CHAPTER 24
Weather, Energy, and Insurance Derivatives
Practices Questions
Problem 24.8.
HDD and CDD can be regarded as payoffs from options on temperature. Explain this
statement.
HDD is max(65 A, 0) where A is the average of the maximum and minimum tempe
CHAPTER 23
Credit Derivatives
Practice Questions
Problem 23.8.
Suppose that the risk-free zero curve is flat at 7% per annum with continuous compounding
and that defaults can occur half way through each year in a new five-year credit default
swap. Suppose
CHAPTER 22
Exotic Options and Other Nonstandard Products
Practice Questions
Problem 22.8.
Describe the payoff from a portfolio consisting of a lookback call and a lookback put with the
same maturity.
A lookback call provides a payoff of ST S min . A lookb
CHAPTER 21
Interest Rate Options
Practice Questions
Problem 21.8.
A bank uses Blacks model to price European bond options. Suppose that an implied price
volatility for a 5-year option on a bond maturing in 10 years is used to price a 9-year option
on the
CHAPTER 20
Value at Risk
Practice Questions
Problem 20.8.
A company uses an EWMA model for forecasting volatility. It decides to change the
parameter from 0.95 to 0.85. Explain the likely impact on the forecasts.
2
Reducing from 0.95 to 0.85 means that mo
CHAPTER 19
Volatility Smiles
Problem 19.8.
A stock price is currently $20. Tomorrow, news is expected to be announced that will either
increase the price by $5 or decrease the price by $5. What are the problems in using Black
Scholes to value one-month op
CHAPTER 18
Binomial Trees in Practice
Practice Questions
Problem 18.8.
Consider an option that pays off the amount by which the final stock price exceeds the
average stock price achieved during the life of the option. Can this be valued from a
binomial tr
CHAPTER 17
The Greek Letters
Practice Questions
Problem 17.8.
What does it mean to assert that the theta of an option position is 0.1 when time is measured
in years? If a trader feels that neither a stock price nor its implied volatility will change,
what
CHAPTER 16
Futures Options
Practice Questions
Problem 16.8.
Suppose you buy a put option contract on October gold futures with a strike price of $900
per ounce. Each contract is for the delivery of 100 ounces. What happens if you exercise
when the October
CHAPTER 15
Options on Stock Indices and Currencies
Practice Questions
Problem 15.8.
Show that the formula in equation (15.9) for a put option to sell one unit of currency A for
currency B at strike price K gives the same value as equation (15.8) for a cal
CHAPTER 14
Employee Stock Options
Practice Questions
Problem 14.8.
Explain how you would do the analysis to produce a chart such as the one in Figure 14.2.
It would be necessary to look at returns on each stock in the sample (possibly adjusted for the
ret
CHAPTER 13
Valuing Stock Options: The Black-Scholes-Merton Model
Practice Questions
Problem 13.8.
A stock price is currently $40. Assume that the expected return from the stock is 15% and its
volatility is 25%. What is the probability distribution for the
CHAPTER 12
Introduction to Binomial Trees
Practice Questions
Problem 12.8.
Consider the situation in which stock price movements during the life of a European option
are governed by a two-step binomial tree. Explain why it is not possible to set up a posi
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 10
Properties of Stock Options
Practice Questions
Problem 10.8.
Explain why the arguments leading to putcall parity for European options cannot be used to
give a similar result for American options.
When early exercise is not possible, we can argu
CHAPTER 9
Mechanics of Options Markets
Practice Questions
Problem 9.8.
A corporate treasurer is designing a hedging program involving foreign currency options.
What are the pros and cons of using (a) the NASDAQ OMX and (b) the over-the-counter
market for
Chapter 8
Securitization and the Credit Crisis of 2007
Practice Questions
Problem 8.8.
Why did mortgage lenders frequently not check on information provided by potential
borrowers on mortgage application forms during the 2000 to 2007 period?
Subprime mort
CHAPTER 7
Swaps
Practice Questions
Problem 7.8.
Explain why a bank is subject to credit risk when it enters into two offsetting swap contracts.
At the start of the swap, both contracts have a value of approximately zero. As time passes, it
is likely that
CHAPTER 6
Interest Rate Futures
Practice Questions
Problem 6.8.
The price of a 90-day 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 90-day
period?
The cash
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 4
Interest Rates
Practice Questions
Problem 4.8.
The cash prices of six-month and one-year Treasury bills are 94.0 and 89.0. A 1.5-year bond
that will pay coupons of $4 every six months currently sells for $94.84. A two-year bond that
will pay cou
CHAPTER 3
Hedging Strategies Using Futures
Practice Questions
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
CHAPTER 2
Mechanics of Futures Markets
Practice Questions
Problem 2.8.
The party with a short position in a futures contract sometimes has options as to the precise
asset that will be delivered, where delivery will take place, when delivery will take plac
CHAPTER 1
Introduction
Practice Questions
Problem 1.8.
Suppose you own 5,000 shares that are worth $25 each. How can put options be used to
provide you with insurance against a decline in the value of your holding over the next four
months?
You should buy