Practice Problem for Final
1. A stock price is currently $40. Over each of the next two three-month periods it is
expected to go up by 10% or down by 10%. The risk-free interest rate is 12% per annum
with continuous compounding.
a. What is the value of a

Hedging Strategies using futures
Instructor: Kihun Kim
Rutgers Business Scholl
Introduction
The purpose of hedging using futures market is to reduce a
particular risk.
In this chapter,
When is a short futures contract should be used?
When is a long future

Sample Question For Midterm
1. On March 1 the price of oil is $60 and the July futures price is $59. On June 1 the price of oil is
$64 and the July futures price is $63.50. A company entered into futures contracts on March 1
to hedge the purchase of oil o

Practice Problem For Quiz 1
1. A cattle farmer expects to have 120,000 pounds of live cattle to sell in three months. The live -cattle
futures contract on the Chicago Mercantile Exchange is for the delivery of 40,000 pounds of cattle. How
can the farmer u

3.ForwardandFuturesPrices
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Summary
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ShortSelling
TheRepoRate
ForwardContracts
ForwardPricevs.FuturesPrice
StockIndexFutures
ForwardandFuturesContractsonCurrencies
ForwardandFuturesContractson
Commodities
1
CostofCarryModelandConvenienceYie

FuturesandOptions
ProfessorKenZhong
RutgersBusiness
School
RutgersUniversity
1
1.Introduction
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Summary
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n
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n
n
n
IntroductiontoDerivatives
UseofDerivatives
ForwardandFuturesContracts
OptionsContracts
TypesofTraders
SizeoftheMarkets
2
WhatisaDerivative?

2.ForwardandFuturesMarkets
1
Review:WhatisaDerivative?
Definition:acontractwhosevalueisderived
fromthevalueofsomeunderlyingvariable
Asset Value
Derivative Value
S&P 500 Index
S&P 500 Index Futures
Google Stock
Google Call Option
3-Month Treasury Yield
Int

5.InterestRatesFutures
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Summary
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SpotRatesandForwardRates
TermStructureofInterestRates
TBondFuturesandTNoteFutures
ThePricingofTbondFutures
EurodollarFutures
1
SpotRates(ZeroRates)
n
Zerocouponbonds
n
n
n
Nointermediatepayment(coupon)
Boththepri

Syllabus: Futures and Options (33:390:420)
Summer 2012
Department of Finance and Economics
Rutgers Business School, Newark and New Brunswick
Course Overview and Objectives
This course introduces students to one of the most important and most technically c

Futures and Options
Summer 2012
(33:390:420)
Instructor: Kihun Kim
Rutgers Business School
Contact Information
Email: [email protected]
Office Hour: 3:00- 5:00 PM Tuesday or By appointment.
Office: Rutgers University Press Building #112
Textbook an

Greek Letters
Instructor: Kihun Kim
Rutgers Business School
Delta
Delta ( ) is the rate of change of the
option price with respect to the underlying
Option
price
Slope =
B
A
Stock price
2
Measure of Option Sensitivity
For a call option:
For a put option:

Black-Sholes-Merton Model
Instructor: Kihun Kim
Rutgers Business School
Binomial Pricing vs. Black-Scholes Pricing
As the time step become smaller, binomial pricing become the
same as Black-Scholes-Merton Model.
Binomial pricing model is discrete time but

Futures Option
Instructor: Kihun Kim
Rutgers Business School
Options on Futures
Referred to by the maturity month of the underlying futures
The option is American and usually expires on or a few days
before the earliest delivery date of the underlying fut

Futures Option
Instructor: Kihun Kim
Rutgers Business School
Options on Futures
Referred to by the maturity month of the underlying futures
The option is American and usually expires on or a few days
before the earliest delivery date of the underlying fut

Introduction to Binomial Tree
Instructor: Kihun Kim
Rutgers Business School
Binomial Option Pricing Model
The binomial option pricing model is a simple way to price
options.
It assumes that the prices of the underlying asset can only
have two possible val

Trading Strategies Involving Options
Instructor: Kihun Kim
Rutgers Business School
Option strategies
Option strategies is a general name for combinations of
options, stocks
Examples:
Buy a stock and a put on the stock (protective put)
Buy a stock and writ

Mechanics of Options Market
Instructor: Kihun Kim
Rutgers Business School
Terminology
Moneyness :
At-the-money option
In-the-money option
Out-of-the-money option
2
For calls:
S = K: Option is at-the-money.
S > K: Option is in-the-money.
S < K: Option is o

Mechanics of Futures Markets
Instructor: Kihun Kim
Rutgers Business School
1.Futures Contract
Institutional Characteristics
A futures/forward contract is an agreement to buy or sell an
asset at a certain time in the future for a predetermined price.
Both

4.HedgingUsingFutures
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Summary
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WhyHedge
HowtoHedge
BasisRisk
OptimalHedgeRatio
HedgingUsingStockIndexFutures
RollingTheHedgeForward
1
WhyHedge?
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Objective:Neutralizetherisk
Anexample:
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Afirmisduetosellanassetataparticular
timeinthefut