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    Assignment 3 - IFM

    Uploaded by

    Kim Bình
    This document contains 5 questions regarding options pricing and arbitrage opportunities. Question 1 asks to calculate the no-arbitrage price of a put option given call option pricing and stock parameters. Question 2 asks to identify an arbitrage portfolio given call and put prices. Question 3 asks to identify the position of an investor who has written a covered call. Question 4 asks to calculate the break even index price at option expiration. Question 5 asks to calculate profit from short selling gold futures over a period of changing prices.

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    Assignment 3 - IFM

    Uploaded by

    Kim Bình
    33 views3 pages
    This document contains 5 questions regarding options pricing and arbitrage opportunities. Question 1 asks to calculate the no-arbitrage price of a put option given call option pricing and stock parameters. Question 2 asks to identify an arbitrage portfolio given call and put prices. Question 3 asks to identify the position of an investor who has written a covered call. Question 4 asks to calculate the break even index price at option expiration. Question 5 asks to calculate profit from short selling gold futures over a period of changing prices.

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    This document contains 5 questions regarding options pricing and arbitrage opportunities. Question 1 asks to calculate the no-arbitrage price of a put option given call option pricing and stock parameters. Question 2 asks to identify an arbitrage portfolio given call and put prices. Question 3 asks to identify the position of an investor who has written a covered call. Question 4 asks to calculate the break even index price at option expiration. Question 5 asks to calculate profit from short selling gold futures over a period of changing prices.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    33 views3 pages

    Assignment 3 - IFM

    Uploaded by

    Kim Bình
    This document contains 5 questions regarding options pricing and arbitrage opportunities. Question 1 asks to calculate the no-arbitrage price of a put option given call option pricing and stock parameters. Question 2 asks to identify an arbitrage portfolio given call and put prices. Question 3 asks to identify the position of an investor who has written a covered call. Question 4 asks to calculate the break even index price at option expiration. Question 5 asks to calculate profit from short selling gold futures over a period of changing prices.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Assignment 3

    1. A 4-month European 60-strike call on a dividend-paying stock is currently selling for 6.


    The current stock price is 60 and a dividend of 0.5 is expected in 2 months. The
    continuously compounded risk-free interest rate is 8%.
    Calculate the no-arbitrage price of a 4-month European 60-strike put on the stock?
    Answer: 4.91452

    2. A 4-month European 60-strike call on a dividend-paying stock is currently selling for 6.


    The current stock price is 60 and a dividend of 0.5 is expected in 2 months. The
    continuously compounded risk-free interest rate is 8%.
    Construct an arbitrage portfolio if the market put price is 5, assuming that an investor can
    lend or borrow at the risk-free interest rate.
    a. Short-sell a put, long a call, short-sell 1 share of the stock and lend 59 at the risk-free
    rate.
    b. Short-sell a put, long a call, buy 1 share of the stock and borrow 61 at the risk-free rate.
    c. Short-sell a put, short-sell a call, short-sell 1 share of the stock and lend 71 at the risk-
    free rate.
    d. Buy a put, short-sell a call, buy 1 share of the stock and borrow 59 at the risk-free rate.
    e. Buy a put, buy a call, short-sell 1 share of the stock and lend 49 at the risk-free rate.
    Answer: a
    3. An investor has a written a covered call. Determine which of the following represents
    the investor’s position?
    a. Short the call and short the stock.
    b. Short the call and long the stock.
    c. Short the call and no position on the stock.
    d. Long the call and short the stock.
    e. Long the call and long the stock.
    Answer: b

    4. An investor bought a 70-strike European put option on an index with 6 months to


    expiration. The premium for this option was 1.
    The investor also wrote (short) an 80-strike European put option on the same index with 6
    months to expiration. The premium for this option was 8.
    The 6-month interest rate is 0%.
    Calculate the index price at expiration that will allow the investor to break even (profit=0).
    a. 87 b. 80 c. 77 d. 73 e. 63
    Answer: d

    5. A trader short-sell 3 units of gold futures on September 5 morning, when the futures
    price is 348.4. The notional value of the gold futures is 100 ounces per contract. Given:
    Day Futures price
    September 5 346.1
    September 6 349.0
    September 7 351.8
    September 10 352.3
    September 11 348.4
    The initial margin is 1200 per contract, and the maintenance margin is 70% of the initial
    margin. Suppose that margin account earns interest of 3%, compounded continuously. If
    the trade closes out all positions at the end of September 11, calculate the profit? (take 3
    digits after the decimal point)
    Answer: -0.306.

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