Lecture Notes 22, 23
Kevin R Foster
CCNY Spring 2009
for Hull Ch 22, Credit Risk and Ch 23 Credit Derivatives
As the financial crisis has shown, one of the most important (but difficult to quantify)
risks is Credit Risk: the risk that some company will go
Lecture Notes on Ch 1 & 2
Kevin R Foster
CCNY Spring 2009
From Hull Chapters 1 & 2
Derivative: value depends on another variable
Exchanges vs Over-the-Counter (OTC): OTC much bigger.
Forward contract: agree to buy/sell a particular asset at given price an
Lecture Notes 13b
Kevin R Foster
CCNY Spring 2009
from Bjrk
Another look at the Black-Scholes-Merton model
The basic method of showing the BSM model remains fundamentally similar to how we
solved the tree models: show that there is some combination of sto
Homework # 8 Possible Solutions
Econ 27500
Kevin R Foster
1. Question 13.29.
Option with S0=30, K=29, r=.05, =.25, T=4/12. Find prices of European call, American call,
European put; verify that put-call parity holds. The B-S-M model implies a price for th
Homework # 4
Due Feb 19 Thursday
Econ 27500
Kevin R Foster
You are encouraged to form study groups to work on these problems. However each student must hand in a
separate assignment: the group can work together to discuss the papers and comment on drafts,
Homework #10
Due May 7 Thursday
Econ 27500
Kevin R Foster
You are encouraged to form study groups to work on these problems. However each student must hand in a
separate assignment: the group can work together to discuss the papers and comment on drafts,
Homework # 6
Due March 5 Thursday
Econ 27500
Kevin R Foster
You are encouraged to form study groups to work on these problems. However each student must hand in a
separate assignment: the group can work together to discuss the papers and comment on drafts
Homework # 7
Due March 19 Thursday
Econ 27500
Kevin R Foster
You are encouraged to form study groups to work on these problems. However each student must hand in a
separate assignment: the group can work together to discuss the papers and comment on draft
Econ 27500
Homework # 4 Possible Solutions
Kevin R Foster
1. Question 1.26. Gold is $600/oz. Forward to deliver in 1 yr is $800. Arbitrageur can borrow
at 10%. What strategy (assume zero storage cost and no income)? Essentially here gold
returns a (800-60
Homework # 5
Due Feb 26 Thursday
Econ 27500
Kevin R Foster
You are encouraged to form study groups to work on these problems. However each student must hand in a
separate assignment: the group can work together to discuss the papers and comment on drafts,
Econ 27500
Homework # 5 Possible Solutions
Kevin R Foster
1. Question 5.25.
Choice between borrowing cash at 11% annual or gold at 2% annual (storage is 0.5 continuous additional). The
risk-free rate is 9.25% continuous. Is gold rate too high or too low?
Lecture Notes 13a
Kevin R Foster
CCNY Spring 2009
Another take on Black-Scholes-Merton
The basic Black-Scholes formula is pretty simple, once we get used to it. The
expected payoff to a call (for example) at time T is maxcfw_ST K,0. If the call is
not exe
Homework # 8 last one before exam!
Due April 2 Thursday
Econ 27500
Kevin R Foster
You are encouraged to form study groups to work on these problems. However each student must hand in a
separate assignment: the group can work together to discuss the papers
Possible Solutions to Homework # 7
Econ 27500
Kevin R Foster
1. Question 11.16.
A stock is $50; after 6 months it will be 60 or 42. With r=.12 find value of call with K=48.
Find the risk-neutral probabilities by setting qu + (1-q)d = exp(rT), with u=60/50
Lecture Notes on Ch 6 & 7
Kevin R Foster
CCNY Spring 2009
From Hull Chapters 6 & 7
Interest Rate Futures
Day Count Conventions: Ugh, crazy details! Interest is only credited at some low
frequency (every 6 months, for example) but it accrues continuously a
Lecture Notes 11
Kevin R Foster
CCNY Spring 2009
From Hull Chapter 11
One way of solving problems of option valuation is to split the problem into tiny
steps: first, suppose that the stock would either rise or fall by some discrete
amount. Of course this
Lecture Notes 14, 15, 17
Kevin R Foster
CCNY Spring 2009
Hull Chapter 14 Employee Stock Options
Read the chapter. Accounting for employee stock options has changed after the dot-com bubble and corporate scandals about the dating
of the options' exercise p
Lecture Notes on Ch 8, then beginning modelling
Kevin R Foster
CCNY Spring 2009
From Hull Chapters 8
Mechanics of Option Trading
Again recall difference between option payoff and option profit (profit is net of cost of
option).
Payoff to long European cal
Lecture Notes 20
Kevin R Foster
CCNY Spring 2009
for Hull Ch 20, Value at Risk (VaR)
Value at Risk is one of the basic measures of the risk of a loss in a particular
portfolio. It is typically stated in a form like, "there is a one percent chance that,
ov
Problems in Class
Eco 275, K Foster, CCNY
Feb 19, 2009
1. A bond pays $3000 in six months and then $3000 in twelve months. The current market
value is $5740.41. At semi-annual compounding, what is the annual interest rate
(assuming it is constant)? What i
Lecture Notes on Ch 3 & 5
Kevin R Foster
CCNY Spring 2009
From Hull Chapters 3 & 5
Recall payoff graphs, nets to positions including call/put.
Chapter 3 concentrates on hedgers.
A hedge is basically locking in cash flows at an early date before the asset
Lecture Notes on Ch 10
Kevin R Foster
CCNY Spring 2009
From Hull Chapter 10
Combining a stock position with an option allows investor to put a cap or floor on
payoff. But this has a more subtle implication it can allow us to take another view of
put-call
Lecture Notes on Ch 9
Kevin R Foster
CCNY Spring 2009
From Hull Chapter 9
Due to technical difficulties, modeling is postponed
Notation:
C
value of American call option (sometimes distinguish between C0 and CT, the
value now and value at maturity)
P
value
Midterm Econ 275
Kevin R Foster, CCNY Spring 2009
The questions are worth 75 points. You have 75 minutes to do the exam, one point per minute. All answers should be put into
the blue books.
You may refer to your books, notes, calculator, computer, or astr
Possible Solutions to Homework #10
Econ 27500
Kevin R Foster
1. Use the Black-Scholes-Merton model, modified for a dividend-paying stock, using S0=25,
K=24, r=0.03, T=2/12, sigma = 0.32, and q=0.01, gets d1 (after subtracting q=0.01) as
.403314 and d2 as
Final exam Econ 275
Kevin R Foster, CCNY Spring 2009
The questions are worth 120 points. You have 120 minutes to do the exam, one point per minute. All answers should
be put into the blue books.
You may refer to your books, notes, calculator, computer, or