Convexity, Timing, and Quanto Adjustments
Explain how you would value a derivative that pays off 100R in five years where R is
the one-year interest rate (annually compounded) observed in four years. What differ
Value at Risk
Consider a position consisting of a $100,000 investment in asset A and a $100,000
investment in asset B. Assume that the daily volatilities of both assets are 1% and that the
coefficient of correla
Martingales and Measures
How is the market price of risk defined for a variable that is not the price of an investment
The market price of risk for a variable that is not the price of an investment asset
MATBUS 470 Winter 2015 assignment 1.
Due: February 6th before noon in M3-2001.
1. On May 8, 2013, as indicated in Table 1.3 the spot bid price of Google stock is 871.23
and the offer price of a put option with a strike price of $860 and maturity date of
OIS Discounting, Credit Issues, and Funding Costs
Explain what is meant by (a) the 3-month LIBOR rate and (b) the 3-month OIS rate.
Which is higher? Why?
The 3-month LIBOR rate is the rate at which a AA-rated bank
Suppose you own 5,000 shares that are worth $25 each. How can put options be used to
provide you with insurance against a decline in the value of your holding over the next four
You should buy
A stock price is currently $40. It is known that at the end of one month it will be either $42 or
$38. The risk-free interest rate is 8% per annum with continuous compounding. What is the
What is the difference between a long forward position and a short forward position?
When a trader enters into a long forward contract, she is agreeing to buy the underlying asset
for a certain price
Properties of Stock Options
List the six factors affecting stock option prices.
The six factors affecting stock option prices are the stock price, strike price, risk-free interest
rate, volatility, time to matur
Determination of Forward and Futures Prices
Explain what happens when an investor shorts a certain share.
The investors broker borrows the shares from another clients account and sells them in the
usual way. To cl
Companies A and B have been offered the following rates per annum on a $20 million fiveyear loan:
Company A requires a floating-ra
Hedging Strategies Using Futures
Under what circumstances are (a) a short hedge and (b) a long hedge appropriate?
A short hedge is appropriate when a company owns an asset and expects to sell that asset in the
Trading Strategies Involving Options
What is meant by a protective put? What position in call options is equivalent to a protective
A protective put consists of a long position in a put option combined with
Mechanics of Futures Markets
Distinguish between the terms open interest and trading volume.
The open interest of a futures contract at a particular time is the total number of long positions
European Put Option on 1000 shares with strike of 50 and same parameter as 19.3
100,000 put options are sold
Week Stock price Delta of Call Delta of Put Shares purchased Cost ($000) Cumulative Cost ($000) Interest Cost ($000)
Interest Rate Derivatives: Models of the Short Rate
What is the difference between an equilibrium model and a no-arbitrage model?
Equilibrium models usually start with assumptions about economic variables and de
Explain the difference between a call option on yen and a call option on yen futures.
A call option on yen gives the holder the right to buy yen in the spot market at an exchange
rate equal to th
HJM, LMM, and Multiple Zero Curves
Explain the difference between a Markov and a non-Markov model of the short rate.
In a Markov model the expected change and volatility of the short rate at time t depend only
MATBUS 470 Fall 2014 Test 2 1.  A stock index is currently 810 and has a volatility of 20% and a dividend yield of 2%. The risk-free
rate is 5%. Consider a 6month European put option with a strike price of 800. Value the option using a
2step binomial m
MATBUS 470 Winter 2014 Test 2 1.
 Consider a European put option to sell 1000 Euros in 1 year for $1.95 per Euro. The current spot
price for 1 Euro is $2.00 and next year the price will either go up by 5% or down by 5%. Assume the
dollar risk free rate
MATBUS 470 Winter 2014 Test 1 1. [IConsider a 9month forward contract on a stock with a current price of $50. Assume that the stock
will pay dividends of $X per share at times 3 montl5and 6 months. Assume the riskfree rate of interest
MATBUS 470 Fall 2014 Test 1 1.  Suppose the spot price of gold is $1200 per ounce and the 12-month forward price of gold is $1250.
Assuming the risk-free rate of interest is 5% pa. compounded continuously and that gold can be leased
at a rate q per ann
MATBUS 470 Winter 2015 Test 2 1.  For a stock index the current value is $1300, the volatility is 25% and the dividend yield is 2%. The
risk-free rate of interest is 2%. Use the Black-Scholes option pricing formula to price a 1-year European
MATBUS 470 Winter 2015
Due: Noon April 6 in M3 2001.
1. A financial institution has the following portfolio of over-the-counter options on sterling:
Type Position Delta of option Gamma of option Vega of option
MATBUS 470 Winter 2014
Due: Noon March 13th in M3 2001.
1. A stock price is currently $30. During each two-month period for the next four months it
is expected to increase by 8% or reduce by 10%. The risk-free interest rate is 5%. Use a