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
NAME: _
FIN 512
OPTIONS AND FUTURES MARKETS (DERIVATIVES)
SPRING 2017
PROBLEM SET 1
Submit a hard copy of these problems with your answers at the beginning of class on Monday,
February 13. Late assignments will not be accepted. You may work on these probl
NAME: _
FIN 512
OPTIONS AND FUTURES MARKETS (DERIVATIVES)
SPRING 2017
PROBLEM SET 2
Submit a hard copy of these problems with your answers at the beginning of class on Monday,
February 20. Late assignments will not be accepted.
You may work on these probl
NAME: _
FIN 512
FINANCIAL DERIVATIVES
SPRING 2017
PROBLEM SET 7 - REVISED
Submit a hard copy of these problems with your answers at the beginning of class on
Wednesday, April 26. Solve these problems on additional pages and attach them to this
worksheet.
NAME: _
FIN 512
FINANCIAL DERIVATIVES
SPRING 2017
PROBLEM SET 4
Submit a hard copy of these problems with your answers at the beginning of class on Monday,
March 27 (the first class after Spring Break). Write your answers on this worksheet. Late
assignmen
NAME: _
FIN 512
FINANCIAL DERIVATIVES
SPRING 2017
PROBLEM SET 5
Submit a hard copy of these problems with your answers at the beginning of class on Wednesday,
March 29. Write your answers on this worksheet. Late assignments will not be accepted.
PROBLEM 1
NAME: _
FIN 512
FINANCIAL DERIVATIVES
SPRING 2017
PROBLEM SET 3
Submit a hard copy of these problems with your answers at the beginning of class on Monday,
February 27. Do all your work on these pages; do not submit any spreadsheets. Late assignments
will
NAME: _
FIN 512
FINANCIAL DERIVATIVES
SPRING 2017
ANSWERS TO PROBLEM SET 8
Submit a hard copy of these problems with your answers at the beginning of class on
Wednesday, May 3. Write your answers on these pages, and be sure to show your work; use the
addi
NAME: _
FIN 512
FINANCIAL DERIVATIVES
SPRING 2017
PROBLEM SET 8
Submit a hard copy of these problems with your answers at the beginning of class on
Wednesday, May 3. Write your answers on these pages, and be sure to show your work; use the
additional page
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
NAME: _
FIN 512
FINANCIAL DERIVATIVES
SPRING 2017
ANSWERS TO EXAM 1 78 POINTS POSSIBLE
There are 7 (seven) pages in this exam including this cover sheet make sure you have all the
pages before you begin.
Write your name at the top of this page
Write your
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
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
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
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 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
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