Tutorial 11 Solutions
Problem 14.4.
Calculate the price of a three-month European put option on a non-dividend-paying stock
with a strike price of $50 when the current stock price is $50, the risk-free interest rate is
10% per annum, and the volatility is
Tutorial 9- Tutorial Solutions
Problem 11.1.
What is meant by a protective put? What position in call options is equivalent to a protective put?
A protective put consists ofa long position in a put option combined with a long position in the underlying
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TUTORIAL 10 - SOLUTIONS
Binomial Trees
Problem 12.2.
Explain the no-arbitrage and risk-neutral valuation approaches to valuing a European
option using a one-step binomial tree.
In the no-arbitrage approach, we set up a riskless portfolio consisting of a p
1
Tutorial 8- Tutorial Solutions
Practice Questions
Problem 9.1.
An investor buys a European put on a share for $3. The stock price is $42 and the strike price is $40. Under
what circumstances does the investor make a profit? Under what circumstances will
Tutorial 2 Solution
Problem 4.1.
A bank quotes you an interest rate of 14% per annum with quarterly compounding. What is
the equivalent rate with (a) continuous compounding and (b) annual compounding?
(a) The rate with continuous compounding is
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4 ln 1
Tutorial 6- Tutorial Solutions
A.
1. C From the swap, this party receives a fixed rate based on the yield curve in Canada and
pays a floating rate based on the yield curve in US.
2. A In the middle of the swap when the creditworthiness of the counterparty
Tutorial 6 - Tutorial Questions
A. Multiple Choice Questions
1. The current U.S. dollar ($) to Canadian dollar (C$) exchange rate is 0.7. In a $1 million plain
vanilla currency swap, the party that is entering the swap to hedge existing exposure to a C$de
Tutorial 3- Tutorial Solutions
Problem 2.1.
Distinguish between the terms open interest and trading volume.
The open interest of a futures contract at a particular time is the total number of long
positions outstanding. (Equivalently, it is the total numb
1
Tutorial 5- Tutorial Solutions
Multiple Choice Questions
1. Which of the following statements is FALSE?
A. In a plain vanilla interest rate swap, fixed rates are traded for variable rates.
B. The default problem is not important in the swap market.
C. I
Tutorial 2 Question
Problem 4.1.
A bank quotes you an interest rate of 14% per annum with quarterly compounding. What is
the equivalent rate with (a) continuous compounding and (b) annual compounding?
Problem 4.4.
An investor receives $1,100 in one year i
Tutorial 3- Tutorial Questions
Problem 2.1.
Distinguish between the terms open interest and trading volume.
Problem 2.2. An investor takes a short position in two 3-month futures contracts on a stock.
The contract size is 100 shares and the futures price
1
Tutorial 4- Tutorial Solutions
Problem 3.1.
Under what circumstances are (a) a short hedge and (b) a long hedge appropriate?
A short hedge is appropriate when a company owns an asset and expects to sell that asset in the
future. It can also be used when
Tutorial 5- Tutorial Questions
Multiple Choice Questions
1. Which of the following statements is FALSE?
A. In a plain vanilla interest rate swap, fixed rates are traded for variable rates.
B. The default problem is not important in the swap market.
C. In
1
Tutorial 4- Tutorial Questions
Problem 3.1.
Under what circumstances are (a) a short hedge and (b) a long hedge appropriate?
Problem 3.2.
Explain what is meant by basis risk when futures contracts are used for hedging?
Problem 3.6.
Suppose that the stan
Tutorial 1 Questions
Practice Questions from the Textbook.
Problem 1.1
What is the difference between a long forward position and a short forward position?
Problem 1.2.
Explain the difference between hedging, speculation, and arbitrage.
Problem 1.3.
What
Tutorial 1 Solution
Practice Questions
Problem 1.1
What is the difference between a long forward position and a short forward position?
When a trader enters into a long forward contract, she is agreeing to buy the underlying asset
for a certain price at a