CHAPTER
How RIsK
MANAGEMENT CAN
INCREASE THE VALUE
OF THE FIRM #
If a firm manages its financial price risk, it follows that the volatility of the value
of the firm or of the firm's real cash flows will decline. This general relation is illustrated in Fig

1/04/2015
BFF5915 Options, Futures and Risk Management
Week 6: Options Markets
Binh Do
Reading: Sundaram and Das Ch 7
1
1
1/04/2015
Learning objectives
Understand option payoffs
Understand the use of options
Learn about institutional features of options m

5/03/2015
BFF5915 Options, Futures and Risk Management
Week 3 : Pricing Forwards and Futures
Binh Do
Reading: Sundaram and Das Ch 3&4
1
1
5/03/2015
Objectives
Pricing forward/futures using cost-of-carry models
Implementing arbitrage on forward/futures and

10/04/2015
BFF5915 Options, Futures and Risk Management
Week 7: Option Trading Strategies
Binh Do
Reading: Sundaram and Das Ch 8
1
Lecture objectives
Understand key option strategies
Learn how to draw payoff diagrams
Learn how to implement these strategie

5/03/2015
BFF5915 Options, Futures and Risk Management
Week 4: Hedging with Futures and Forwards
Binh Do
Reading: Sundaram and Das Ch 5 & Ch 2 on MGRM (pp. 42-45)
1
Lecture objectives
Understand the hedging principle
Differentiate between perfect hedge an

BFF5915 Options, Futures and Risk Management
Lecture 8. Option Pricing The Black-Scholes Model
Reading: Sundaram & Das - Ch 14
BINH DO
1
Outline
Introduction
The Black-Scholes Assumptions and Formulae
Numerical example
Derivation (optional)
Interpreting t

BFF5915 Options, Futures
and Risk Management
Week 12: Lessons from
Derivative Losses and Risk
management
Hull et al. (Ch 25)
Outline
Case studies of derivative disasters.
Lessons to be learned from financial and non-financial
institutions.
2
Losses attr

BFF5915 Tute 9 BlackScholes model
Question1
(a) Explain why the BlackScholes model is inappropriate if the stock can gap.
(b) The BlackScholes model assumes constant volatility. How serious a shortcoming
is this?
Question 2
A stock has an expected

BFF5915 Options, Futures and Risk management
Week7TutorialQuestions+Solutions
Problem 11.10
Suppose that put options on a stock with strike prices $30 and $35 cost $4 and $7,
respectively. How can the options be used to create (a) a bull spread, and (b)

The Calculation of FCFF, FCFE and FCFD
2013
$000
Revenue
Cost
EBIT
Tax
Depreciation and Amortization
Capital Expenditure
Change in Net Working Capital
FCFF
Interest Expense (before tax)
Net Borrowing
FCFD
FCFE
Tax Shield
2014
284723 369997 407278
263664 3

BFF5915 Options, Futures and Risk management
Week5TutorialQuestions+Solutions
Problem 6.8
The yield on a 90-day Treasury note is quoted as 5.45%. What continuously
compounded return (on an actual/365 basis) does an investor earn on the Treasury note
for

BFF5915 Options, Futures and Risk management
Week6TutorialQuestions+Solutions
Problem 9.8
Explain why an American option is always worth at least as much as a European option
on the same asset with the same strike price and exercise date.
The holder of a

BFF5915 Options, Futures and Risk management
Week8TutorialQuestions+Solutions
Problem 12.9
A stock price is currently AUD 50. It is known that at the end of two months it will be
either AUD 53 or AUD 48. The risk-free interest rate is 10% per annum with

BFF5915 Options, Futures and Risk management
Week9TutorialQuestions+Solutions
Problem 13.10
What is the price of a European call option on a non-dividend-paying stock when the
stock price is $52, the strike price is $50, the risk-free interest rate is 12

BFF5915 Options, Futures and Risk management
Week11TutorialQuestions+Solutions
Problem 17.10
A company uses delta hedging to hedge a portfolio of long positions in put and call
options on a currency. Which of the following would give the most favourable

BFF5915 Options, Futures and Risk management
Week12TutorialQuestions+Solutions
Problem 7.9
Companies X and Y have been offered the following rates per annum on a $5 million 10year investment:
Fixed rate
8.0%
8.8%
Company x:
Company y:
Floating rate
BBSW

BFF5915 Options, Futures and Risk management
Week 10 Tutorial Questions + Solutions
Problem 15.9
A foreign currency is currently worth $1.50. The domestic and foreign risk-free interest
rates are 5% and 9%, respectively. Calculate a lower bound for the va

BFF5915 Options, Futures and Risk Management
Week 5 : Interest Rate Forwards and Futures
Binh Do
Reading: Sundaram and Das Ch 6 (pp122-135)
1
Outline
Introduction
Forward Rate Agreements
Payoff from an FRA
Hedging with FRAs
Valuing and pricing FRAs
Eurodo