Formula Sheet Test 1
FIN 433
F = S (1+r )T
F0 = S0erT
F0 = (S0 I )erT
F0 = S0 e(rq )T
F0 < S0 e(r+u )T
F0 <(S0+U )erT
F0 = S0ecT
F0 < S0ecT
= (F0 K )erT
= (K F0 )erT
F0 = S0 e(cy )T
F = e rT (S + M )
F = Se (r d )T
C (K ) + C (K ) > 2C (K )
1
3
2
FIN 433
Homework Solutions
Chapter 8
4. You are managing a separate portfolio dedicated to your retirement income. You do not wish to take
excessive risk, and would prefer to limit the downside. What common option structure would suffice?
Answer: A protec
Formula Sheet Test 2
FIN 433
F = S (1+r )T
F0 = S0erT
F0 = (S0 I )erT
F0 = S0 e(rq )T
F0 < S0 e(r+u )T
erT
F0 = S0ecT
F0 < S0ecT
= (F0 K )erT
= (K F0 )erT
F0 = S0 e(cy )T
F = e rT (S + M )
p > Ke rT S0
F = Se (r d )T
c > S0 Ke rT
p* Su + (1- p*) Sd = S0
Values for N(d), given d: Rows give first decimal of d and columns give second and third decimals
d
0.000
0.005
0.010
0.015
0.020
0.025
0.030
0.035
0.040
-2.9
0.001866 0.001836 0.001807 0.001778 0.001750 0.001722 0.001695 0.001668 0.001641
-2.8
0.002555 0
FIN 433
Dr. N. Richie
ASSIGNMENT #1
Application of the BOPM and the Black-Scholes Model
Due:
Delivery:
Monday, 26 February 2013
Assignment submission through Blackboard
Purpose:
1. Gather relevant financial data.
2. Build a financial model using Microsoft
Risk-Neutral Valuation and the
Binomial Model
Chapter 11
Sorta
Objectives
4
4
This segment introduces option pricing in a very simple
setting.
It has three key objectives:
1.
To describe the pricing of options by replication.
2.
To introduce the concept o
Properties of Stock
Options
Chapter 10
Notation
c : European call
C : American Call option
option price
price
p : European put
option price
S0 : Stock price today
K : Strike price
T : Life of option
(expressed as a fraction)
: Volatility of stock
price
FIN 433
Homework Solutions
Chapter 2
7. What are the different ways in which futures contracts may be settled? Explain why
these exist.:
11. Suppose the delivered bond in the Treasury Bond futures contract has a remaining maturity
of 20 years and a 7% cou
FIN 433
Homework Solutions
Chapter 1
2. Give an example of a security that is not a derivative.
Answer: An interest rate is not a derivative. It is a fundamental economic quantity reflecting the value of
money.
A stock is also typically viewed as a primit
FIN 433
Chapter 1
2. Give an example of a security that is not a derivative.
3. Can a derivative security be the underlying for another derivative security? Give an example.
6. Explain who bears default risk in a forward contract.
13. What derivatives str
Chapter 8.
Options: Payoffs and Trading
Strategies
1
Objectives
4
Chapter 7
4
Examined the payoffs of naked option positions.
4
Highlighted the important property that options
react to volatility.
4
4
4
Long option positions Bullish on volatility.
Short o
Mechanics of Options
Markets
Chapter 7
Types of Options
A call
is an option to buy
A put
is an option to sell
A European
option can be exercised only at the end of its
life
An American
Long
option can be exercised at any time
vs. Short
Symbols
Symbols:
T
Chapter 4.
Pricing Forwards and Futures II:
Building on the Foundations
The Empirical Performance
4
4
4
Howwelldoesthe"costofcarry"theoryofpricingforwardsholdup
empirically?
Thetheoryisbasedonreplication.
Ifreplicationisnotpossible,thenofcourse,thetheoryi
Mechanics of Futures
Markets
Chapter 2
Futures Contracts
Available
on a wide range of underlyings
Exchange
traded
Specifications
need to be defined:
What can be delivered,
Where it can be delivered, &
When it can be delivered
Futures
4
4
Futures contracts
FIN 433
Homework Solutions
Chapter 2
7. What are the different ways in which futures contracts may be settled? Explain why
these exist.:
Futures contracts may be settled (a) by delivery, (b) in cash, and (c) by exchange of physicals.
The most common is ph