Trading Strategies Involving Options
Use putcall parity to relate the initial investment for a bull spread created using calls to the
initial investment for a bull spread created using puts.
A bull spread using
A trader writes five naked put option contracts, with each contract being on 100 shares.
The option price is $10, the time to maturity is six months, and the strike price is $64.
(a) What is the margin requi
Valuing Stock Options: The Black-Scholes-Merton Model
A stock price is currently $40. Assume that the expected return from the stock is 15% and its
volatility is 25%. What is the probability distribution for the
Properties of Stock Options
Explain why the arguments leading to putcall parity for European options cannot be used to
give a similar result for American options.
When early exercise is not possible, we can argu
Exotic Options and Other Nonstandard Products
Describe the payoff from a portfolio consisting of a floating lookback call and a floating
lookback put with the same maturity.
A floating lookback call provides a p
Value at Risk
A company uses an EWMA model for forecasting volatility. It decides to change the
parameter from 0.95 to 0.85. Explain the likely impact on the forecasts.
Reducing from 0.95 to 0.85 means that mo
Mechanics of Options Markets
A corporate treasurer is designing a hedging program involving foreign currency options.
What are the pros and cons of using (a) the NASDAQ OMX and (b) the over-the-counter
Suppose that the risk-free zero curve is flat at 7% per annum with continuous compounding
and that defaults can occur half way through each year in a new five-year credit default
Weather, Energy, and Insurance Derivatives
HDD and CDD can be regarded as payoffs from options on temperature. Explain this
HDD is max(65 A 0) where A is the average of the maximum and minimum tempera