Chapter 11: Forward and Futures Hedging,
Spread, and Target Strategies
Hedging is the tai chi of trading.
Jim Kharouf
Futures, October, 1996, p. 90
Chance/Brooks
An Introduction to Derivatives and Risk Management, 7th ed. 11: 1
Ch.
Important Concepts in C

CHAPTER 11: FORWARD AND FUTURES HEDGING, SPREAD, AND TARGET STRATEGIES
END-OF-CHAPTER QUESTIONS AND PROBLEMS
1.
(Short Hedge and Long Hedge) The terms short and long refer to the position taken in the futures
contract. A short (long) hedge means that you

CHAPTER 9: PRINCIPLES OF PRICING FORWARDS, FUTURES, AND OPTIONS ON FUTURES
END OF CHAPTER QUESTIONS AND PROBLEMS
1.
(Value of a Forward/Futures Contract) Other than the insignificant margin requirement, a futures
contract requires no initial outlay of fun

CHAPTER 5: OPTION PRICING MODELS: THE BLACK-SCHOLES-MERTON MODEL END-OF-CHAPTER QUESTIONS AND PROBLEMS 1. (BSM Model as the Limit of the Binomial Model) In a discrete time model, the stock price can make a jump to only one of two possible values. The leng

CHAPTER 3: PRINCIPLES OF OPTION PRICING
END-OF-CHAPTER QUESTIONS AND PROBLEMS
1.
(Basic Notation and Terminology) The average of the bid and ask discounts is 8.22.
Discount = 8.22(68/360) = 1.5527
Price = 100 1.5527 = 98.4473
Yield = (100/98.4473) (365/68

Chapter 3: Principles of Option Pricing
Asking a fund manager about arbitrage opportunities is akin
to asking a fisherman where his favorite hole is. He will be
glad to tell you a fish story from long ago, but he will not tell
you where he caught the trou

Chapter 2:
The Structure of Options Markets
If the financial markets are a war zone, this is the
theater of hand-to-hand combat.
Richard Thomson
Apocalypse Roulette, 1998, p. 49
Important Concepts in Chapter 2
Definitions and examples of call and put opti

Chapter 13: Interest Rate Forwards and
Options
If a deal was mathematically complex in 1993 and 1994,
that was considered innovation. But this year, what took you
forward with clients wasnt the math it was bringing them
the most efficient application of a

Chapter 10: Futures Arbitrage Strategies
We use a number of tools to manage our investment portfolio for
the highest return, while minimizing the risk. Some of these tools
happen to be called 'derivatives.'
Anonymous respondent quoted in
1996 Capital Acce

Chapter 11: Advanced Futures Strategies
Some people think of speculative traders as gamblers; they
earn too much money and provide no economic value. But
to avoid crises, markets must have liquidity suppliers who
react quickly, who take contrarian positio

Chapter 1: Introduction
The speed of money is faster than its ever been.
Loleen Doerrer
Time, April 11, 1994, p. 33
D. M. Chance
An Introduction to Derivatives and Risk Management, 6th ed. 1: 1
Ch.
Important Concepts in Chapter 1
Different types of deriva

Chapter 12: Swaps
I once had to explain to my father that the bank didnt really
make its money taking deposits and lending out money to
poor folk so they could buy houses. I explained that the
bank actually traded for a living.
Stan Jonas
Derivatives Stra

Chapter 5: Option Pricing Models:
The Black-Scholes Model
When I first saw the formula I knew enough about it to know
that this is the answer. This solved the ancient problem of
risk and return in the stock market. It was recognized by the
profession for

Chapter 9: Principles of Pricing Forwards,
Futures, and Options on Futures
To know value is to know the meaning of the market.
Charles Dow
Money Talks (by Rosalie Maggio), 1998, p. 23
D. M. Chance
An Introduction to Derivatives and Risk Management, 6th ed

Chapter 6: Basic Option Strategies
Im not a seat-of-the-pants person, and options trading is a
seat-of-the-pants business.
Elizabeth Mackay
Women of the Street (by Sue Herera), 1997, p. 25
D. M. Chance
An Introduction to Derivatives and Risk Management, 6

Chapter 10: Futures Hedging Strategies
It is often said in the derivatives business that you cannot
hedge history.
Dan Goldman
Risk Management for the Investment Community,
1999, p. 16
D. M. Chance
An Introduction to Derivatives and Risk Management, 6th e

Chapter 7: Advanced Option Strategies
It takes two things to make a good trader, Struve advises
Norman. You have to understand the mathematics, and
you need street smarts. You dont want to be the guy with
thick glasses who is reading the sheet just when t

Chapter 8: The Structure of Forward and
Futures Markets
It is like watching your favorite soap opera. You know all
the characters. You know the plot. But you never really
know how the day is going to end.
Turk Ozdek
Futures, July 2001, p. 86
D. M. Chance

MIDDLE EAST TECHNICAL UNIVERSITY
DEPARTMENT OF BUSINESS ADMINISTRATION and
INSTITUTE OF APPLIED MATHEMATICS
SPRING 2003
BA 4825/5825 FINANCIAL DERIVATIVES
IAM 520 FINANCIAL DERIVATIVES
Dr. Gner, Dr. Oran, Dr. Danolu
Final Examination
June 10, 2003
1.
(10

MIDDLE EAST TECHNICAL UNIVERSITY
DEPARTMENT OF BUSINESS ADMINISTRATION and
INSTITUTE OF APPLIED MATHEMATICS
SPRING 2003
BA 4825/5825 FINANCIAL DERIVATIVES
IAM 520 FINANCIAL DERIVATIVES
Dr. Danolu
Midterm Examination II
May 9, 2003
1.
(20 points)
After gra

CHAPTER 7: ADVANCED OPTION STRATEGIES
END-OF-CHAPTER QUESTIONS AND PROBLEMS
1.
(Option Spreads: Basic Concepts) Simple long or short positions expose the trader to considerable risk.
This is especially true for short positions. By taking an opposite posit

CHAPTER 2: STRUCTURE OF OPTIONS MARKETS
END-OF-CHAPTER QUESTIONS AND PROBLEMS
1.
(Options) a. Homeowners insurance is a put option. In the event of a loss, the insurance
company pays you a portion of the value of the house. The rest is like a deductible.

CHAPTER 13: INTEREST RATE FORWARDS AND OPTIONS
END-OF-CHAPTER QUESTIONS AND PROBLEMS
1.
(Structure and Use of a Typical FRA) Most interest rate derivatives, specifically swaps and options, pay
off later than the expiration or settlement date. For example,

CHAPTER 1: INTRODUCTION
END-OF-CHAPTER QUESTIONS AND PROBLEMS
1.
(Introduction) Business risk is the risk associated with a particular line of business, whereas financial
risk is the risk associated with stock prices, exchange rates, interest rates and co

CHAPTER 12: SWAPS
END-OF-CHAPTER QUESTIONS AND PROBLEMS
1.
(Introduction) Interest rate swaps are more widely used than currency and equity swaps, because nearly
all businesses face some form of interest rate risk. Interest rate swaps are the primary mean

CHAPTER 10: FUTURES ARBITRAGE STRATEGIES
END-OF-CHAPTER QUESTIONS AND PROBLEMS
1.
(Carry Arbitrage and the Implied Repo Rate) A repurchase agreement (repo) is a type of loan in which
the borrower sells a security such as a T-bill with the agreement to buy

CHAPTER 4: OPTION PRICING MODELS: THE BINOMIAL MODEL
END-OF-CHAPTER QUESTIONS AND PROBLEMS
1.
(One-Period Binomial Model) When we price an option according to its boundary conditions, we do
not find an exact price for the option. We provide only limits on

CHAPTER 6: BASIC OPTION STRATEGIES
END-OF-CHAPTER QUESTIONS AND PROBLEMS
1.
(Different Holding Periods) When a call is purchased, the buyer pays for both the time value and the
intrinsic value of the option. As the call gets closer and closer to expiratio

CHAPTER 8: THE STRUCTURE OF FORWARD AND FUTURES MARKETS
END-OF-CHAPTER QUESTIONS AND PROBLEMS
1.
(Introduction) A forward contract obligates the holder of the long position to purchase the commodity at
a future date. A call option grants the holder of the