Chapter 14
Real Options
Question 14.1
Note that, in order to get the answers exact, the up and down factors are u = e0.30 and d = 1/u. The discount rate for the cash flows (which we use with real-world probabilities) is 0.07 + 2 (0.11 0.07) = 15%. The pre
Chapter 10
Binomial Option Pricing
Question 10.1
1.
25 Since Cu = 25 and Cd = 0 we have = 50 = 0.50. To solve the bond amount, one could use Equation (10.2); however, once we know the options , finding the replicating bond position is a simple algebra exe
Chapter 11
The Black-Scholes Formula
Question 11.1
You can use the NORMSDIST function of Microsoft Excel to calculate the values for N ( d1 ) and N (d2 ). NORMSDIST(z) returns the standard normal cumulative distribution evaluated at z. Here are the interm
Chapter 12
Financial Engineering and Security Design
Question 12.1
Let R = e.06. The present value of the dividends is
R 1 + (1.50) R 2 + 2 R 3 + (2.50) R 4 + 3 R 5 = 8.1317.
The note originally sells for 100 8.1317 = 91.868. With the 50 cent permanent in
Chapter 13
Corporate Applications
Question 13.1
One could first value equity (E) as a call option and value the debt by subtracting equity from the asset value (i.e., B = A E). We chose the insurance approach. We start with valuing default-free debt which
Intro
Basic contracts
Spreads
PCP
PCP
Other strategies
Conc
FIN 512: Financial Derivatives
Lecture 3: Option portfolios
Dr. Martin Widdicks
UIUC
Fall, 2015
1 / 60
Intro
Basic contracts
Spreads
PCP
PCP
Other strategies
Conc
Overview
We have introduced the
Intro
No arbitrage
Synthetics
CC Arbitrage
Examples
Conc
Fin 512: Financial Derivatives
Lecture 5: Financial Forwards and Futures Pricing
Dr. Martin Widdicks
UIUC
Fall, 2015
1 / 60
Intro
No arbitrage
Synthetics
CC Arbitrage
Examples
Conc
Overview
After a
Chapter 9
Parity and Other Option Relationships
Question 9.1
This problem is an application of put-call-parity for a stock with a continuous dividend. We have:
P (35, 0.5) = C (35, 0.5) e T S0 + e rT 35 0.06 0.5 0.04 0.5 P (35, 0.5) = $2.27 e 32 + e 35 =
Chapter 8
Swaps
Question 8.1
We first solve for the present value of the cost per two barrels:
$22 $23 + = 41.033. 1.06 (1.065)2
We then obtain the swap price per barrel by solving:
x+ x = 41.033 1.06 (1.065)2 x = 22.483,
which was to be shown.
Question 8
Appendix B:
Continuous Compounding
Question B.1
Using a continuous rate of return, we have 67032 er 5 = 100000. This implies er 5 = 1.4918248. Solving, we have r 5 = ln(1.4918248) = 0.40, hence the continuous return is r = 0.40 / 5 = 8%.
Question B.2
The
Chapter 1
Introduction to Derivatives
Question 1.1
We will look at the CME
1. The CME trades derivatives (specifically futures and options on futures) on a wide variety of assets and indices/variables. Assets include basic commodities such as Cattle, Hogs
Chapter 2
An Introduction to Forwards and Options
Question 2.1
The payoff diagram of the stock is just a graph of the stock price as a function of the stock price:
In order to obtain the profit diagram at expiration, we have to incorporate the initial cos
Chapter 3
Insurance, Collars, and Other Strategies
Question 3.1
This question is a direct application of put-call parity (Equation 3.1) of the textbook. Mimicking Table 3.1, we have: S&R Index 900.00 950.00 1000.00 1050.00 1100.00 1150.00 1200.00 S&R Put
Chapter 4
Introduction to Risk Management
Question 4.1
The following table summarizes the unhedged and hedged profit calculations: Copper price in one year $0.80 $0.90 $1.00 $1.10 $1.20 Total cost $0.90 $0.90 $0.90 $0.90 $0.90 Unhedged profit $0.10 0 $0.1
Chapter 5
Financial Forwards and Futures
Question 5.1
Four different ways to sell a share of stock that has a price S0 at time 0. Get Paid at Time 0 T 0 T Lose Ownership of Security at Time 0 0 T T
Description Outright Sale Security Sale and Loan Sale Sho
Chapter 6
The Wide World of Futures Contracts
Question 6.1
The current exchange rate is 0.02 /, which implies 50/ . The euro continuously compounded interest rate is 0.04, the yen continuously compounded interest rate is 0.01. Time to expiration is 0.5 ye
Chapter 7
Interest Rate Forwards and Futures
Question 7.1
We can use (7.1) and solve for the effective annual yield as follows:
P (0, n) = 1 [1+r (0, n)]n
1/ n
[1 + r (0, n)]n = P (0, n)1 r (0, n) = P (0, n) 1
We can determine the continuous rate for ma
LIBOR
Details
Examples
Conc
Fin 512: Financial Derivatives
Lecture 8: LIBOR
Dr. Martin Widdicks
UIUC
Fall, 2015
1 / 27
LIBOR
Details
Examples
Conc
London
You might wonder, Why London? Why is the USD interbank
market based in London?
Although we will focus