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Prob Set - 1

The document contains 11 questions related to financial derivatives including options, forwards, futures, and swaps. It asks the reader to calculate payoffs and profits in various derivative positions, determine if arbitrage opportunities exist from price discrepancies in related markets, explain the differences between hedging, speculation and arbitrage, and compare long forward and call option positions. It also asks whether stock options, like stocks, provide funds for companies.

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Amal Mobaraki
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24 views

Prob Set - 1

The document contains 11 questions related to financial derivatives including options, forwards, futures, and swaps. It asks the reader to calculate payoffs and profits in various derivative positions, determine if arbitrage opportunities exist from price discrepancies in related markets, explain the differences between hedging, speculation and arbitrage, and compare long forward and call option positions. It also asks whether stock options, like stocks, provide funds for companies.

Uploaded by

Amal Mobaraki
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1.

Compute the payoff and profit to a call buyer, a call writer, put buyer and put writer if the
strike (exercise) price for both the put and the call is $45, the stock price is $50, the call
premium is $3.50 and the put premium is $2.50.

2. Compute the payoff to the long and short positions in a forward contract given that the
forward price is $25 and the spot price at maturity is $30.

3. Suppose that a company based in the United States will receive a payment of €10000000
in three months. The company is worried that the euro will deprecate and is
contemplating using a forward contract to hedge the risk. Compute the following:
a. The value of the €10000000 in U.S dollars at maturity given that the company hedges
the exchange rate risk with a forward contract at 1.25 $/€.
b. The value of the €10000000 in U.S dollars at maturity given that the company did not
hedge the exchange rate risk and the spot rate at maturity is 1.20 $/€.

4. Suppose that an investor owns one share of ABC stock currently prices at $30. The
investor is worried about the possibility of a drop in share price over the next three
months and is contemplating purchasing put options to hedge this risk. Compute the
following:
a. The profits on the unhedged position if the stock price in three months is $25.
b. The profits on the unhedged position if the stock price in three months is $35.
c. The profits for a hedged stock position if the stock price in three months is $25, the
strike price on the put is $30, and the premium is $1.5.
d. The profits for a hedged stock position if the stock price in three months is $35, the
strike price on the put is $30, and the premium is $1.5.

5. An investor believes that the euro will strengthen against the dollar over the next three
months and would like to take a position with a value of €250000. He could purchase
euros in the spot market at 0.80 $/€ or purchase two futures contracts at 0.83 $/€ with an
initial margin of $10000. Compute the profit from the following:
a. Purchasing euros in the spot market if the spot rate in three months is 0.85 $/€.
b. Purchasing euros in the spot market if the spot rate in three months is 0.75 $/€.
c. Purchasing the future contract if the spot rate in three months is 0.85 $/€.
d. Purchasing the future contract if the spot rate in three months is 0.75 $/€.

6. An investor who has $30000 to invest believes that the price of stock XYZ will increase
over the next three months. The current price of the stock is $30. The investor could
directly invest in the stock, or she could purchase 3-month call options with a strike price
of $35 for $3. Compute the profit from the following:
a. Investing directly in the stock if the price of the stock is $45 in three months.
b. Investing directly in the stock if the price of the stock is $25 in three months.
c. Purchasing call options if the price of the stock is $45 in three months.
d. Purchasing call options if the price of the stock is $25 in three months.

7. Assume stock DEF trades on the New York Stock Exchange (NYSE) and the Tokyo
Stock Exchange (TSE). The stock currently trades on the NYSE for $32 and on the TSE
for ¥2880. Given the current exchange rate is 0.0105 $/¥, determine if an arbitrage profit
is possible.

8. Options and futures are zero-sum games what do you think is meant by this statement?

9. Explain carefully the difference between hedging, speculation and arbitrage.

10. What is the difference between entering into a long forward contract when the forward
price is $50 and taking a long position in a call option to buy the asset for $50 (strike
price)?

11. When first issued, a stock provides funds for a company. Is the same true for a stock
option?

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