2017 Fall FE-620A
CWID: 10424779 Yu-Chen Lu
12.20. Consider a European call option on a non-dividend-paying stock where the stock
price is$40, the strike price is $40, the risk-free rate is 4% per ann
Instructor: Dragos Bozdog
Email: [email protected]
Office: Babbio 429A
FE620-Dragos Bozdog
1
A swap is an agreement to exchange
cash flows at specified future times
according to certain specified ru
Instructor: Dragos Bozdog
Email: [email protected]
Office: Babbio 429A
FE620-Dragos Bozdog
1
Defines:
the period of time to which the interest rate applies
The period of time used to calculate acc
Instructor: Dragos Bozdog
Email: [email protected]
Office: Babbio 429A
FE620-Dragos Bozdog
1
Investment assets are assets held by
significant numbers of people purely for
investment purposes (Exampl
Instructor: Dragos Bozdog
Email: [email protected]
Office: Babbio 429A
FE620-Dragos Bozdog
1
A long futures hedge is appropriate
when you know you will purchase an
asset in the future and want to lo
Instructor: Dragos Bozdog
Email: [email protected]
Office: Babbio 429A
FE620-Dragos Bozdog
1
A call is an option to buy
A put is an option to sell
A European option can be exercised only at the
end
Instructor: Dragos Bozdog
Email: [email protected]
Office: Babbio 429A
FE620-Dragos Bozdog
1
c:
European call
option price
C:
p:
American call
option price
European put
option price
P:
American put
Instructor: Dragos Bozdog
Email: [email protected]
Office: Babbio 429A
FE620-Dragos Bozdog
1
Available on a wide range of assets
Exchange traded
Specifications need to be defined:
What can be deliv
Lecture 1
1. A one-year forward contract is an agreement where
A. One side has the right to buy an asset for a certain price in one years time.
B. One side has the obligation to buy an asset for a cer
Instructor: Dragos Bozdog
Email: [email protected]
Office: Babbio 429A
FE620-Dragos Bozdog
1
Bond plus option to create principal protected
note
Stock plus option
Two or more options of the same typ
Instructor: Dragos Bozdog
Email: [email protected]
Office: Babbio 429A
FE620-Dragos Bozdog
1
A derivative is an instrument whose value
depends on, or is derived from, the value of
another asset.
Exa
FE 620
Assignment - 2
Name- Jay Soni
CWID: 10406256
Value of S&P 500 index = 1250
S&P 500 futures price= 1259
Value of portfolio VA= $50,000,000 Risk-free interest rate= 6% per annum Dividend
yield on
Problems on Options
1 A stock price is currently $100. Over of each of the next two six-month periods, it is expected
to go up by 10% or down by 10%. The risk free rate is 8% per annum with continuous
Chapter 3 In-class Practice Problems
1. A company wishes to hedge its exposure to a new fuel whose price changes
have a 0.6 correlation with gasoline futures price changes. The company will lose
$1 mi
Further Questions
Problem 4.25 (Excel file)
A five-year bond provides a coupon of 5% per annum payable semiannually. Its price is 104.
What is the bond's yield? You may find Excel's Solver useful.
The
Solution to problem 14.31
We have:
!", !", !.!, !.!, !.!
We follow the book example 14.10
a) First we calculate the option price as European with 2 dividends. The present
Solution to problem 12.20
We have:
!", !", !.!", !.!
Time to maturity T = 0.5,
Then
and number of steps N= 2
=
a) From the text book we also have
= !
!
Solution to problem 7.23
National principal = 100 millions
Fixed rate = 0.1
Floating rate = 0.12 (Quarterly compounded) or
=4*LN (1+0.12/4) = 0.118 (continuously c
Solution to problem 6.28
a) The future price is $118 23/32 = $118.71875. On the first day of the delivery month the bond has
15 years and 7 months to maturity. We
Solution to problem 4.32
The following table gives the prices of bonds
Bond Principal ($)
100
100
100
100
Time to Maturity
(yrs)
0.5
1.0
1.5
2.0
Annual Coupon ($)*
Bond Price ($)
0.0
0.0
6.2
8