CHAPTER 13
Valuing Stock Options: The BlackScholesMerton Model
Practice Questions
Problem 13.18.
Consider an American call option on a stock. The stock price is $70, the time to maturity is
eight months, the riskfree rate of interest is 10% per annum,
A deposit account pays 12% per annum with continuous compounding, but interest is actually paid quarterly. How much interest will be paid each quarter on a $10,000
deposit?
The equivalent rate of interest with quarterly compounding iswhere
SO,
The amount
CHAPTER 10
Properties of Stock Options
Practice Questions
Problem 10.11.
A fourmonth European call option on a dividendpaying stock is currently selling for $5.
The stock price is $64, the strike price is $60, and a dividend of $0.80 is expected in one
CHAPTER 6
Interest Rate Futures
Practice Questions
Problem 6.8.
The price of a 90day Treasury bill is quoted as 10.00. What continuously compounded
return (on an actual/365 basis) does an investor earn on the Treasury bill for the 90day
period?
The cash
CHAPTER 1
Introduction
Practice Questions
Problem 1.11.
A cattle farmer expects to have 120,000 pounds of live cattle to sell in three months. The livecattle futures contract on the Chicago Mercantile Exchange is for the delivery of 40,000
pounds of cattl
Sean McCaffery
FNCE 4304 Practice Textbook Quizes
1.1) What is the difference between a long futures position and a short futures position?
A trader who enters into a long futures position is agreeing to buy the underlying asset for a
certain price at a c
CHAPTER 2
Mechanics of Futures Markets
Practice Questions
Problem 2.12.
Show that, if the futures price of a commodity is greater than the spot price during the
delivery period, then there is an arbitrage opportunity. Does an arbitrage opportunity exist i
CHAPTER 5
Determination of Forward and Futures Prices
Practice Questions
Problem 5.8.
Is the futures price of a stock index greater than or less than the expected future value of the
index? Explain your answer.
The futures price of a stock index is always
CHAPTER 3
Hedging Strategies Using Futures
Practice Questions
Problem 3.10.
Explain why a short hedgers position improves when the basis strengthens unexpectedly and
worsens when the basis weakens unexpectedly.
The basis is the amount by which the spot pr
Properties of Stock
Options
Chapter 10
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, MKD
1
Notation
c : European call
option price
p : European put
option price
S0 : Stock price
today
K : Strike price
T : Life of option
: Volatility of stoc
Chapter 2
Mechanics of Futures
Markets
1.
2.
Institutional details of futures
and forward instruments and
markets
Forward vs. Futures
Fundamentals of Futures and Options Markets, 8th Ed, Ch 2, MKD
1
Futures Contracts
Available on a wide range of underlyin
09/15/2015
There will be a problem like the one on page 62 aka slide 8 on the test
Problem 3.8 in book
A good rule of thumb is to choose a futures contact that has a
delivery month as close possible to but later than the month
containing the expiriation
Chapter 4
Interest Rates
Definition and estimation
Risk free and zero rates
Bond yields
Forward rates from interest rate
term structure
Fundamentals of Futures and Options Markets, 8th Ed, Ch 4, MKD
1
Types of Short Term Rates
Treasury rates: Rates on ins
CHAPTER 11
Trading Strategies Involving Options
Practice Questions
Problem 11.8.
Use putcall parity to relate the initial investment for a bull spread created using calls to the
initial investment for a bull spread created using puts.
A bull spread using
CHAPTER 6
Interest Rate Futures
Practice Questions
Problem 6.8.
The price of a 90day Treasury bill is quoted as 10.00. What continuously compounded
return (on an actual/365 basis) does an investor earn on the Treasury bill for the 90day
period?
The cash
CHAPTER 4
Interest Rates
Practice Questions
Problem 4.10.
A deposit account pays 12% per annum with continuous compounding, but interest is
actually paid quarterly. How much interest will be paid each quarter on a $10,000 deposit?
The equivalent rate of i
CHAPTER 7
Swaps
Practice Questions
Problem 7.9.
Companies X and Y have been offered the following rates per annum on a $5 million 10year
investment:
Company X
Company Y
Fixed Rate
8.0%
8.8%
Floating Rate
LIBOR
LIBOR
Company X requires a fixedrate invest
CHAPTER 12
Introduction to Binomial Trees
Practice Questions
Problem 12.11.
A stock price is currently $40. It is known that at the end of three months it will be either $45
or $35. The riskfree rate of interest with quarterly compounding is 8% per annum
CHAPTER 4
Interest Rates
Practice Questions
Problem 4.10.
A deposit account pays 12% per annum with continuous compounding, but interest is
actually paid quarterly. How much interest will be paid each quarter on a $10,000 deposit?
The equivalent rate of i
CHAPTER 7
Swaps
Practice Questions
Problem 7.9.
Companies X and Y have been offered the following rates per annum on a $5 million 10year
investment:
Company X
Company Y
Fixed Rate
8.0%
8.8%
Floating Rate
LIBOR
LIBOR
Company X requires a fixedrate invest
CHAPTER 11
Trading Strategies Involving Options
Practice Questions
Problem 11.8.
Use putcall parity to relate the initial investment for a bull spread created using calls to the
initial investment for a bull spread created using puts.
A bull spread using
1.1
Matrix method:
= ( , )
.
=
.
Since C is a diagonal Matrix, the inverse of C is just reciprocal of its elements.
If C is not diagonal, calculate it as:
=
 =


=


In our case
=
=
.
.
.
.
=
.
.
Equation method (not recommended):
, =
(