2
Futures Markets
Answers to Questions and Problems
1. Explain the different roles of a floor broker and an account executive. A floor broker is located on the floor of the exchange and executes orders for traders off-the-floor of the exchange. Typ
13
European Option Pricing
Answers to Questions and Problems
1. What is binomial about the binomial model? In other words, how does the model get its name? The binomial model is binomial because it allows for two possible stock price movements. The
5
Interest Rate Futures: Introduction
Answers to Questions and Problems
1. A 90-day T-bill has a discount yield of 8.75 percent. What is the price of a $1,000,000 face value bill? Applying the equation for the value of a T-bill, the price of a $1,0
15
American Option Pricing
Answers to Questions and Problems
1. Explain why American and European calls on a nondividend stock always have the same value. An American option is just like a European option, except the American option carries the rig
4
Using Futures Markets
Answers to Questions and Problems
1. Explain how futures markets can benefit individuals in society who never trade futures. One of the main benefits that the futures market provides is price discovery; futures markets provi
14
Option Sensitivities and Option Hedging
Answers to Questions and Problems
1. Consider Call A, with: X $70; r 0.06; T t 90 days; DELTA, GAMMA, THETA, VEGA, and RHO for this call. c DELTA GAMMA THETA VEGA RHO $1.82 .2735 .0279 8.9173 9.9144 3.5985
11 Option
Payoffs and Option Strategies
Answers to Questions and Problems
1. Consider a call option with an exercise price of $80 and a cost of $5. Graph the profits and losses at expiration for various stock prices.
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CHAPTER 11
OPTION PAY
3 Futures Prices
Answers to Questions and Problems
1. Explain the function of the settlement committee. Why is the settlement price important in futures markets in a way that the day's final price in the stock market is not so important? In futures m
16
Options on Stock Indexes, Foreign Currency, and Futures
Answers to Questions and Problems
1. Explain why interest payments on a foreign currency can be treated as analogous to a dividend on a common stock. For a stock, dividends represent a leak
Loss No Default of A Default of A Total Volatility of A No Default of B Default of B Total Volatility of B No Default of C Default of C Total Volatility of C 0 45 0 30 0 25
Probability 95% 5% 100%
Prob. Wtd. Loss Prob. Wtd. Sqrd Dev. 0 1.25 1.25 1.
17
The Options Approach to Corporate Securities
Answers to Questions and Problems
1. Explain why common stock is itself like a call option. In the option analysis of common stock, what plays the role of the exercise price and what plays the role of
Market Risk
Risk Component
Typical Exposure Level
Credit
Market
Liquidity
Operational
Legal
Reputational
Highest
High
Medium to High
Medium to Low
Medium to Low
Low
Market Risk
Market
Risk is the exposure of an
institutions financial condition to adverse
12
Bounds on Option Prices
Answers to Questions and Problems
1. What is the maximum theoretical value for a call? Under what conditions does a call reach this maximum value? Explain. The highest price theoretically possible for a call option is to
10
The Options Market
Answers to Questions and Problems
1. State the difference between a call and a put option. Call and put options are the two fundamental kinds of exchange traded options. They differ in the rights and privileges that ownership
18
Exotic Options
Answers to Questions and Problems
1. Using the following parameter values, find the price of a forward-start put: S 0.2; r 0.1; 0.05; tg 0.5. 100; X 100; T t 1 year;
The first step is to value a plain vanilla put on the grant da
19
Interest Rate Options
Answers to Questions and Problems
1. Explain the relationship among mortgage-backed securities, mortgage pass-throughs, and collateralized mortgage obligations. The mortgage-backed security (MBS) is a security that gives th
20
The Swaps Market: Introduction
Answers to Questions and Problems
1. Explain the differences between a plain vanilla interest rate swap and a plain vanilla currency swap. In a plain vanilla interest rate swap, one party pays a fixed rate of inter
21 Swaps:
Economic Analysis and Pricing
Answers to Questions and Problems
1. A trader buys a bond that pays an annual coupon based on LIBOR with a principal amount of $10 million. The actual payment in each year depends on the level of LIBOR observ
22
Answers to Questions and Problems
Swaps: Applications
1. At present, you observe the following rates: FRA0,1 5.25 percent and FRA1,2 5.70 percent, where the subscripts refer to years. You also observe prices on calls and puts on one-year LIBOR t
Solutions to Exercises for OPTION!
Answers to Questions and Problems
1. Consider a call and a put option on the same underlying stock. Both options have an exercise price of $75. The call costs $5, and the put costs $4. If you buy both the call and
6
Interest Rate Futures: Refinements
Answers to Questions and Problems
1. Explain the risks inherent in a reverse cash-and-carry strategy in the T-bond futures market. The reverse cash-and-carry strategy requires waiting to receive delivery. Howeve
7
Stock Index Futures: Introduction
Answers to Questions and Problems
1. Assume that the DJIA stands at 8340.00 and the current divisor is 0.25. One of the stocks in the index is priced at $100.00 and it splits 2:1. Based on this information, answe
8
Stock Index Futures: Refinements
Answers to Questions and Problems
1. Explain the market conditions that cause deviations from a computed fair value price and that give rise to no-arbitrage bounds. The villains are market imperfections, principal
9
Foreign Currency Futures
Answers to Questions and Problems
1. The current spot exchange rate for the dollar against the Japanese yen is 146 yen per dollar. What is the corresponding US dollar value of one yen? The dollar value per yen is simply t
Introduction to Risk Management
By Buket mir
BA 4514 - Risk Management
Agenda
1. Financial Markets and Instruments
2. Risk
3. Risk Management Process
4. Risk Management
5. Video
22.2.2012
Copyright (C) 2012 - Buket mir / BA 4514 - Risk Management
2
22.2.2