Problem 1.10.
Explain why a futures contract can be used for either speculation or hedging.
If an investor has an exposure to the price of an asset, he or she can hedge with futures
contracts. If the investor will gain when the price decreases and lose wh

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 position
in the stock and the option that remains riskless for th

Problem 10.9.
What is a lower bound for the price of a six-month call option on a non-dividend-paying
stock when the stock price is $80, the strike price is $75, and the risk-free interest rate is 10%
per annum?
The lower bound is
80 75e0105 $866
Problem

Problem 17.11.
What is the delta of a short position in 1,000 European call options on silver futures? The
options mature in eight months, and the futures contract underlying the option matures in
nine months. The current nine-month futures price is $8 pe

Problem 13.13.
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% per annum, the volatility
is 30% per annum, and the time to maturity is thre

Problem 7.9.
Companies X and Y have been offered the following rates per annum on a $5 million 10-year
investment:
Company X
Company Y
Fixed Rate
8.0%
8.8%
Floating Rate
LIBOR
LIBOR
Company X requires a fixed-rate investment; company Y requires a floating

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 for hedging when the expiration of the hedge is in
a) June
b)

Problem 4.11.
Suppose that 6-month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%,
4.2%, 4.4%, 4.6%, and 4.8% per annum with continuous compounding respectively. Estimate
the cash price of a bond with a face value of 100 that will mature in

Problem 5.9.
A one-year long forward contract on a non-dividend-paying stock is entered into when the
stock price is $40 and the risk-free rate of interest is 10% per annum with continuous
compounding.
a) What are the forward price and the initial value o

Problem 15.11.
An index currently stands at 696 and has a volatility of 30% per annum. The risk-free rate of
interest is 7% per annum and the index provides a dividend yield of 4% per annum. Calculate
the value of a three-month European put with an exerci