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WI4675 Exercise 4

The document contains exercises related to financial mathematics, focusing on futures contracts, European derivatives, and hedging strategies in financial markets. It includes calculations for margin accounts, payoffs for derivatives, and the properties of call options. Additionally, it discusses self-financing strategies and stochastic processes within a defined filtration framework.

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15 views2 pages

WI4675 Exercise 4

The document contains exercises related to financial mathematics, focusing on futures contracts, European derivatives, and hedging strategies in financial markets. It includes calculations for margin accounts, payoffs for derivatives, and the properties of call options. Additionally, it discusses self-financing strategies and stochastic processes within a defined filtration framework.

Uploaded by

gameom260
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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INTRODUCTION TO FINANCIAL MATHEMATICS

Exercise sheet 4

Exercise 16 An investor agrees to a future contract in order to buy a product for €29.200. The value of the contract in
the next five days develops as follows: 29.250, 29.300, 29.275, 29.225 and 29.250 (all prices are in Euro.) Assume that the
amount in the investor’s margin account initially was €2.000.
(i) Describe the evolution of the margin account in the next five days.
(ii) Assume that a margin call is issued at €1.500. How should the price of the contract evolve on the sixth day, in order
for a margin call to be issued?
Remark: We have not discussed these topics in the lectures. You can look them up and we will discuss them in the
Exercise session.

Exercise 17 A European derivative has the following payoff at maturity:

 0, ST −K1 ST ≤ K1 or ST ≥ K4


 M K2 −K1 , K1 ≤ ST ≤ K2
f (ST ) =
 M, K2 ≤ ST ≤ K3
K4 −ST

MK , K 3 ≤ ST ≤ K4

4 −K3

where M ∈ R+ .
(i) Compose a portfolio of European call options that has the same payoff.
(ii) Compute the price of this derivative and deduce that

C0 (T, K1 ) − C0 (T, K2 ) C0 (T, K3 ) − C0 (T, K4 )


≥ ,
K2 − K1 K4 − K3
where C0 (T, K) denotes the price of a European call with maturity T and strike K.
(iii) Can you dedude now that the price of European call is convex in the strike price?

Exercise 18 Consider a one-period financial market with a fixed-rate investment and an asset with initial price of €100.
For the final price of the asset the following three things can occur: the asset price decreases to €90, stays the same, or
increases to €120. A derivatives trader sells 15 call options with strike price K, 90 ≤ K < 120. The interest rate is
r = 6%.
(i) Show that precisely one K exists which provides a hedge for the call options.
(ii) How does the associated portfolio look like and which fair price for the call options does it yield?

Exercise 19 Let S 1 , S 2 be two risky assets and assume that the evolution of their asset prices is provided in the table
below:
price t−1 t t+1
S 1
90 100 110
S2 70 50 40
ξ1 10 ?
ξ2 20 ?

Assume moreover that the trading strategy ξ 1 , ξ 2 at time t is provided in the table above. Which of the following
strategies are self-financing?
(i) ξt+1
1 2
= 10, ξt+1 = 20
(ii) ξt+1
1 2
= 10, ξt+1 = 22.5

1
(iii) ξt+1
1 2
= 20, ξt+1 =0
(iv) ξt+1
1 2
= 5, ξt+1 = 20

(v) ξt+1
1 2
= 15, ξt+1 = 10.

Exercise 20 Let Ω = {1, 2, 3}.


(i) Describe the power set 2Ω .
(ii) Define a filtration (F1 , F2 , F3 ) such that F1 ̸= F2 ̸= F3 .

(iii) Define two stochastic process X = (X0 , X1 , X2 ) and Y = (Y0 , Y1 , Y2 ) such that the process X is measurable
wrt the filtration defined in (ii), while the process Y is not measurable wrt the filtration defined in (ii). Show that
both process have the desired property.

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