33:390:420 DERIVATIVES
FALL 2016
DERIVATIVES
33:390:420
Dr. Alexander Amati
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F&O, Select Problems & Solutions, Ch 5
Prof Harvey Poniachek, Spring 2012
Problem 5.8.
Is the futures price of a stock index greater than or less than the expected future value of the
index? Explain your answer.
The futures price of a stock index is alway
Midterm Exam
1. (5 points) A portfolio consists of two options on the same underlying stock, with the same
expiration date in three months. The stock currently trades at $85. One option is a call
with strike price of $87. The other option is a put with st
Prof Harvey P, Futures & Options
Assignment #1, Solutions of Select Problems
Spring 2012
Problem 2.11.
A trader buys two July futures contracts on frozen orange juice. Each contract is for the delivery
of 15,000 pounds. The current futures price is 160 ce
CHAPTER 20
Value at Risk
Practice Questions
Problem 20.8.
A company uses an EWMA model for forecasting volatility. It decides to change the
parameter from 0.95 to 0.85. Explain the likely impact on the forecasts.
2
Reducing from 0.95 to 0.85 means that mo
Chapter 8
Securitization and the Credit Crisis of 2007
Practice Questions
Problem 8.8.
Why did mortgage lenders frequently not check on information provided by potential
borrowers on mortgage application forms during the 2000 to 2007 period?
Subprime mort
CHAPTER 6
Interest Rate Futures
Practice Questions
Problem 6.8.
The price of a 90-day Treasury bill is quoted as 10.00. What continuously compounded
return (on an actual/365 basis) does an investor earn on the Treasury bill for the 90-day
period?
The cash
EXAM ON SWAPS
1. Suppose that the yield curve is flat at 5% per annum with continuous compounding. A
swap with a notional principal of $100 million in which 6% is received and six-month
LIBOR is paid will last another 15 months. Payments are exchanged eve
CHAPTER 12
Introduction to Binomial Trees
Practice Questions
Problem 12.8.
Consider the situation in which stock price movements during the life of a European option
are governed by a two-step binomial tree. Explain why it is not possible to set up a posi
CHAPTER 17
The Greek Letters
Practice Questions
Problem 17.8.
What does it mean to assert that the theta of an option position is 0.1 when time is measured
in years? If a trader feels that neither a stock price nor its implied volatility will change,
what
CHAPTER 13
Valuing Stock Options: The Black-Scholes-Merton Model
Practice Questions
Problem 13.8.
A stock price is currently $40. Assume that the expected return from the stock is 15% and its
volatility is 25%. What is the probability distribution for the
CHAPTER 21
Interest Rate Options
Practice Questions
Problem 21.8.
A bank uses Blacks model to price European bond options. Suppose that an implied price
volatility for a 5-year option on a bond maturing in 10 years is used to price a 9-year option
on the
CHAPTER 3
Hedging Strategies Using Futures
Practice Questions
Problem 3.8.
In the Chicago Board of Trades corn futures contract, the following delivery months are
available: March, May, July, September, and December. State the contract that should be
used
CHAPTER 15
Options on Stock Indices and Currencies
Practice Questions
Problem 15.8.
Show that the formula in equation (15.9) for a put option to sell one unit of currency A for
currency B at strike price K gives the same value as equation (15.8) for a cal
CHAPTER 5
Determination of Forward and Futures Prices
Practice Questions
Problem 5.8.
Is the futures price of a stock index greater than or less than the expected future value of the
index? Explain your answer.
The futures price of a stock index is always
CHAPTER 7
Swaps
Practice
Questions
Problem 7.8.
Explain why a bank is subject to credit risk when it enters into two offsetting swap contracts.
At the start of the swap, both contracts have a value of approximately zero. As time passes, it is
likely that
CHAPTER 23
Credit Derivatives
Practice Questions
Problem 23.8.
Suppose that the risk-free zero curve is flat at 7% per annum with continuous compounding
and that defaults can occur half way through each year in a new five-year credit default
swap. Suppose
CHAPTER 11
Trading Strategies Involving Options
Practice Questions
Problem 11.8.
Use putcall parity to relate the initial investment for a bull spread created using calls to the
initial investment for a bull spread created using puts.
A bull spread using
CHAPTER 7
Swaps
Practice Questions
Problem 7.8.
Explain why a bank is subject to credit risk when it enters into two offsetting swap contracts.
At the start of the swap, both contracts have a value of approximately zero. As time passes, it
is likely that
CHAPTER 2
Mechanics of Futures Markets
Practice Questions
Problem 2.8.
The party with a short position in a futures contract sometimes has options as to the precise
asset that will be delivered, where delivery will take place, when delivery will take plac
Financial Engineers Take On New Rule With More Engineering
A major postcrisis rule taking effect in December will force Blackstone Group LP and other creators of
complex securities to eat some of their own cooking
Blackstone Group offices in New York. Bla
Brazil Bourse Aims to Open Region's Door
By ALASTAIR STEWART
SEPTEMBER 17, 2009
SO PAULO - Brazilian financial exchange BM&FBovespa SA is pursuing accords with its
counterpart bourses in Chile, Colombia and Peru that will allow for cross-trading of stocks
CHAPTER 5
Determination of Forward and Futures Prices
Practice Questions
Problem 5.8.
Is the futures price of a stock index greater than or less than the expected future value of the
index? Explain your answer.
The futures price of a stock index is always
CHAPTER 3
Hedging Strategies Using Futures
Practice Questions
Problem 3.8.
In the Chicago Board of Trades corn futures contract, the following delivery months are
available: March, May, July, September, and December. State the contract that should be
used
CHAPTER 4
Interest Rates
Practice Questions
Problem 4.8.
The cash prices of six-month and one-year Treasury bills are 94.0 and 89.0. A 1.5-year bond
that will pay coupons of $4 every six months currently sells for $94.84. A two-year bond that
will pay cou
CHAPTER 6
Interest Rate Futures
Practice Questions
Problem 6.8.
The price of a 90-day Treasury bill is quoted as 10.00. What continuously compounded
return (on an actual/365 basis) does an investor earn on the Treasury bill for the 90-day
period?
The cash
CHAPTER 9
Mechanics of Options Markets
Practice Questions
Problem 9.8.
A corporate treasurer is designing a hedging program involving foreign currency options.
What are the pros and cons of using (a) the NASDAQ OMX and (b) the over-the-counter
market for
CHAPTER 10
Properties of Stock Options
Practice Questions
Problem 10.8.
Explain why the arguments leading to putcall parity for European options cannot be used to
give a similar result for American options.
When early exercise is not possible, we can argu
Dividends
If a stock pays dividends at a rate q, then we just reduce the initial price, S0, to S0e-qT, and then go
ahead. This changes the Black-Scholes-Merton formula as well as the boundaries and put-call
parity formulas.
where now both d1 and d2 subtra
When finance people talk about "The Greeks" they don't mean the lunchcounter on Amsterdam
Ave! "The Greeks" in this context refer to the changes in the price of an option when some of
the parameters are changed.
So what?
Consider an example about employee