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

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 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 9
Outlier and Influence
9.1. Outlier and Influence
Outlier
Particular case(s) that do not follow the
same model as the rest of the data
Usually no precise definition
In
In
one sample distribution
Outlier = case of 3 s.d. away from the mean
reg

Chapter 6
Polynomial Regression and Factors
6.1 Polynomial Regression
Model
E (Y | X x) 0 1 x 2 x 2 . d x d
Var (Y | X x) 2
Properties
Rarely represent physical model
Sometime well describe the shape of mean
function
6.1 Polynomial with several predictors

Chapter 7
Transformation
7.1. Transformation
Is
linear regression appropriate?
7.1. Transformation
The assumption of linear relationship does not also hold
We can transform
The predictor
The response
Both
to achieve the linear relationship
Power transfor

Chapter 2
Simple Linear Regression
Motivation
The Simplest model relating Response Y and Predictor X.
Simple Linear Regression
Mean function:
E(Y|X=x)= 0 + 1 x
Variance function
Var(Y|X=x)=2
Parameters to estimates:
0 = intercept (Expectation of Y whe

Chapter 10
Variable Selection
10.1. The active terms
Variable
Aim: Identify the correct model
selection
select the useful predictor
Ignore the non-informative terms
Y v.s. X1, X2, X999
Divide X=(X1, X2, X999) into two sets, XA, and XI,
so that E(Y|X) = E

Chapter 8
Regression Diagnostic - Residuals
8.1. Regression Diagnostics
Y X e, e~N (0, 2 )
Regression diagnostic
Check if the assumptions (mean/var/error) are
consistent with the observed data.
Study the residuals
If the model works well, then the residua

Chapter 1
Scatterplot and Regression
Motivation example 1
What
is the value of gravity?
Remember
v=u+at
this?
Motivation example 1
v=u+gt
Experiment
Drop sth from the top of
different buildings
Record the landing speed
and travelling time
Building
V (fi

Chapter 3
Multiple Regression
Multiple Regression
What
is multiple regression?
Adding more predictors to explain the
response variable better.
Improve
by
Adding X2 to explain the part of Y that has
not already been explained by X1.
Terms and Predictors (

Chapter 5
Weighted Least Square
5.1 Weighted Least Square (WLS)
Model
E (Y | X xi ) ' xi
Var (Y | X xi )
Alternative representation
Y X e,
2
wi
1
w1
2
2 0
1
Var (e) W
0
Errors are independent
but not identically
distributed
assumed
known
0
1
0
w

Chapter 4
Drawing Conclusion
4.1 Understanding parameter estimates
parameters=(0, 1, p, 2)
Unit of s:
Unit of 2:
unit of y/unit of x. (e.g. gallon/$1000 for -6.14)
(unit of y)2
Meaning of i:
Rate of change of y on xi , after adjusting for other variables

STAT 3008
Applied Regression Analysis
Teachers
Instructor: Dr.YAU Chun Yip
Email: cyyau@sta.cuhk.edu.hk
Office: Lady Shaw 110
Office Hour: Mon & Wed 14:00-16:00
Tutor: Mr. Chow Wai Kit, Benjamin
Email: s1010098100@sta.cuhk.edu.hk
Office: Lady Shaw G30
P

Valuing Stock Options:
The Black-Scholes-Merton
Model
Chapter 13
Fundamentals of Futures and Options Markets, 7th Ed, Global Edition.
Ch 13, Copyright John C. Hull 2010
1
The Black-Scholes-Merton
Random Walk Assumption
Consider
a stock whose price is S

Volatilityforecasting
1
Volatilityforecasting
If volatility rises, what will happen to the
option price?
Call? Put?
If you believe that the volatility of a
particular asset will rise dramatically next
month, how can you benefit or realize your
view?
How w

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 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 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

Gamma
Call
price
If you long a call, and when share price
goes up, your delta is
increasing or decreasing?
S1
S2
S3
Stock price
Gamma
Put
price
If you long a put, and when share price
goes up, your delta is
increasing or decreasing?
S1
S2
S3
Stock price
G

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

The Greek Letters
Chapter 17
Fundamentals of Futures and Options Markets, 7th Ed, Global Edition
Ch 17, Copyright John C. Hull 2010
1
Example (Page 359)
A bank has sold for $300,000 a European call
option on 100,000 shares of a non-dividendpaying stock
S

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 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 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

CHAPTER 1
Introduction
Practice Questions
Problem 1.8.
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
months?
You should buy

Trading Strategies
Involving Options
Chapter 11
Fundamentals of Futures and Options Markets, 7th Ed, Global Edition.
Ch 11, Copyright John C. Hull 2010
1
Three Alternative Strategies
Take
a position in the option and
the underlying
Take a position in 2