scholes-Merton M
550.444 Introduction to Financial Derivatives
Principals
David Audley, Ph.D.; Sr. Lecturer in AMS
Introduction (M1)
o david.audley@jhu.edu
o Office: WH 212A; 410-516-7136
o Office Hours: 10:00 Noon, Mon/Wed
o Always best to email first!
1.1
1.2
Principal
550.444 Introduction to Financial Derivatives
Schedule
Lecture Encounters
o Tuesday & Thursday, 3:00 - 4:15pm,
Forward & Futures
Contracts (M2)
o Shaffer 3
o Friday:
o S1: Hodson 213, 3:00pm
o S2: Hodson 313, 1:30pm
Section
o Tu/Th/Friday as assigned se
550.444 Introduction to Financial Derivatives
Where we are
Previously:
Module 14: Final Exam Review
and End-of-Course Wrap-up
o Options, Analysis & Modeling (Chapter 9-10, OFOD)
o Binomial Tree Model (Chapter 13 OFOD)
o Modeling the Stochastic Process fo
550.444 Introduction to Financial Derivatives
Where we are
Previously: Options (Chapter 9-10, OFOD)
Now: Option Analysis and Modeling: Binomial Tree
Approach (Chapter 13, OFOD)
Then: Weiner Process and the Ito Lemma
(Chapter 14, OFOD)
Option Analysis a
550.444 Introduction to Financial Derivatives
Where we are
Previously: Modeling the Stochastic Process for
Derivative Analysis (Chapter 14, OFOD)
Previously: Black-Scholes-Merton Model for Options
(Chapter 15, 17-18, OFOD)
Now: Hedging & The Greeks (Ch
550.444: Introduction to Financial Derivatives
Final Exam and Course Wrap-Up Summary
Know the properties of stock options; be able to explain/develop (prove?) the
bounding conditions for European-style option value and the condition of
put-call parity; e
HW 6
Swaps
Problem 7.1.
Companies A and B have been offered the following rates per annum on a $20 million fiveyear loan:
Company A
Company B
Fixed Rate
5.0%
6.4%
Floating Rate
LIBOR+0.1%
LIBOR+0.6%
Company A requires a floating-rate loan; company B requi
HW 4
Value of Forward and Futures
Problem 5.2.
What is the difference between the forward price and the value of a forward contract?
The forward price of an asset today is the price at which you would agree to buy or sell the
asset at a future time. The v
550.444
HW 2
Problem 3.4.
Under what circumstances does a minimum-variance hedge portfolio lead to no hedging at all?
A minimum variance hedge leads to no hedging when the coefficient of correlation between the
futures price changes and changes in the pri
HW 3
Interest Rates
Problem 4.5.
Suppose that zero interest rates with continuous compounding are as follows:
Maturity (months)
3
6
9
12
15
18
Rate (% per annum)
8.0
8.2
8.4
8.5
8.6
8.7
Calculate forward interest rates for the second, third, fourth, fifth