FIN 459
Accounts and Tax Treatment for Future Contracts
Hedgers Contract start closes out position
Speculator contract startclose out position
contract end
Heding Using Future Contracts
H= P*(spot)/(future)
P = correlation
# of Contracts = (P*(Qa)/(Qf)
H
FIN459-659 Quiz#2 You have 30 minutes to complete the quiz. The quiz is open book, open notes, open calculator. No consulting with other students is allowed. Good luck! 1. Treasury Bill futures quotations are based on the Treasury Bill IMM Index which is
FIN459-659 An Introduction to Derivatives Quiz#1 You have 30 minutes to complete the quiz. The quiz is open book, open notes, open calculator. No consulting with other students is allowed. Good luck! 1. (5 point) A derivative security is a financial contr
FIN 459-659
Introduction to Derivatives
Quiz #5 Answer Key 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. C D C C B C C C C C A B 12. 13. 14. A. Parity Value = (Face Value/Exchange Price)*Stock Price = 30*25 = $ 750 B. Investment Value = (50/1.06) + (50/(1.06^2) + (1
Option Pricing
By Dr. Fernando Diz
Two State Option Pricing
We shall price a European option one period before expiration. Suppose we have a European CALL option with one year to Expiration and an EXERCISE price of 110.0. We also know that in one year th
Introduction to Options II
By Dr. Fernando Diz
Hedge Strategies
Hedge or covered strategies involve positions in both the underlying security and one or more options.
Covered call writing
It involves writing calls against an underlying portfolio of the
Option Pricing I
by Dr. Fernando Diz
Elementary Pricing: Calls
Suppose you own a call option on ABC stock with exercise price of E = $40.0 Suppose that at expiration ABC is trading at $35.0 What is the intrinsic value of the option?
Elementary Pricing: C
FIN459-659 Quiz#3 You have 30 minutes to complete the quiz. The quiz is open book, open notes, open calculator. No consulting with other students is allowed. Good luck! 1. The 52 week high and low range for a stock price is one measure of, a. The stock's
FIN459-659 Introduction to Derivatives Spring 08 Quiz#4 You have 40 minutes to complete the quiz. The quiz is open book, open notes, open calculator. No consulting with other students is allowed. Good luck! 1. A share of common stock can be financially en
Black-Scholes Model
S0
$189.03
Black-Scholes Model
S0
$189.03
r
$190.00
0.42
31.08%
0.13%
K
T
c
r
$190.00
0.42
$14.00
0.13%
q
0.00%
q
0.00%
K
T
s
Premiums
Black-Scholes Premium
c
$14.7097
c
$14.00
p
$15.5742
Difference
$0.00
Implied Volatility
s
29.62%
In
Binomial Tree Builder for European Call Options
INPUTS
Stock price (S)
Strike price (K)
Annual risk-free interest rate (r)
Annual stock volatility (s)
Option maturity (days) (T)
Number of time steps used (n)
Dt = T / n
OUTPUT
Call premium (c)
BINOMIAL TRE
U.S. TREASURY FUTURES & OPTIONS
What are futures and options?
An option is a contract that sets a price that you can either buy or sell a certain stock for at a subsequent time.
A futures contract is a legal agreement, generally made on the trading floor
Hedging Strategies Using
Futures
Chapter 3
Long and Short Hedges
A
long futures hedge is appropriate when
you know you will purchase an asset in
the future and want to lock in the price
A short futures hedge is appropriate
when you know you will sell an
Name: _
In-Class Assignment: Mechanics of Futures Markets
1. Trading Volume and Open Interest
Explain what is meant by open interest. Why does the open interest usually decline during the
month preceding the delivery month? On a particular day, there were
The Black-Scholes-Merton Model
So, K, T, , r
D1=[ln (So/K)+(r+1/22)T](T)
D2=D1-(T)
N1=N(First two decimals of d1)+next two decimals [N(higher #)-N(lower #)]
N2=N(first two decimals of d2)+next two decimals[N(greater number)-(Lower
number)]
C=SoN(d1)-Ke-rT
Definitions Arbitrage: a trading strategy that takes advantage of two or more securities being mispriced relative to each otherTerm
Structure of Interest Rates: the relationship between interest rates and their maturitiesInvestment Assets: assets held pur
Properties of volatility useful for trading
by Dr. Fernando Diz Syracuse University
Properties of Volatility useful for Trading 1. Persistence a high volatility day tends to be followed by another high volatility day and that a low volatility day tends to
FIN459-659 Introduction to Derivatives Spring 08 Quiz#5 You have the entire class period to complete the quiz. The quiz is open book, open notes, open calculator. NO computer, NO consulting with other students is allowed. You will have to use the last pag
Options Positions
By Dr. Fernando Diz
The Analysis of Options' Positions
Position value: is the sum of the values of all the securities in a position, each weighted by the number bought or sold. Example: VP = n1V1 + n2V2+ .+ nnVn
Analysis of Options' Pos
FIN 659 An Introduction to Derivatives
Graduate Assignment The Expected Earnings Announcement Impact on Stock Prices This assignment is meant for you to conduct a short empirical study on the use of the Black-Scholes option pricing model to forecast the e
Futures Hedging
Futures Hedging
Hedging: is a transaction designed to reduce or in some cases eliminate risk. Why hedge?
1. It is part of doing business. Underwriters of derivative securities are not in the business of taking directional bets. 2. Modify
Forward/Futures Pricing
by Dr. Fernando Diz
Arbitrage
Definition: Any trading strategy requiring no out of pocket cash that has some probability of making a profit, without any risk of loss. An arbitrage opportunity is such a trading strategy.
Arbitrage
FIN 459/659 Introduction to Derivatives Spring 08 MW 8:00-9:20 Instructor Info Fernando Diz, PhD Martin J. Whitman Associate Professor of Finance Office: 610 WSOM Phone: 443-3499 E-mail: [email protected] Office Hours: M-W 11:00am to 12:00pm or by appointment.
Foreign Currency Futures
Currency Futures Quotations
Foreign Currency Futures
Interest rate parity: foreign exchange rates will adjust to ensure that a trader will obtain the same rate of return by investing in any riskfree instrument in any country, pro
FIN459-659 In-class practice exercises Binomial Opton Pricing
1. You need to price the price of a common stock European Call option price one period before expiration. The assumptions that you will be using are:
a. The current price of the common stock is
The Black-Scholes Formula
By Dr. Fernando Diz
The Black Scholes Formula
C = S N(d1) E erT N(d2)
where: d1 = (ln(S/E) + (r+sigma2/2)T)/sigma*sqrt(T)
d2 = d1 sigma*sqrt(T) N(d1), N(d2) = cumulative normal probabilities. sigma2 = annualized variance of the c