ASSIGNMENT 1

Speculator will buy 2 call and 1 put of strike price 56.

Option Type of Strike Premiu Value Strategy

Option Price m
A Call 56 0.75 56.75 Buy 2 call
         
B Put 56 0.6 55.4 Buy 1 put
         

Intitial outflow= premium paid = Rs 2.1

Maximum profit = unlimited

Option Type of Strike Premiu Value  

Option Price m
A Call 56 0.75 56.75 Buy 2 call
           
B Put 56 0.6 55.4 Buy 1 put
           

57.00 Premiu Gain Net

m Gain
A -0.75 1 0.5
       
B -0.6 0 -0.6
       
    Net -0.1
Gain

Spot Total
price profit
55 -1.1
55.25 -1.35
55.5 -1.6
55.75 -1.85
56 -2.1
56.25 -1.6
56.5 -1.1
 56.75 -0.6
57 -0.1
57.25 0.4
57.5 0.9
57.75 1.4
58 1.9

Maximum loss= Rs 2.1

Pay off table

Spot Total
price profit
55 -1.1
55.25 -1.35
55.5 -1.6
55.75 -1.85
56 -2.1
56.25 -1.6
56.5 -1.1
56.75 -0.6
57 -0.1
57.25 0.4
57.5 0.9
57.75 1.4
58 1.9
ASSIGNMENT 2

a) Prime/Fixed 80/100 bp over 5 year US-treasury means bank is willing to receive

(4.55+100bps) 5.55%

Bank will pay Prime + 1.25% to the company and it will receive 6.80% (5.55 + 1.25) from the
company.

Fixed rate achieved by Asterix is 6.8 %.

b) Bank is facing credit risk if Asterix defaults and also face interest rate risk as it will receive
6.80% in exchange of paying Prime + 1.25%, if the Prime rises cost to bank will go up, whereas
the fixed interest will not change.

c) Since the cost of fixed borrowing to Bank of London is 5.25% i.e., 0.30% lower than 5.55%,
so Bank of NY will pay to Bank of London 5.25% and receive LIBOR - 0.30% from the Bank
of London.