OFFICE USE ONLY
Semester One 2015
Examination Period
Faculty of Business and Economics
EXAM CODES:
BFF5915
TITLE OF PAPER:
OPTIONS, FUTURES AND RISK MANAGEMENT PAPER 1
EXAM DURATION:
3 hours writing time
READING TIME:
10 minutes
THIS PAPER IS FOR STUDENTS

BFF5915 Tutorial 10
Option hedging using the BSM
Suggested solution
Q.1 A delta of 0.7 means that, when the price of the stock increases by a small amount, the
price of the option increases by 70% of this amount. Similarly, when the price

BFF5915 Tutorial 7
Options markets Properties of Stock Options
Suggested solution
Q.1
a. Profit function for a long call is max(ST -100,0)-5. Profit would be realised if max(ST -100,0)5>0, or when ST >105. Option will be exercised as long as ST >100
ST
10

BFF5915 Tutorial 4
Hedging strategies using futures
Question 1
a) Does a perfect hedge always succeed in locking the spot price of an asset for a future
transaction? Explain your answer
b) If the minimum variance hedge ratio is calculated as 1.0, the hedg

BFF5915 PAST EXAM QUESTIONS
(Note: Coverage of material for some of these questions is not done until weeks
10, 11, and 12.)
Question 1
It is currently June 2010, and you are the CFO of a large corporation intending to
borrow in November 20

BFF5915 Tutorial 1
Suggested Solution
Problem 1.
a) The rate with a continuous compounding is
0.14
4 ln1
0.1376 or 13.76% p.a.
4
b) The rate with annual compounding is
4
0.14
1 0.1475 or 14.75% p.a.
1
4
Problem 2.
A bonds price is obtained by di

BFF5915 Tutorial 3
Forward and futures contracts
Q.1
a. Outline differences between a forward contract and a futures contract
b. Explain how the clearinghouse operates to protect the futures market.
c. Explain how margins protect investors against the pos

BFF5915 Tutorial 2
Basics of derivatives
Question 1
What is a derivative security? Give an example of a derivative security. Give an
example of a security that is NOT a derivative.
Question 2
Can a derivative security be the underlying for another derivat

BFF5915 Tutorial 2
Basics of derivatives
Suggested solution
Question 1
A derivative security is a financial security whose value depends on (or derives from)
other, more fundamental, underlying variables such as the price of a stock, a commodity
price, an

BFF5915 Tutorial 1
Basic financial mathematics
The following questions are taken from Hull, Fundamentals of Options and Futures
Markets, 7th Edition. Students should have already obtained relevant concepts from previous
finance units. If you are unsure, r

MidSemester Test Details
The MidSemester Test (MST) will be held in each of the lecture venues.
Friday 2nd September (12pm 3pm seminar). Test will be held during first hour of seminar.
Test will begin at approximately 12:10 pm. Do not be late.
Friday 2nd

BFF5915
ASSIGNMENT
Options, futures and risk
management
Lecture: Li Ge
Lecture time: Friday 12pm
LI YANG
24137669
Q1. Use DerivaGem to calculate the value of an American put option on a nondividend-paying stock when the stock price is USD 30, the strike p

Question 1
For each of EIGHT (8) questions below, state whether it is true or false (1 mark), and explain
the reason (1.5 marks).
a) You are long 5 eurodollar futures contracts. If the Libor rate underlying the contract
increases by 5 basis points,

Question 1
For each of EIGHT (8) questions below, state whether it is true or false (1 mark), and explain
the reason (1.5 marks).
a) Futures markets serve no useful economic purpose.
False. Possible useful economic functions include price discover

Portfolio Position
Stock
200
Put at K=5
200
Call at K=6
-200
InstrumentStrike
Call
Put
Call
Put
Call
Put
Other Information
S
55
T
0.25
interest rat
0.04 dividend
Price
50
50
55
55
60
60
5.93
0.43
2.13
1.59
0.25
4.66
0
Implied Vola
Delta
Gamma Vega
0.2068

BFF5915 Tutorial 12
Credit derivatives
Question 1
A credit default swap requires a semiannual payment at the rate of 60 basis points per year.
The principal is $300 million and the credit default swap is settled in cash. A default occurs
after four years

OFFICE USE ONLY
BFF5915 OPTIONS, FUTURES AND RISK MANAGEMENT
Question 1
For each of the questions below, state whether it is true or false (1 mark), and explain the
reason (1.5 marks).
a) A company enters into a futures contract to

OFFICE USE ONLY
BFF5915 OPTIONS, FUTURES AND RISK MANAGEMENT
Question 1
For each of the statements below, state whether it is true or false (1 mark), and explain the
reason (1.5 marks).
(a) A company enters into a futures contract to shor

BFF5915 quiz
Question 1
On the floor of a futures exchange one futures contract is traded where both the
long and short parties are closing out existing positions. What is the resultant change
in the open interest? Circle one.
Select one:
a. No change
b.

BFF5915 Tutorial 10
Option hedging using the BSM
Question 1
What does it mean to assert that the delta of a call option is 0.7? How can a short position in
1000 call options be made delta neutral when the delta of each option is 0.7?
Question 2

BFF5915 Tute 8 - Trading strategies involving options
Q.1 The following tables list BHP option prices on 15/7/2016. The stock closed the day
at 20.36.
a) Assume you are holding 1000 BHP shares with a long investment horizon. You are
of the view that the s

BF5915 Tutorial 5 Determination of forward and futures prices
Suggested solution:
Question 1:
a) The forward price, F0 , is given by equation (5.1) as:
F0 40e011 4421
or $44.21. The initial value of the forward contract is zero.
b) The delivery price K in

BFF5915 Tutorial 6
Interest rate forwards and futures
Suggested solutions
Question 1
FRA terminology:
(a) The payoff from an FRA is the dollar amount received at maturity of the FRA.
For example, if we are long an FRA at a strike interest ra

BFF5915 Tute 8 - Trading strategies involving options
Suggested solutions
Q.1
a) Covered call strategy: write a call option that expires 25/8/16 at any strike between
22-23.5. For 1000 shares held, write 10 calls (as each covers 100 shares). If you
choose

BF5915 Tutorial 9 BlackScholesMerton model
Suggested Solutions
Question 1
a) The required probability is the probability of the stock price ST exceeding K=$40, in a
real world (not riskneutral world). We have learned that the probability of ST >K in a

BFF5915 Tutorial 12
Credit derivatives
Solution
Question 1
The seller receives
300 000 000 00060 05 $900 000
at times 0.5, 1.0, 1.5, 2.0, 2.5, 3.0, 3.5, and 4.0 years. The seller also receives a final accrual
payment of about $300,000 ( $300 000 000 0060

BFF5915 Tutorial 11 Interest rate swaps
Suggestion solution
Question 1
A swap rate for a particular maturity is the average of the bid and offer fixed rates that a
market maker is prepared to exchange for LIBOR in a standard plain vanilla swap with that
m

BFF5915 Tutorial 7
Options markets Properties of Stock Options
Q.1
a. Suppose that a European call option to buy a share for $100 cost $5 and is held until maturity.
Under what circumstances will the holder of the option make a profit? Under what
circumst

BFF5915 Tutorial 4
Hedging strategies using futures
Suggested solutions
Q.1
a) No. Perfect hedging using futures/forwards locks in the futures/forward price,
which is in general different from the spot price
b) The statement is not true. The minimum varia

BFF5915 Tutorial 11 Interest rate swaps
Question 1
Explain what a swap rate is. What is the relationship between swap rates and par yields?
Question 2
Companies A and B have been offered the following rates per annum on a $20 million fiveyear loan:
Compan