Chapter 9
Parity and Other Option Relationships
Question 9.1. This problem requires the application of put-call-parity. We have: P (35, 0.5) = C (35, 0.5) eT S0 + erT 35 P (35, 0.5) = $2.27 e0.060.5 32 + e0.040.5 35 = $5.523. Question 9.2. This problem re
Chapter 1
Introduction to Derivatives
Question 1.2.
A variety of counter-parties are imaginable. For one, we could think about speculators who have
differences in opinion and who do not believe that we will have excessive temperature variations
during the
Chapter 2
An Introduction to Forwards and Options
Question 2.1. The payoff diagram of the stock is just a graph of the stock price as a function of the stock price:
In order to obtain the prot diagram at expiration, we have to nance the initial investment
Chapter 6
Commodity Forwards and Futures
Question 6.1.
The spot price of a widget is $70.00. With a continuously compounded annual risk-free rate of 5%,
we can calculate the annualized lease rates according to the formula:
F0,T = S0 e(r l )T
F0,T
S0
ln
=
Chapter 4
Introduction to Risk Management
Question 4.1. The following table summarizes the unhedged and hedged prot calculations: Copper price in Total cost one year $0.70 $0.90 $0.80 $0.90 $0.90 $0.90 $1.00 $0.90 $1.10 $0.90 $1.20 $0.90 Unhedged prot $0.
Chapter 3
Insurance, Collars, and Other Strategies
Question 3.1. This question is a direct application of the Put-Call-Parity (equation (3.1) of the textbook. Mimicking Table 3.1., we have: S&R Index 900.00 950.00 1000.00 1050.00 1100.00 1150.00 1200.00 S
Chapter 2
An Introduction to Forwards and Options
Question 2.1. The payoff diagram of the stock is just a graph of the stock price as a function of the stock price:
In order to obtain the prot diagram at expiration, we have to nance the initial investment
Chapter 8
Swaps
Question 8.1. We rst solve for the present value of the cost per two barrels: $22 $23 = 41.033. + 1.06 (1.065)2 We then obtain the swap price per barrel by solving: x x = 41.033 + 1.06 (1.065)2 x = 22.483, which was to be shown. Question 8
Chapter 5
Financial Forwards and Futures
Question 5.1. Four different ways to sell a share of stock that has a price S(0) at time 0. Description Outright Sale Security Sale and Loan Sale Short Prepaid Forward Contract Short Forward Contract Question 5.2.
Chapter 1
Introduction to Derivatives
Question 1.1. This problem offers different scenarios in which some companies may have an interest to hedge their exposure to temperatures that are detrimental to their business. In answering the problem, it is useful
Part 1 Insurance, Hedging, and Simple Strategies
We see that the total aggregate position gives us ST , no matter what the nal index value isbut
this is the same payoff as part (a). Our proof for the payoff equivalence is complete.
Now let us turn to the
Chapter 10
Binomial Option Pricing: I
Question 10.1.
Using the formulas given in the main text, we calculate the following values:
a)
for the European call option:
b)
for the European put option:
= 0.5
= 0.5
B = 38.4316
B = 62.4513
price = 11.5684
price =
Chapter 3
Insurance, Collars, and Other Strategies
Question 3.1.
This question is a direct application of the Put-Call-Parity (equation (3.1) of the textbook. Mimicking Table 3.1., we have:
S&R Index
900.00
950.00
1000.00
1050.00
1100.00
1150.00
1200.00
S
Chapter 5
Financial Forwards and Futures
Question 5.1. Four different ways to sell a share of stock that has a price S(0) at time 0. Description Outright Sale Security Sale and Loan Sale Short Prepaid Forward Contract Short Forward Contract Question 5.2.
Chapter 2
An Introduction to Forwards and Options
Question 2.1.
The payoff diagram of the stock is just a graph of the stock price as a function of the stock price:
In order to obtain the prot diagram at expiration, we have to nance the initial investment
Part 1 Insurance, Hedging, and Simple Strategies
into the forward contract so that we will receive $100 after one year. Then, the payoff from our
modied forward strategy is: $ST $1,200 + $100 = $ST $1,100, which equals the payoff of
the borrow to buy inde