Valuing Stock Options:
The Black-Scholes-Merton
Model
Chapter 13
Fundamentals of Futures and Options Markets, 8th Ed, Ch 13, Copyright John C. Hull 2013
1
The Black-Scholes-Merton
Random Walk Assumption
Consider
a stock whose price is S
In a short perio
Options on Stock Indices
and Currencies
Chapter 15
Fundamentals of Futures and Options Markets, 8th Ed, Ch 15, Copyright John C. Hull 2013
1
Index Options
The most popular indices underlying options
in the U.S. are
The S&P 100 Index (OEX and XEO)
The S&P
Futures Options
Chapter 16
Fundamentals of Futures and Options Markets, 8th Ed, Ch 16, Copyright John C. Hull 2013
1
Options on Futures
Futures options are generally American and usually
expires on or a few days before the earliest delivery date
of the un
MARKET ORGANIZATION
AND STRUCTURE
FINANCIAL INSTRUMENTS AND MARKETS
Learning Outcomes
Explain and illustrate the main function of the financial system.
Describe classifications of assets and markets.
Compare and contrast the position an investor can take
Discovering Asia Week 2
Geography and History
Dr. Christian Harijanto
The topics
Geography
History
Topographical map of Asia
Climate regions
Tectonic map of Asia
Rivers in Asia
Geography
A sub-continental scale of Eurasian continent and the archipelago
Discovering Asia 111, Lecture wk 3
Politics in Asia
Dr. Christian Harijanto
What is Democracy?
Many definitions
Elections the key
Minimal criterion: able to elect a
different set of rulers
Asia after WW2
agricultural, underdeveloped, poor
Japan bombed,
Discovering Asia
Week 1
Dr. Christian Harijanto
School of Education
Topics
Topics and coverage
Assignments
What comes to mind when asked about
Asia?
What is Asia? How is Asia doing?
Geography
Politics
Economies
International Relations
Role of Religions
Po
Tutorial 2
Textbook: Fundamentals of Futures and Options Markets by John C. Hull. Pearson new
International Edition. Ed 8. ISBN number: 978-1-29204-190-2
Note: Questions with * must be covered in tutorial class
Problem 4.11.*
Suppose that 6-month, 12-mont
Problem 12.10.
A stock price is currently $80. It is known that at the end of four months it will be either $75
or $85. The risk-free interest rate is 5% per annum with continuous compounding. What is
the value of a four-month European put option with a s
Problem 12.13.
For the situation considered in Problem 12.12, what is the value of a six-month European put
option with a strike price of $51? Verify that the European call and European put prices
satisfy putcall parity. If the put option were American, w
Problem 12.14.
A stock price is currently $25. It is known that at the end of two months it will be either $23
or $27. The risk-free interest rate is 10% per annum with continuous compounding. Suppose
is the stock price at the end of two months. What is t
Problem 13.9.
A stock price has an expected return of 16% and a volatility of 35%. The current price is $38.
a) What is the probability that a European call option on the stock with an exercise price
of $40 and a maturity date in six months will be exerci
A portfolio manager announces that the average of the returns realized in each of the last 10
years is 20% per annum. In what respect is this statement misleading?
This problem relates to the material in Section 13.2 and Business Snapshot 13.1. The
statem
Problem 13.10.
Prove that, with the notation in the chapter, a 95% confidence interval for
S0e(
2
2)T 196 T
and
S0 e(
2
2)T 196 T
From equation (13.2), ln ST has the distribution
2
T , 2T
ln S 0
2
95% confidence intervals for
ln ST
are therefore
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 cattle. How can the farmer use the contract for
Problem 1.15.
It is May and a trader writes a September call option with a strike price of $20. The stock
price is $18, and the option price is $2. Describe the investors cash flows if the option is
held until September and the stock price is $25 at this
A company will buy 1000 units of a certain commodity in one year. It decides to hedge 80% of its
exposure using futures contracts. The spot price and the futures price are currently $100 and $90,
respectively. If the spot price and the futures price in on
It is July 2013. A mining company has just discovered a small deposit of gold. It will take six
months to construct the mine. The gold will then be extracted on a more or less continuous
basis for one year. Futures contracts on gold are available on the N
Question 1
Explain in detail which of the following is true and which is not true?
A. When interest rates in the economy increase, all bond prices increase
B. As its coupon increases, a bonds price decreases
C. Longer maturity bonds are always worth more
The price of a stock on February 1 is $84. A trader buys 200 put options on the stock with a strike
price of $90 when the option price is $10. The options are exercised when the stock price is $85.
Using a diagram explain in detail what is the traders net
The current USD/euro exchange rate is 1.4000 dollar per euro. The six month forward exchange rate
is 1.3950. The six month USD interest rate is 1% per annum continuously compounded. Estimate the
six month euro interest rate. Show your work in detail.
Let
Some examples of rearranging equations using logs
(Note that these particular examples are generally not
appropriate for linear regression but rather just show how
logs can be used.)
=
ln( ) = ln( )
ln() = ln( ) + ln( )
= ln( ) + ln()
- =
ln( ) = ln(
Toys
China
Franc
e
Allocated
production
units to:
(toys and
wine)
Produces
and
consumes
(output per
unit x units
allocated)
Wine
Production Exports
(-) and
Imports
(+)
*
Domestic
Consumption
*
*
Allocated
production
units to:
(toys and
wine)
Produces
and
Problem 5.1: Exchange Rate between JPY and A$
The Exchange rate between JPY and A$ is JPY 80.23 / A$.
a) What is the direct quote from an Australian perspective?
b) What is the direct quote from a Japanese perspective?
c) What is the indirect quote from a
Assignment 2 (Assessment worth 15%)
Due Date 22 January at 4pm (due date will be strictly observed)
Question 1
Is the following statement true or false? Explain why it is true or false stating any
assumptions.
Calls increase in value while puts decrease i
Properties of stock options
6 factors affecting value of stock options:
1. Current stock price
2. Strike price
3. Expiration date
4. Stock price volatility
5. Risk-free interest rate
6. Dividends expected during the life of the option.
Value of call incre
Introduction to Derivative Securities- INVE3000
MID SEMESTER TEST - PRACTICE QUESTIONS
Question 1
Which of the following is an example of an option series?
A. All calls on a certain stock
B. All calls with a particular strike price on a certain stock
C. A