Econ 455/655 Options and Futures
Lau
Due: 2/8/2012
Problem Set II
Instructions:
1.
Answer all questions.
2.
Please form study group of up to 2 persons and work on the problem set. Each person
must hand in a separate handwritten copy. No Excel spreadsheet.
Econ 455/655 Options and Futures
Lau
Due: 4/25/2012
Problem Set XI
Instructions:
1)
Please form study group of up to 2 persons and work on the problem set.
2)
You have to show all your steps!
3)
If you wont be in class on the due date, you have to mail/Em
Econ 455/655
Options and Futures
Lau
Problem Set III
Due: 2/15/2012
Instructions:
1.
Please form study group of up to 2 persons and work on the problem set.
2.
No Excel spreadsheet.
3.
Show your formulas and steps clearly.
1.
Consider a forward contract o
Econ 455/655 Options and Futures
Lau
Due: 2/22/2012
Problem Set IV
1.
A corporate client wants to deposit $1,000,000 into a bank for 1 year. A bank offers the
corporate client 2 different deposits plans:
a)
depositing the funds in USD at 4% per annum with
Econ 455/655 Options and Futures
Lau
Due: 4/4/2012
Problem Set VIII
Instructions:
1)
Please form study group of up to 2 persons and work on the problem set.
2)
You have to show all your steps!
3)
4)
If you wont be in class on the due date, you have to mai

Chapter 15
The Greek Letters
SOLUTIONS
TO QUESTIONS
AND PROBLEMS
Problem 15.1.
.
Suppose the strike price is 10.00. The option writer aims to be fully covered whenever the
option is in the money and naked whenever it is out of the money. The option writ

Chapter
Options
14
on Stock
Currencies,
SOLUTIONS
Indices,
and Futures
TO QUESTIONS
Contracts
AND PROBLEMS
Problem 14.1.
When the S&P 100 goes down to 480, the value of the portfolio can be expected to be lOx
(480/500) = $9.6 million. (This assumes that
.J8I
Chapter
13
The BlackScholesMerton
SOLUTIONS
TO QUESTIONS
Model
AND PROBLEMS
Problem 13.1.
The BlackScholes option pricing model assumes that the probability distribution of the stock
price in I year (or at any other future time) is lognormal. It a

Ch~pter
Wiener
SOLUTIONS
12
Processes
TO QUESTIONS
and Ito's Lemma
AND PROBLEMS
Problem 12.1.
Imagine that you have to forecast the future temperature from a) the current temperature, b)
the history of the temperature in the last week, and c) a knowledg

Chapter
.I
11
Binomial
Trees
SOLUTIONS TO QUESTIONS AND PROBLEMS
Problem 11.1.
Consider a portfolio consisting of:
I
: caB option
+tl:
shares
If the stock price rises to $42, the portfolio is worth 42d  3. If the stock price falls to $38, it
is worth
.I
Chapter
10
Trading Strategies
SOLUTIONS TO QUESTIONS
Involving
Options
AND PROBLEMS
Problem 10.1.
.
.~
>#
A protective put consists of a long position in a put option
the underlying shares. It is equivalent to a long position in acombined with aalong
.
Chapter 9
Properties
of Stock
Options
SOLUTIONS TO QUESTIONS AND PROBLEMS
Problem 9.1.
The six factors affecting stock option prices are the stock price, strike'price, riskfree interest
rate, volatility, time to maturity, and dividends.
ProbHem 9.2.
Th
L
.J
Chapter
8
Mechanics
of Options
Markets
SOLUTIONS TO QUESTIONS AND PROBLEMS
Problem 8.1.
The investor makes a profit if the price of the stock on the expiration date is less than $37. In
these circumstances the gain from exercising the option is great
I
Chapter
7
Swaps
SOLUTIONS TO QUESTIONS
AND PROBLEMS
Problem 7.1.
A has an apparent comparative advantage in fixedrate markets but wants to borrow floating.
B has an apparent comparative advantage in floatingrate markets but wants to borrow fixed.
This
.I
Chapter
Interest
SOLUTIONS
6
Rate Futures
TO QUESTIONS
AND PROBLEMS
Problem 6.1.
There are 33 calendar days between July 7, 2004 and August 9, 2004. There are 184 calendar
days between July 7, 2004 and January 7,2005. The interest earned per $100 of pr

Chapter
5
Determination of Forward and
Futures Prices
SOLUTIONS
TO QUESTIONS
AND PROBLEMS
Problem 5.1.
The investor's broker borrows the shares from another client's account and sells them in the
usual way. To close out the position, the investor must p
.J
Chapter
4
Interest
SOLUTIONS
Rates
TO QUESTIONS
AND PROBLEMS
Problem 4.1.
(a) The rate with continuous compounding is
4ln
(
1+
0.14
4
)=
0.1376
or 13.76% per annum.
(b) The rate with annual compounding is
0.14
4
(1+4 ) 1=0.1475
or 14.75% per annum.
Pr
.
Chapter
3
Hedging Strategies
Using Futures
SOLUTIONS TO QUESTIONS AND PROBLEMS
Problem 3.1.
A shorf hedge is appropriate when a company owns an asset and expects to sell that asset in
the future. It can also be used when the company does not currently o
.J
Chapter
2
Mechanics
SOLUTIONS
of Futures
TO QUESTIONS
Markets
AND PROBLEMS
Problem 2.1.
The open interest of a futures contract at a particular time is the total number of long positions
outstanding. (Equivalently, it is the total number of short posi
1
Chapter
1
Introduction
SOLUTIONS TO QUESTIONS AND PROBLEMS
Problem 1.1.
When a trader enters into a long forward contract, she is agreeing to buy the underlying asset
for a certain price at a certain time in the future. When a trader enters into a short
Econ 455/655 Options and Futures
Problem Set XIII
1.
Lau
Due: 5/9/12
(30 points) A fund manager has a welldiversified portfolio that mirrors the performance of the
S&P500 and is worth $100 million. The value of the S&P500 is 1000 and the portfolio
manage
Econ 455/655 Options and Futures
Lau
Due: 5/2/12
Problem Set XII
1.
(20 points) A financial institution has the following portfolio of overthecounter options on
British Pound:
Type
Position
Call
1000
0.50
2.2
1.8
Call
500
0.80
0.6
0.2
Put
2000
0.40
Econ 455/655 Options and Futures
Lau
Due: 4/25/2012
Problem Set XI
Instructions:
1)
Please form study group of up to 2 persons and work on the problem set.
2)
You have to show all your steps!
3)
If you wont be in class on the due date, you have to mail/Em
Econ 455/655 Options and Futures
Practice Problem Set VII
Lau
Spring 2012
1.
The spot price of a nondividendpaying stock price is $100. Over the next 6month period,
it is expected to go up by 20% or down by 20%; and over the second next 6month period,
Econ 455/655 Options and Futures
Problem Set VI
Lau
Due: 3/7/2012
1.
What is the lower bound for the price of a 6month call option on a nondividendpaying stock
when the stock price is $80, the strike price is $75, and the riskfree interest rate is 10%
Econ 455/655 Options and Futures
Problem Set V
Lau
Due: 2/29/2012
1.
An investor writes 1 naked put option contracts. The option price is $8.00, the strike price is
$60.00, and the stock price is $55. What is the margin requirement?
2.
An investor writes
Econ 455/655 Options and Futures
Lau
Due: 2/1/2012
Problem Set I
Instructions:
1.
Please form study group of up to 2 persons and work on the problem set. Each person
must hand in a separate handwritten copy. No Excel Spreadsheet.
2.
Show your formulas and