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Derivatives Assignments1

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5 views2 pages

Derivatives Assignments1

Uploaded by

hanlx2007
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We take content rights seriously. If you suspect this is your content, claim it here.
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Derivarives Securities: Assignment 1

Question 1
TechCorp stock is currently trading at $420. An upcoming announcement in 2
months might significantly affect its price. The at-the-money 3-month European
call option is priced at $50 by the market. The prevailing risk-free rate is 3%.

1. Calculate the price of an at-the-money 3-month European put option using


put-call parity.
2. If the market price for the above put option is $55, discuss potential arbi-
trage opportunities.

3. How would the scenario change if the options were American instead of
European?

Question 2
Consider a 9-month bear call spread on the Dow Jones with strikes of 30000 and
32000. The index current level is 31000 and its volatility is 20%. The risk-free
rate is 3.5% and the index pays a dividend yield of 2.5%.

1. Using a 5-step binomial tree, calculate the price of the bear call spread.
Ensure you detail the tree parameters.
2. Determine the break-even point, maximum profit, maximum loss, and
delta for this strategy.

3. Without referencing the binomial tree, what’s the price of a bear put
spread using the same strikes?

Question 3
A 2-year straddle on the FTSE 100 index utilizes strike prices of 7000 for both
the call and put. The current index level is 6800, the risk-free rate stands at
5%, with a dividend yield of 3% and index volatility of 25%.

1. Utilizing a 5-step binomial tree, price the straddle given it’s of European
style. Illustrate all tree parameters.
2. Price the straddle again, this time assuming it’s of American style, with
the same binomial tree. Again, detail all parameters.

3. Elaborate on the discrepancies between the American and European prices


calculated.

1
Question 4
An exotic European derivative on a stock showcases the following payoff struc-
ture at maturity in 2 years:

{ 2 50 − ST if ST ≤ 120ST if 120 < ST ≤ 180170if ST > 180

where ST signifies the stock price at maturity. The stock’s current price is $150,
and its volatility is 20%. No dividends are expected, and the risk-free rate is
3%.

1. Using a spreadsheet software, plot this payoff and compare it with a basic
stock investment for the range [$0, $250] with intervals of $10.
2. Price this derivative employing a 5-step binomial tree. Illustrate deltas at
each node.

3. Ponder on the possibility of replicating this payoff using standard options


and other securities.

Question 5
Examine a 1-year European put on the DAX with a strike of 13000. The index
level at present is 13500, its volatility stands at 18%. It provides a dividend
yield of 2%, and the risk-free rate is 3.5%.

1. Use the Black-Scholes-Merton model to estimate the price of this put


option.
2. Identify the put’s delta. In the event of the short position choosing to
delta-hedge, what becomes of the net cash flow?

3. Without employing the Black-Scholes-Merton model, determine the 1-year


13000-strike straddle price and its subsequent delta.

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