FINE 443: Applied Corporate Finance Assignment # 3 Total: 20 Points
Question # 1 (10 points) Case: American Chemical: Collinsville Plant With Laminate
Use the following assumptions along with case information:
Project the P&L, Capital Deployed and Average
FINE 443: Applied Corporate Finance Assignment # 4 Total: 20 Points
Question # 1 (10 points) The company MoFin Inc.(MFI) had pre-tax operating
income of $150 million in the latest year. MFs statutory tax rate is 40% and the
standard deviation of percentag
Options Markets
Definitions and Terminology
How Options Markets Work
Determinants and Bounds of Option
prices
Put-call Parity
Properties
1. Definitions
A call is an option to buy
a certain asset at (or
by) a certain date in the
future (expiration date)
fo
Futures
Mechanism of Futures Trading
Specifications of the Futures contract
Futures vs Spot
Margin
Hedging
Forward vs. Futures Contracts
1. Mechanism of Futures Trading
Steps
Call a broker and Inform of the purchase
The broker submits the order to the flo
The Black-Scholes Model
Deriving and interpreting B-S
Using B-S
1. Deriving of B-S
The option price (f ) and the stock price (S) depend on
the same underlying source of uncertainty.
We can form a portfolio consisting of the stock and the
option which elim
The Option Greeks
Delta
Gamma
Vega
Theta
Rho
What are the Greeks?
The Greeks measures the sensitivity of the value of a
derivative to a small change in a given underlying
asset,
The Greeks are vital tools in risk management
Quantify the risk and hedge
Introduction
Forward, Futures, Option
Hedging, Speculation, Arbitrage
1
1. What Is a Derivative?
Definition
An agreement between two parties which has a value
determined by the price of something else
.i.e. The value depends on the value of the underlyin
Option Trading Strategies
Three Alternative Strategies
Take a position in:
1. The option and the underlying
2. Two or more options of the same type
This is known as a spread
4. A mixture of calls and puts
This is known as a combination
1.Option and the un
Swaps
1. Swaps
Major types
Currency Swap
Interest Rate Swap
Swaps market is the largest financial derivative
market in the world.
manage both interest and exchange rate risk.
Swaps are OTC instruments
2. Interest Rate Swap
An agreement between two pa
The Binomial Model
Option pricing principles
One-period model
N-period model and extensions
What do we want to find and
what do we know?
We know (given)
- The value of an option at maturity
- the price of an underlying security
We want to find
- The pri
BS Options on Stock Indices & Currencies
1. Option on Stock Index
One index option contract is on 100 x Index
Settlement in Cash
On exercise of the option, buyer of call receives
(Index Value (S) K )+ x 100 in cash
On exercise of the option, buyer of
Desautels Faculty of Management
Financial Derivatives
FINE 448
Professor:
Larbi
Hammami
Student
Name:
McGill
ID:
INSTRUCTIONS:
Write your name and student number in the space provided above.
Please outline solutions and indicate intermediate steps and cal
a w ,a w) a m a M a m) ;
Table/cfw_8 2 C1,!11ulative T111111) Distribution f _ If J/ . f ' :H/
l
CHAPI ER 18 Option Valuation 693 1
" " mt ._ .
.tf'- 4,. 1 , 11. 1
. _._._, .
-. _. H'-
.: y,
, :1
I
i -
1 ' 1,
x
. cfw_-
~ 1
1
3 I
I I
E
5: , . ;
.
E '
Formulas
Compounding continuously $1 er*n
QA * (S / F )
Q *h
A
QF
QF
N P
$1 e-r*n
Rm m(e Rc / m 1)
R
Rc m ln 1 m
m
N
Discounting Continuously
P
P
( P P , M )
F
M
F
h
S
F
N ( P* P )
F0 S 0 e rT
f 0 S 0 - Ke rT
F0 ( S 0 - I) e rT
f 0 S 0 - I 0 - Ke
Formulas
$1 er*n
Compounding continuously
QA * (S / F )
Q *h
A
QF
QF
N P
$1 e-r*n
Rm m(e Rc / m 1)
R
Rc m ln 1 m
m
N
Discounting Continuously
P
P
( P P , M )
F
M
F
h
S
F
N ( P* P )
F0 S 0 e rT
f 0 S 0 - Ke rT
F0 ( S 0 - I) e rT
f 0 S 0 - I 0 - Ke
CHAPTER 19
The Greek Letters
Practice Questions
Problem 19.1.
Explain how a stop-loss trading rule can be implemented for the writer of an out-of-themoney call option. Why does it provide a relatively poor hedge?
Suppose the strike price is 10.00. The opt
CHAPTER 15
The Black-Scholes-Merton Model
Practice Questions
Problem 15.1.
What does the BlackScholesMerton stock option pricing model assume about the
probability distribution of the stock price in one year? What does it assume about the
probability dist
CHAPTER 4
Interest Rates
Practice Questions
Problem 4.1.
A bank quotes you an interest rate of 14% per annum with quarterly compounding. What is
the equivalent rate with (a) continuous compounding and (b) annual compounding?
(a) The rate with continuous c
CHAPTER 13
Binomial Trees
Practice Questions
Problem 13.1.
A stock price is currently $40. It is known that at the end of one month it will be either $42 or
$38. The risk-free interest rate is 8% per annum with continuous compounding. What is the
value of
CHAPTER 17
Options on Stock Indices and Currencies
Practice Questions
Problem 17.1.
A portfolio is currently worth $10 million and has a beta of 1.0. An index is currently
standing at 800. Explain how a put option on the index with a strike of 700 can be
CHAPTER 11
Properties of Stock Options
Practice Questions
Problem 11.1.
List the six factors affecting stock option prices.
The six factors affecting stock option prices are the stock price, strike price, risk-free interest
rate, volatility, time to matur
Assignment 3
1. The price of a stock is $40. The price of a one-year European put option on the stock with a strike
price of $30 is quoted as $7 and the price of a one-year European call option on the stock with a strike
price of $50 is quoted as $5. Supp
Assignment 2
1. A stock is expected to pay a dividend of $1 per share in two months and in five months. The
stock price is $50, and the risk-free rate of interest is 8% per annum with continuous
compounding for all maturities. An investor has just taken a
1. The current price of a stock is $58, and three-month call options with a strike price of $60
currently sell for $2.90. An investor who feels that the price of the stock will increase is
trying to decide between buying 250 shares and buying 5,000 call o
Assignment 2
1. A stock is expected to pay a dividend of $2 per share in three months and in seven months.
The current stock price is $50, and the risk-free rate of interest is 8% per annum with continuous
compounding for all maturities. An investor has j
Assignment 3
1. The price of a stock is $40. The price of a one-year European put option on the stock with a strike
price of $30 is quoted as $7 and the price of a one-year European call option on the stock with a strike
price of $50 is quoted as $5. Supp
Recommended Problems
Chapter 1 :
1 to 22,24 to 37,39,41
Chapter 2 :
1 to 4,6 to 12,15 to 22,24 to 32,34
Chapter 3 :
1 to 32
Chapter 4 :
1 to 5,8 to 14,16,19,22,24 to 28,31,33 to 35
Chapter 5 :
1 to 9,12 to 15,18,24 to 33
Chapter 6 :
1 to 4, 7,9 to 13,15 t
FINE 448 Assignment 1
Huai Zhang 260567650
Sharon Liu 260550894
Jacob Zhang 260564009
Wen Wang 260483439
1. Depending on the risk aversion of the investor, more conservative investors should invest
in the stocks directly, while more aggressive investor wi