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
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
FINS3635
Lecture 10 BlackScholesMerton 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
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 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
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 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
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
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 PRACTICE PROBLEMS
Ch. 1314 The BlackScholesMerton 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
FINS3635
Lecture 11 Options on different assets
Hull: Chapters 16 & 17
Options on different assets
Hull: Ch. 16 & Ch. 17
Index options
Currency options
Futures options
FINS3635
Week11Optionson
differentassets
2
Options on Stock Indices
Index options b
FINS3635 Options, Futures & Risk Management Techniques
Semester 1, 2015
Lecture 7 Binomial Trees
Dynamic replication
When pricing forwards and swaps we typically relied on buyandhold
replication strategies
We made took some appropriate position at tim
FINS3635
Lecture 8 More Binomial Trees and other
models of the stock price
Recap from last week
We modeled the stock price using a binomial tree
We assumed the stock could either go up or down by some known
factors u and d
This allowed us to value deri
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
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
Valuing Stock Options:The BlackScholes Model
FINC6010
BUSINESS
SCHOOL
1
The BlackScholes 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
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 oneperiod Binomial model is arbitrage free if
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 BlackScholes formula
for a European call option?
a) Logarithmic returns are normally distributed.
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 zerocoupon 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 zerocoupon bond is performing better than share. Form
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. 20 Numerical Procedures
For the practice problems, you can use either the 4th, 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 Ed
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
FINS 3635 PRACTICE PROBLEMS
Ch. 1314 The BlackScholesMerton 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
2 methods can be used to sense check against each other
o 1) Short = +; Long =
o 2) Short = sell in future, lock price in, if drop = good etc
Week 2 Tutorial



NB: that there is NO cashflow at the start
o EVEN IF YOU ARE SHORTING A FUTURE i.e. you d
Currency / interest swaps
simpliest: exchange principal + fixedrate payment on loan in
one currency for principal + fixedrate payment on loan in
different currency
exchange for fixed for floating also possible
principal need not be exchanged  greate
OPTIONS: interesting stuff / stuff i didnt know / should remember
Other uses of options: p2
can think of any asset as a PF of options
create asset w/ unusual payoffs
use option to decrease transaction costs
Because commodities are harder to deliver, c
Swaps
NOTE: for interest rate swaps, the principal need not be
(Ref: Ch. 7, Hull)
exchanged; here it is exchanged. (This implies a
greater default risk for currency swaps.)
Comparative Advantage Argument
7.8 Currency Swaps
Example: Suppose the current New
If the stated, or quoted rate (sometimes called the APR)
Determination of Forward and Futures Prices
is r compounded m times per year then we get the
(Hull Ch. 5)
EAR by compounding:
1 + y = (1 +
Continuous compounding
Its common to use continuously compo