Financial Decision and Pricing Model
Solution to Quiz 5
Mar 18,2013
1
Solutions:
There will be a margin call when $1,000 has been lost from the margin account.This
will occur when the price of silver increases by 1, 000 5, 000 = $0.20. The price of
silver

Financial Decision and Pricing Model
Solution to Quiz 3
Feb 20,2013
1
Solutions:
Using spot-forward parity, the forward price should be
F = S0 erT = $30 e12%0.5 = $31.86.
2
Solutions:
Case 1If the forward price is lower than $31.86, which is the fair forw

Financial Decision and Pricing Model
Solution to Quiz 2
Feb 6,2013
1
Solutions:
One strategy is to buy 200 shares. Another is to buy 2,000 options(20 contracts).
If the share price does well, the second strategy will give rise to greater gains. For
exampl

Financial Decision and Pricing Model
Solution to Quiz 1
Feb 1,2013
1
Solutions:
(a) The investor is obligated to sell pounds for 1.7000 when they are worth 1.6900.
The gain is (1.7000 1.6900) 100, 000 = $1, 000.
(b) The investor is obligated to sell pound

Quiz 5
Summary of last times contents
Futures markets
o Central clearinghouse
o Standardized contracts
o Margin account
Futures hedging
o Long/short hedging
o Basis risk
Concept Questions:
1. Suppose that you enter into a short futures contract to sell

Quiz 4
Summary of last times contents
Determination of forward prices for the underlying with known income or cost
(dividend-paying stock, foreign exchanges, and commodities).
Let F: forward/delivery price; S: current spot price
r: risk-free interest rat

Quiz 3
Summary of last times contents
Determination of forward prices (assume that the underlying asset does not
provide incomes or incur costs during the lifetime of the forward contract).
o The spot-forward parity:
where F: forward/delivery price
S: cu

Quiz 2
Summary of last times contents
Uses of derivatives:
o Risk hedging
o Speculation
o Arbitrage
Interest rate
o Simple
o Discrete compounding
o Continuous compounding
simple
discrete
compounding
DC (higher
compounding
frequency)
continuous
compoundi

Quiz 1
Summary of last times contents
Forward: obligation
Option: right
Forwards and options can be used for risk management.
Payoff/profit structure of forward and option at maturity:
Forward (K: Delivery price; S: Spot market price at maturity)
S>K

FinancialDecisionandPricing
Models
Lecture 4
Swaps
Main Contents
Term structure of interest rate
Types of interests
Term structure of interest rate
Forward rates
Swaps
Swaps Basics
Swaps and Balance Sheet Restructing
Pricing
4.1TermStructureofInterest
Rat

FinancialDecisionandPricing
Models
Lecture 1
Introduction to Derivative Markets
What is a Financial Derivative
Financial derivatives ( ) cover a variety of
financial instruments whose values are derived
from one or more underlying assets, market
securitie

Arrangement of Midterm Examination
Time: 2:30pm to 4:30pm, Mar 20 Wed, 2013
Venue: LSK LT2
Scope: Lectures 1 to 4
Format: Short answer questions, open lecture notes, close book
One A-4 formula sheet and calculator are allowed.
Checklist:
1. What is a fina