4 views

Uploaded by almirb7

file

save

- Some My Projects Options Mkt
- ERP Practice Exam3 7115
- Derivatives
- Stochastic Review
- Derivatives
- John Hull 習題解答[Interest Rate, Swap]
- J15 P4 Answers
- Tiffany Case Analysis
- 13 Option Market
- brief history of derivatives
- John Hull [Interest Rate, Swap]
- 33 Icwai September 2011 Issue
- hedging in low cost airlines
- Futures&Options an Introduction
- Concepts of Hedging
- ICE Cotton Brochure
- Derivatives Anu
- Notes on Forward Pricing
- Black, merton andScholes - Their work and its consequesnces - Ajay Shah
- Commodity Derivative Market in India
- Answers to Chapter Exercises
- Notice: Self-regulatory organizations; proposed rule changes: National Life Insurance Co., et al.
- The Super Scalper Strategy
- Price
- crisk mgmt
- kasar nya.docx
- Derivatives Report 18th August 2011
- 2017 Nov Finance
- Theory
- 123 (1)
- Info Test
- InfoTest2
- test24
- test30
- test32
- test21
- test31
- test22
- A lectin from elder (Sambucus nigra L.) bark..pdf
- test29
- Elderberry.pdf
- InfoTest1
- Astragalus Root and Elderberry Fruit Extracts Enhance the IFN-β Stimulatory Effects of Lactobacillus acidophilus in Murine-Derived Dendritic Cells.pdf
- test27
- Building Citizen Trust Through E Government 2005 Government Information Quarterly
- test10
- test15
- test22
- test28
- test26
- test11
- test13
- test30
- test20
- test9
- test27
- test29
- test14
- test21
- test12

You are on page 1of 3

Columbia University Instructor: Martin Haugh Outline Solutions to Final Examination Fall 2004 Question 1 (a) $86. (b) Go long a European call option and short a European put option, both with strike F and the same maturity as the forward contract. (c) There is an arbitrage. If the spot rate and T-Bill prices are correct, then the theoretical forward price is 94/.95 = 98.947 which is more than the market price of 95. An arbitrage strategy is to simultaneously buy the forward contact, short copper today and invest the proceeds in 6-month T-Bills. (d) The forward value, F , is given by F = 420(1 + .12/4)2 + .5(1 + .12/4)2 + .5(1 + .12/4) = 446.623.

(e) Since the value of a ﬂoating rate bond is par at any reset point, we see that the value of the security is (1 − 1/(1 + s6 )6 ) × 10M. (f ) The forward value, F , is given by F = 9100(1 + .12/2)2 − 500(1 + .12/2) − 500 = 9194.76. (g) Only the third elementary security is attainable. (h) The standard deviations and correlation are irrelevant for the equal-and-opposite hedge! The equal-and-opposite hedge is a long position in (25 × 100, 000)/(30 × 1000) = 83.33 ≈ 83 oil futures contracts. (i) The problem here is one of data-snooping where the analyst continues to mine the data until he ﬁnds some “statistically signiﬁcant” pattern in the data. Such a pattern, however, will rarely be statistically signiﬁcant when you take into account the fact that the analyst has been systematically looking in the data for patterns. Put another way, even the most random pattern-less data will eventually yield apparent “patterns” if it is mined suﬃciently. Question 2 (a) The risk-neutral probability, q , is given by q = (R−d)/(u−d) = (1.01−.9434)/(1.06− .9434) = .5712. 1

F0 .and at node I1 is 3. This was explained in Question 4(a) of Assignment 5. (1 − q )10. Working backwards in the lattice we see that the value of the option at t = 0 is . (b) No.8.4074.525.0658/d(0. Question 3 {2} {1} 6.1809 = 4.7.The put only pays out at the bottom node at t = 3 and then the payout = 10.2745.315) + (1.4074 + 16. at node I1 is 1.9082 = 2.9 price. it also exists at I0 .9 {2} (a) π0 (ω8 ) = π0 (I1 ) × π1 (ω8 ) = .5066)(. (b) A unique futures price does exist. F1 . These prices then imply the unique futures price. The security that pays 1 if the terminal stock price is 106 is worth 0. at I0 is given by Q F0 = E0 [F1 ] = (1. 2) = 2.5066. This is because it exists at each of the time t = 1 nodes.1016 is worth .1350.7. (1) S2 .3524 × . (c) The security that pays 1 if the terminal stock price is 119. This is the unique price of e8 if and only if e8 is attainable.3 4. and the date t = 2 value of the ﬁrst security. and since the one-period model beginning at I0 is complete.1016 × .3705 = 0.1016 when the terminal stock price is 119.535.0381/R) = 5.0658/.1306. at node I1 is 1. (This was also covered in one of the Assignments.315) + (3. (c) Yes.37) = 2. The value then at the bottom node at t = 2 is max(94 − 88.2613.5327.1809.535)(. there is a unique value for G0 . and 16. you cannot apply put-call parity since this only holds for European options and in this case the value of the American put is not equal to the value of the European put since we saw in part (a) that it was optimal to exercise the American put option early. We expect (and observe that) G0 > F0 since the payoﬀ of the ﬁrst security appears to be negatively correlated with changes in the short rate.1016.9996. (d) The payoﬀ of the call is 3 when the terminal stock price is 106. 2 .0381. Still the option can be priced simply by working backwards in the lattice as usual and the value is 9.525)(.0004 and it is optimal to exercise the option at that node.8.9014. It so happens that e8 is not attainable and so {2} we cannot say that π0 (ω8 ) is its price. The time t = 1 futures 1. both of which are attainable.2. Part (c) and linear pricing then implies that the call option price is 3 × 0.5 6. This is most easily seen by observing that the payoﬀ of the forward contract is a linear combination of the date t = 2 payoﬀ of a zero-coupon bond with maturity t = 2.) It can be checked (though you did not need to do so) that G0 = 2.

9 (e) First we ﬁnd the best possible lower bound for this security at node I1 . Since the other one-period models are complete.8. the option payoﬀ is attainable. This is found by solving the following linear program: max θT S subject to Aθ ≤ X where X = [1 2 3 4]T . in states ω6 through (1) ω9 the option always expires in the money and therefore is worth S2 − 1.0815 3 2 1.4045 2.0815 4 1 A= 1. and 1.4917]T .3524y .0815 2 4 . S = [1.8. 3 .7. we have the best arbitrage-free lower bound on the date t = 0 price of X is given by .(d) We can price the option because it is attainable. Since π0 (I1 ) = . 1.7. This payoﬀ is attainable.9 the 3 securities at I1 .3524. 6. In particular.7. The value of the security at the other {1} 6.0815 5 2 Let y be the optimal value of this linear program. being the payoﬀ from a long position in the ﬁrst security and a short position in the cash account. θ is the 3 × 1 vector of holdings in 6.5 at t = 2.9 two date t = 1 nodes is zero.8.05 3.

- Some My Projects Options MktUploaded bydaljitarora
- ERP Practice Exam3 7115Uploaded bySakthivel Balakrishnan
- DerivativesUploaded byManali Shukla
- Stochastic ReviewUploaded byIsaiah Eng
- DerivativesUploaded byPaul Christian Lopez Fiedacan
- John Hull 習題解答[Interest Rate, Swap]Uploaded byAllo
- J15 P4 AnswersUploaded byNasir Khan
- Tiffany Case AnalysisUploaded bySumeet Sahoo
- 13 Option MarketUploaded byBilly Cai
- brief history of derivativesUploaded byashishshah88
- John Hull [Interest Rate, Swap]Uploaded bymisharawal10
- 33 Icwai September 2011 IssueUploaded byjayanna833090
- hedging in low cost airlinesUploaded byAbhishek Shrivastava
- Futures&Options an IntroductionUploaded byKoolmind
- Concepts of HedgingUploaded bydevanshu
- ICE Cotton BrochureUploaded byAl Per
- Derivatives AnuUploaded byanuradha
- Notes on Forward PricingUploaded byWei Liang Ho
- Black, merton andScholes - Their work and its consequesnces - Ajay ShahUploaded bySergey Varnavskiy
- Commodity Derivative Market in IndiaUploaded byNaveen K. Jindal
- Answers to Chapter ExercisesUploaded byMuhammad Ibad Desmukh
- Notice: Self-regulatory organizations; proposed rule changes: National Life Insurance Co., et al.Uploaded byJustia.com
- The Super Scalper StrategyUploaded byEchal Boneless
- PriceUploaded byGustavo
- crisk mgmtUploaded byRavi Gupta
- kasar nya.docxUploaded byDaniel Robertho
- Derivatives Report 18th August 2011Uploaded byAngel Broking
- 2017 Nov FinanceUploaded bySulu Kitchen
- TheoryUploaded byjk
- 123 (1)Uploaded byMohan Yeturi

- Info TestUploaded byalmirb7
- InfoTest2Uploaded byalmirb7
- test24Uploaded byalmirb7
- test30Uploaded byalmirb7
- test32Uploaded byalmirb7
- test21Uploaded byalmirb7
- test31Uploaded byalmirb7
- test22Uploaded byalmirb7
- A lectin from elder (Sambucus nigra L.) bark..pdfUploaded byalmirb7
- test29Uploaded byalmirb7
- Elderberry.pdfUploaded byalmirb7
- InfoTest1Uploaded byalmirb7
- Astragalus Root and Elderberry Fruit Extracts Enhance the IFN-β Stimulatory Effects of Lactobacillus acidophilus in Murine-Derived Dendritic Cells.pdfUploaded byalmirb7
- test27Uploaded byalmirb7
- Building Citizen Trust Through E Government 2005 Government Information QuarterlyUploaded byalmirb7
- test10Uploaded byalmirb7
- test15Uploaded byalmirb7
- test22Uploaded byalmirb7
- test28Uploaded byalmirb7
- test26Uploaded byalmirb7
- test11Uploaded byalmirb7
- test13Uploaded byalmirb7
- test30Uploaded byalmirb7
- test20Uploaded byalmirb7
- test9Uploaded byalmirb7
- test27Uploaded byalmirb7
- test29Uploaded byalmirb7
- test14Uploaded byalmirb7
- test21Uploaded byalmirb7
- test12Uploaded byalmirb7