5. What are the principal agencies of the 2010 European Supervisory Framework‚ created in 2010 in response to the world financial crisis? 6. How does the physical delivery provision in futures markets enforce convergence of spot and futures prices on the expiration date of the contract? 7. What is the difference between term insurance and cash value life insurance? 2 Econ 252 Spring 2011 Final Exam Professor Robert Shiller PART I CONTINUES ON THE NEXT PAGE. CONTINUATION OF
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HW#4 1. A portfolio is currently worth $10 million and has a beta of 1.0. The S&P 100 is currently standing at 800. Explain how a put option on the S&P 100 with a strike price of 700 can be used to provide portfolio insurance. 2. “Once we know how to value options on a stock paying a dividend yield‚ we know how to value options on stock indices and currencies.” Explain this statement. 3. Explain how corporations can use range-forward contracts to hedge their foreign exchange risk. 4
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of out-of-the-money calls and puts of the same underlying security‚ strike price and expiration date while owning the underlying stock. Covered Combination Construction Long 100 Shares Sell 1 OTM Call Sell 1 OTM Put Limited Profit Potential Maximum gain for the covered combination is achieved when the underlying stock price on expiration date is trading at or above the strike price of the call options sold. This is the price where the trader’s long stock gets called away for a profit plus he
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1. A company enters into a short futures contract to sell $5000. The current future price is 250 cents per pound. The initial margin is $3000 and the maintenance margin is $2000. What price change would lead to a margin call? Under what circumstances $1500 could be withdrawn from the margin account? 2. Stock is expected to pay a dividend of Tk 10 per share in 2 months and again in 5 months. The stock price is Tk 500 and risk free rate of interest is 8% p.a. with continuously compounded for all
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8.3.)An investor sells a European call option with strike price of K and maturity T and buys a put with the same strike price and maturity. Describe the investor’s position. The payoff to the investor is - max (ST - K ‚ 0) + max(K - ST‚ 0) This is K- ST in all circumstances. The investor’s position is the same as a short position in a forward contract with delivery price K. 8 .4.)Explain why brokers require margins when clients write options but not when they buy options? When an investor
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Exercise (strike) price 1. A stock has an exercise (strike) price of $40. a. If the stock price goes to $41.50‚ is the exchange likely to add a new strike price? b. If the stock price goes to $42.75 is the exchange likely to add a new strike price? 15-1. a) No. For stocks over $25‚ the normal interval is $5‚ with a new strike price added at the halfway point or $42.50 (between $40 and $45). b) Yes‚ the stock price has equaled or exceeded the halfway point of $42.50 Option trading prices 2. Look
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b) Purchase a call option Cain can eliminate exchange risk by using a call option. The call option would be to purchase USD in the future. To benefit from this option Cain will need to exercise it only of the CAD/USD depreciates below the strike price of the option. c) No action (leave the USD exposure unhedged) By taking zero action Cain will encounter one of two scenarios (barring the rates stay the same): In the case that the CAD appreciates in respect to the USD; Pixonix will pay
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Bermudan option has exercise price X‚ a final maturity date and one early exercise date. • The payoff at the final maturity date T2 is max(ST2 − X‚ 0). • The option can be exercised early only at time T1 and the payoff at that time would be max(ST1 − X‚ 0). Using put-call parity for European options‚ show that it is never optimal to exercise this Bermudan option early. (b) Consider a Bermudan put option over an asset that pays no dividend. Suppose the Bermudan option has exercise price X and final maturity date
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dollar borrowing rate 8.0% p.a. 90-day pound deposit rate 8.0% p.a. 90-day pound borrowing rate 14.0% p.a. Dayton’s WACC 12.0% p.a. Dayton has also collected data on two specific options as well: Strike rate Premium 90-day put option on £ $1.750/£ 1.5% 90-day put option on £ $1.710/£ 1.0% [pic] Annex A: Dayton Hedging Table Based on the exchange rates and interest rates‚ the transaction exposure hedging strategy
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Chapter 20 (Excel file included) You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly 3 months’ time. a) If the stock is trading at $55 in 3 months‚ what will be the payoff of the call? b) If the stock is trading at $35 in 3 months‚ what will be the payoff of the call? c) Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration. Short call: value at expiration date: a. You owe $15. b. You owe
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