Solution to Derivatives Markets: for Exam Fm
Solution to Derivatives Markets: for Exam FM
Yufeng Guo June 24, 2007
www.guo.coursehost.com
c °Yufeng Guo
ii
Contents
Introduction 1 Introduction to derivatives 2 Introduction to forwards and options vii 1 7 29 79 129 141
3 Insurance, collars, and other strategies 4 Introduction to risk management 5 Financial forwards and futures 8 Swaps
iii
CONTENTS
CONTENTS
www.guo.coursehost.com
c °Yufeng Guo
iv
Preface
This is Guo’s solution to Derivatives Markets (2nd edition ISBN 0-321-28030X) for Exam FM. Unlike the official solution manual published by AddisonWesley, this solution manual provides solutions to both the even-numbered and odd-numbered problems for the chapters that are on the Exam FM syllabus. Problems that are out of the scope of the FM syllabus are excluded. Please report any errors to yufeng_guo@msn.com. This book is the exclusive property of Yufeng Guo. Redistribution of this book in any form is prohibited.
v
PREFACE
PREFACE
www.guo.coursehost.com
c °Yufeng Guo
vi
Introduction
Recommendations on using this solution manual: 1. Obviously, you’ll need to buy Derivatives Markets (2nd edition) to see the problems. 2. Make sure you download the textbook errata from http://www.kellogg. northwestern.edu/faculty/mcdonald/htm/typos2e_01.html
vii
CHAPTER 0. INTRODUCTION
www.guo.coursehost.com
c °Yufeng Guo
viii
Chapter 1
Introduction to derivatives
Problem 1.1. Derivatives on weather are not as farfetched as it might appear. Visit http: //www.cme.com/trading/ and you’ll find more than a dozen weather derivatives currently traded at CME such as "CME U.S. Monthly Weather Heating Degree Day Futures" and "CME U.S. Monthly Weather Cooling Degree Day Futures." a. Soft drink sales greatly depend on weather. Generally, warm weather boosts soft drink sales and cold weather reduces sales. A soft drink producer can use weather futures contracts to reduce the revenue swing caused by weather and smooth its earnings. Shareholders of a company
Yufeng Guo June 24, 2007
www.guo.coursehost.com
c °Yufeng Guo
ii
Contents
Introduction 1 Introduction to derivatives 2 Introduction to forwards and options vii 1 7 29 79 129 141
3 Insurance, collars, and other strategies 4 Introduction to risk management 5 Financial forwards and futures 8 Swaps
iii
CONTENTS
CONTENTS
www.guo.coursehost.com
c °Yufeng Guo
iv
Preface
This is Guo’s solution to Derivatives Markets (2nd edition ISBN 0-321-28030X) for Exam FM. Unlike the official solution manual published by AddisonWesley, this solution manual provides solutions to both the even-numbered and odd-numbered problems for the chapters that are on the Exam FM syllabus. Problems that are out of the scope of the FM syllabus are excluded. Please report any errors to yufeng_guo@msn.com. This book is the exclusive property of Yufeng Guo. Redistribution of this book in any form is prohibited.
v
PREFACE
PREFACE
www.guo.coursehost.com
c °Yufeng Guo
vi
Introduction
Recommendations on using this solution manual: 1. Obviously, you’ll need to buy Derivatives Markets (2nd edition) to see the problems. 2. Make sure you download the textbook errata from http://www.kellogg. northwestern.edu/faculty/mcdonald/htm/typos2e_01.html
vii
CHAPTER 0. INTRODUCTION
www.guo.coursehost.com
c °Yufeng Guo
viii
Chapter 1
Introduction to derivatives
Problem 1.1. Derivatives on weather are not as farfetched as it might appear. Visit http: //www.cme.com/trading/ and you’ll find more than a dozen weather derivatives currently traded at CME such as "CME U.S. Monthly Weather Heating Degree Day Futures" and "CME U.S. Monthly Weather Cooling Degree Day Futures." a. Soft drink sales greatly depend on weather. Generally, warm weather boosts soft drink sales and cold weather reduces sales. A soft drink producer can use weather futures contracts to reduce the revenue swing caused by weather and smooth its earnings. Shareholders of a company