F149 Derivatives
Professor Zheng Sun
Lecture 5
Binomial Models for Option Pricing
This Version: February 2010
Disclaimer: Some part of the notes are adapted by Professor Zheng Sun from
Professor Fan Yus lecture notes on Derivatives at the Merage School in
M149 Derivatives
Professor Zheng Sun
Lecture 1
Introduction to Derivatives
Introduction to Forwards and Futures
Disclaimer: Some part of the notes are adapted by Professor Zheng Sun from
Professor Fan Yus lecture notes on Derivatives at the Merage School
M249 Derivatives
Professor Zheng Sun
Lecture 4
Introduction to Options
This Version: February 2014
Disclaimer: Some part of the notes are adapted by Professor Zheng Sun from
Professor Fan Yus lecture notes on Derivatives at the Merage School in 2007
at th
M149 Derivatives
Professor Zheng Sun
Sample Midterm Exam
Student Name _
Student Number _
Instructions
1. Write down your name and student number in the spaces provided above.
2. There are five questions in this examination.
3. You have one hour and 20 min
Arbitrage with CATs and TIGRs
William L. Silber and Jessica A. Wachter
Before there was such a thing as Treasury STRIPS, banks such as Salomon and Merrill
Lynch would create their own zero-coupon bonds by setting up trusts. The zeros created
by Salomon wh
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2008 Financial Crisis
-Derivative
Market
-by Nader Ordubadi, Peihang Li,
Sam Chen, Johnny, Wenjing Zhang
What had happened?
Who are involved?
Economic
globalization
What are derivatives?
Derivatives are financial
instruments that derive their value
from s
Solutions to Assignment #1
Problem 1.20.
A trader enters into a short forward contract on 100 million yen. The forward exchange rate is
$0.0080 per yen. How much does the trader gain or lose if the exchange rate at the end of the
contract is (a) $0.0074 p
Solutions to Assignment #3
Problem 3.8.
In the Chicago Board of Trades corn futures contract, the following delivery months are
available: March, May, July, September, and December. State the contract that should be used
for hedging when the expiration of
Solutions to Assignment #2
Problem 2.11.
A trader buys two July futures contracts on frozen orange juice. Each contract is for the delivery
of 15,000 pounds. The current futures price is 160 cents per pound, the initial margin is $6,000
per contract, and
Solutions to Assignment #4
Problem 3.29.
It is now October 2013. A company anticipates that it will purchase 1 million pounds of copper
in each of February 2014, August 2014, February 2015, and August 2015. The company has
decided to use the futures contr
Solutions to Assignment #5
Problem 5.9.
A one-year long forward contract on a non-dividend-paying stock is entered into when the stock
price is $40 and the risk-free rate of interest is 10% per annum with continuous compounding.
a) What are the forward pr
M 149 Derivatives
Professor Zheng Sun
Midterm Exam
Student Name _
Student Number _
Instructions
1. Write down your name and student number in the spaces provided above.
2. There are five questions in this examination.
3. You have one hour and 20 minutes t
Solutions to Assignment #6
Problem 9.9.
Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until
maturity. Under what circumstances will the holder of the option make a profit? Under what
circumstances will the option b
Solutions to Assignment #7
Problem 11.10.
Suppose that put options on a stock with strike prices $30 and $35 cost $4 and $7,
respectively. How can the options be used to create (a) a bull spread and (b) a bear
spread? Construct a table that shows the prof
F149 Derivatives
Professor Zheng Sun
Lecture 5
Binomial Models for Option Pricing
Disclaimer: Some part of the notes are adapted by Professor Zheng Sun from
Professor Fan Yus lecture notes on Derivatives at the Merage School in 2007
at the permission of t
M149 Derivatives
Professor Zheng Sun
Lecture 4
Introduction to Options
Disclaimer: Some part of the notes are adapted by Professor Zheng Sun from
Professor Fan Yus lecture notes on Derivatives at the Merage School in 2007 at
the permission of the author.
Agnes Chung
31644064
Professor Zheng Sun
Mgmt 149 Derivatives 2015 Winter
Homework 8
12.9)
After 2 months the value of the option will be $4 (if the stock price is $53) or $0 (if the stock price is
$48).
Portfolio:
The value of the portfolio is either or
Agnes Chung
31644064
Professor Zheng Sun
Mgmt 149 Derivatives 2015 Winter
Homework 7
10.9)
10.10)
10.12)
PV of strike price =
2.5 < 2.75
Arbitrageurs can borrow $49.50 at 6% for one month, buy the stock and a put. This generates a profit in
all circumstan
Agnes Chung
31644064
Professor Zheng Sun
Mgmt 149 Derivatives 2015 Winter
Homework 6
9.12)
There are three types of possibilities for the trader:
Type 1: When stock price is less than $40, the put option provides a payoff of $40 Spot
Price and the call op
Agnes Chung
31644064
Professor Zheng Sun
Management 149 Derivatives Winter 2015
Homework 5
5.9b)
The forward price is:
45e0.1*0.5 = $47.31
The value of the forward contract is:
Delivery price:
40e0.1*1 = $44.21
45 44.21e-0.1*0.5 = $2.95
5.10)
150e(0.07-0.
Agnes Chung
31644064
Professor Zheng Sun
Mgmt 149 Derivatives 2015 Winter
Homework 1
1.20)
a) The trader gains if the exchange rate is $0.0074 per yen because he is getting a higher rate
of $0.0080 USD per Japanese yen due to the details of his forward co
Agnes Chung
31644064
Professor Zheng Sun
Mgmt 149 Derivatives 2015 Winter
Homework 4
3.29)
October 2013: Long position in 96 September 2014 contracts & 32 march 2014 contracts
February 2014: Close out 32 March 2014 contracts for the delivery of 800,000 po
Agnes Chung
31644064
Professor Zheng Sun
Mgmt 149 Derivatives 2015 Winter
Homework 3
3.2)
Basis risk is the uncertainty of the basis (difference between spot price and futures price) at
expiration of the hedge.
3.8)
July, September, and March
3.9)
No a pe
Agnes Chung
31644064
Professor Zheng Sun
Mgmt 149 Derivatives 2015 Winter
Homework 2
2.11
The price has to drop under $1.50 per pound of OJ in order to receive a margin call.
This is the thought process: There will be a margin call if the equity goes unde