Term Paper on "Financial Derivatives"

Quoted Instructions for "Financial Derivatives" Assignment:

Please do the question paper that i have attached in the resource section of the assignment. I will paste it below as well for reference. Most of the questions are multiple choice, however some questions need basic calculations which you need to show. For questions needing calculations please write the calculations as well instead of just writing the answer as i will get some credit incase you are wrong.

1) A trader enters into a one-year short forward contract to sell an asset for $60 when the spot price is $58. The spot price in one year proves to be $63. What is the trader*****s gain or loss? Show a dollar amount and indicate whether it is a gain or a loss.

2) A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option.

What is the breakeven stock price, above which the trader makes a profit?

What is the breakeven stock price below which the trader makes a profit?

3) A hedger takes a long position in an oil futures contract on November 1, 2009 to hedge an exposure on March 1, 2010. The initial futures price is $60. On December 31, 1999 the futures price is $61. On March 1, 2010 it is $64. The contract is closed out on March 1, 2010.

What gain is recognized in the accounting year January 1 to December 31, 2010? Each contract is on 1000 barrels of oil.

What is your answer to question if the trader is a speculator rather than a hedger?

4) An exchange rate is 0.7000 and the six-month domestic and foreign risk-free interest rates are 5% and 7% (both expressed with continuous compounding). What is the six-month forward rate? Give four decimal places

5) The spot price of an asset is positively correlated with the market. Which of the following would you expect to be true (circle one)

The forward price equals the expected future spot price.

The forward price is greater than the expected future spot price.

The forward price is less than the expected future spot price.

The forward price is sometimes greater and sometimes less than the expected future spot price.

FOR QUESTION SIX YOU CAN WRITE HALF A PAGE MAX*****¦

6) Is it ever optimal to exercise early an American call option on a) the spot price of gold, b) the spot price of copper, c) the futures price of gold, and d) the average price of gold measured between time zero and the current time? Explain your answers.

7) Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively.

What is the maximum gain when a bull spread is created from the calls?

What is the maximum loss when a bull spread is created from the calls? What is the maximum gain when a bear spread is created from the calls?

What is the maximum loss when a bear spread is created from the calls?

8) A three-month call with a strike price of $25 costs $2. A three-month put with a strike price of $20 and costs $3. A trader uses the options to create a strangle. For what two values of the stock price in three months does the trader breakeven with a profit of zero?

_ _ _ _ _ _ _ and _ _ _ _ _ _

9) Which two statements are true (circle two)

Delta is a measure of the volatility of an option

Delta is a measure of the position in the underlying stock that should be taken to hedge an option

Delta is estimated by considering two adjacent nodes on a tree at a certain time and calculating the difference in option prices divided by the difference in the stock prices

The delta of a put option is positive

10) The Black-Scholes-Merton model assumes (circle one)

The return from the stock in a short period of time is lognormal

The stock price at a future time is lognormal

The stock price at a future time is normal

None of the above

11) Volatility can be defined as (circle one)

The standard deviation of the return, measured with continuous compounding, in one year

The variance of the return, measured with continuous compounding, in one year

The standard deviation of the stock price in one year

12) A stock price is $100. Volatility is estimated to be 20% per year. What is the an estimate of the standard deviation of the change in the stock price in one week (circle one)

$0.38

$2.77

$3.02

$0.76

13) To create a range forward contract in order to hedge foreign currency that will be paid a company should (Circle one)

Buy a put and sell a call on the currency with the strike price of the put higher than that of the call

Buy a put and sell a call on the currency with the strike price of the put lower than that of the call

Buy a call and sell a put on the currency with the strike price of the put higher than that of the call

Buy a call and sell a put on the currency with the strike price of the put lower than that of the call

14. Suppose that General Motors Acceptance Corporation issued a bond with 10 years until maturity, a face value of $1000, and a coupon rate of 7% (annual payments). The yield to maturity on this bond when it was issued was 6%.

a. What was the price of this bond when it was issued?

b. Assuming the yield to maturity remains constant, what is the price of the bond immediately before it makes its first coupon payment?

c. Assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment?

15) What is the price of a five-year, zero-coupon, default-free security of 4.8% with a face value of $1000?

16)Draw the diagram that tells you if you buy a Bond what its relationship is to Call Yield, Yield to Maturity, and Yield to a Call.

17) Using a binomial tree, what is the price of a $40 strike 6-month call option, using 3-month intervals as the time period? Assume the following data: S = $37.90, r = 5.0%, σ = 0.35

2.50

2.76

2.92

3.08

18). Compute Î" for the following call option. The stock is selling for $23.50. The strike price is $25. The possible stock prices at the end of 6 months are $27.25 and $21.75.

A) 0.4091

B) 0.6822

C) 0.8433

D) 0.9216

19). Using a binomial tree, what is the price of a $40 strike 6-month put option, using 3-month intervals as the time period? Assume the following data: S = $37.90, r = 5.0%, σ = 0.35

A) $3.52

B) $3.66

C) $3.84

D) $3.91

Using Black-Scholes for the last two problems.

20. What is the delta on a $25 strike put? Assume S = $24.00, σ = 0.35, r = 0.06, the stock pays a 2.0% continuous dividend and the option expires in 40 days?

A) 0.582

B) 0.602

C) 0.662

D) 0.702

21. Assume S = $33.00, σ = 0.32, r = 0.06, div = 0.01. You short 100 $35 strike calls at 68 days until expiration. Under a delta hedge position, what is your overnight profit/loss if the stock rises to $34.50?

A) $9.23 loss

B) $9.23 gain

C) $7.62 loss

D) $7.62 gain

22. A European call option on a certain stock has a strike price of $30, a time to maturity of one year and an implied volatility of 30%. A put option on the same stock has a strike price of $30, a time to maturity of one year and an implied volatility of 33%. What is the arbitrage opportunity open to a trader. Does the opportunity work only when the lognormal assumption underlying Black-Scholes holds. Explain the reasons for your answer carefully.