FINS 3635 PRACTICE PROBLEMS
For the practice problems, you can use either the 5th, 6th, 7th or 8th Edition of Hull.
However, you have to be careful with the numbering. All the solutions will use the
numbering of the 8th Edition, so when checking your answ
Chapter 2 Mechanics of Futures Market
2.1 Introduction
Closing out a position
Closing out: entering into opposite trade to the original one
Example: Investor who bought July corn futures contract on March 5 can close position by selling one July
corn futu
FINS3635 S1/2012
Mock Final Questions
Matthias Thul
Last Update: May 26, 2012
1) Which of the following model assumptions is not necessary for obtaining the Black-Scholes formula
for a European call option?
a) Logarithmic returns are normally distributed.
THE UNIVERSITY OF NEW SOUTH WALES
TUTORIAL PROBLEMS WEEK 10, 2012
Campus: Kensington
SCHOOL OF BANKING AND FINANCE
Options, Futures, and Risk Management Techniques
1. (Binomial Model) Prove the statement: The one-period Binomial model is arbitrage free if
Valuing Stock Options:The Black-Scholes Model
FINC6010
BUSINESS
SCHOOL
1
The Black-Scholes Random Walk Assumption
Consider a stock whose price is S
In a short period of time of length Dt the change in the stock price is
assumed to be normal with mean mS
Portfolio Diversification and Role of
Derivatives
BUSINESS
SCHOOL
Portfolio
A group of investments.
If a portfolios returns are normally distributed,
only two measures are needed to describe its
return distribution:
- standard deviation
- expected rate
Determination of forward and futures
prices
BUSINESS
SCHOOL
Price versus Value
price
- price at which the contract parties agree to exchange the underlying asset in the
future.
value
- determined by unanticipated changes in the assets spot price, which
Interest Rate Futures
BUSINESS
SCHOOL
Day count convention in Australia
Two day count conventions commonly used:
-Actual/Actual
- Australian Commonwealth Government Treasury bonds
-Actual/365 used for money market instruments
- Australian Commonwealth Gov
Currency Futures
BUSINESS
SCHOOL
Current Exchange Rate Regimes
1944 - Bretton Woods
1971 - US dollar devalued
1971 - Smithsonian Agreement
March 1973 - nations free to adopt a variety of exchange rate
mechanisms
- freely-floating strategy
- managed-fl
Binomial Option Pricing Model
BUSINESS
SCHOOL
Replicating-Portfolio Valuation
Derivative assets are, in fact, redundant.
Even if derivatives didnt exist, we could artificially re-create them solely
from the underlying assets.
Consider put call parity
2
Greek Letters
BUSINESS
SCHOOL
1
Example
A bank has sold for $300,000 a European call
option on 100,000 shares of a nondividend
paying stock
S0 = 49,
K = 50, r = 5%, s = 20%,
T = 20 weeks, m = 13%
The Black-Scholes value of the option is
$240,000
How d
Trading Strategies Involving Options
BUSINESS
SCHOOL
1
Overview
How options can be used for hedging a pre-existing position
in the spot market, and for speculating on subsequent spot
movements.
Hedging
- Fiduciary call writing
- Covered call writing
- P
Mechanics of Options Markets
BUSINESS
SCHOOL
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 option can be exercised at any time
Fundamentals of Futures
1) Consider a currency swap in which the cash-flows from a fixed-rate bond denoted in Australian dollars are swapped for a those of a fixed-rate bond denoted in euros. Assume for
simplicity that the principals are not exchanged at time 0. The principal of
FINS3635
Lecture 2 Pricing Forwards
Quick recap from last week
Arbitrage pricing strategy
We typically price derivatives by constructing replicating portfolios
from assets with known prices
Today we will price forward contracts
These are contracts in
FINS3635
Lecture 6 Option strategies
Terminology and notation
An option is an instrument that gives the right, but not the
obligation, to trade the underlying asset at a fixed price
Its like a forward contract that you can get out of at any time
Option
FINS 3635 - Options, Futures, and Risk
Management Techniques: Mock Final Solution
May 31, 2012
1) (a) At maturity, the shareholders get whatever is left of the assets after paying
out the bondholders claims. If theres nothing left, they can abandon the
fi
FINS 3635 - Options, Futures, and Risk
Management Techniques: Mock Final
May 28, 2012
1) Consider a firm with two classes of zero-coupon debt: senior debt and junior debt.
Suppose that the firms debt securities both mature at time T1 and the senior
rankin
THE UNIVERSITY OF NEW SOUTH WALES
TUTORIAL SOLUTIONS WEEK 10, 2012
Campus: Kensington
SCHOOL OF BANKING AND FINANCE
Options, Futures, and Risk Management Techniques
1. Suppose that erT u > d, i.e. the zero-coupon bond is performing better than share. Form
Chapter 1: Introduction
Derivatives financial instrument whose value depends on the values of other, more basic,
underlying variables (e.g. prices of traded assets)
Transfers wide range of risks in the economy from one entity to another
Can be used for he
1.
a. 0.437840024
b. 0.434381052
c. Where an American and a European option are otherwise identical (having the
same strike price, etc.), the American option will be worth at least as much as the
European (which it entails). If it is worth more, then the
FINS 3635 PRACTICE PROBLEMS
Ch. 13-14 The Black-Scholes-Merton Model
For the practice problems, you can use either the 4th, 5th, 6th, 7th or 8th Editions of Hull.
However, you have to be careful with the numbering. All the solutions will use the
numbering
Chapter 1
1.1 Long=buy vs short=sell
1.2 hedging reduces exposure; speculation is exposure without any offset; atrbirtage is a free lunch
1.3 Forwards are obligatory; options are not.
1.4 Selling call has same payoff as buying put; but buying means YOU ha
FINS 3635: Vocabulary
Here is some trading terminology (source: Hull, Ch. 2) This material is examinable.
day trade: a trade where the trader announces to the broker that he/she plans to close out the
position in the same day.
spread transaction: when the
FINS3635 COMPUTER
ASSIGNMENT
Z?, JEFFREY HUI Z5014807, JOEL JANKULOVSKI
Z3462629, MICHAEL DONOHUE Z3462572
1. IMPLIED VOLATILITY
a. The implied volatility for a European put option is 24.4117% (4 d.p).
b. The implied volatility for an American put optio
1
FINS3635 Options, Futures and Risk Management
FINS3635: Options, Futures and Risk Management
Techniques Assignment
Group Members
Student Number
Yizhi Luo ( Hueson)
3284806
Ke Sun (Duran)
3284758
Zhefeng He (Tim)
3285248
2
FINS3635 Options, Futures and R
FINS3635 Options, Futures & Risk Management Techniques
Semester 2, 2015
Lecture 6 Fundamentals of Options and Option Strategies
Terminology and notation
An option is an instrument that gives the right, but not the
obligation, to trade the underlying asse
FINS3635
Lecture 12 Greek Letters
Hull: Chapter 18
Greek Letters
Management of Market Risk
Delta
Gamma
Vega
Other Greek Letters
Theta
Rho
FINS3635week12
2
Example (Hull 18.1)
A bank has sold (for $300,000) a European call
option on 100,000 shares
FINS3635
Lecture 10 Black-Scholes-Merton Model
Hull: Chapters 13 & 14
Lectures Outline
Brief introduction to stochastic processes (from
Ch. 13 and focusing on the lecture notes)
Markov process
Wiener process
Generalized Wiener process
Ito process
Mo