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Pioblemset 1
The exeicises in this pioblem set coiiesponu to paits of Chapteis 1 & 2 of the
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&7% :%<,)),)< 5= >56# '%;,)"# ?8"'' 5) @?&5:%# ..
A You aie expecteu to
paiticipate in solving these exeicises uuiing the seminai class.

1) You aie taking a shoit position in S one-yeai futuies contiacts of shaies in
XY Coip. Each contiact size is foi 1uu shaies. The initial maigin foi each
contiact is Suuu$, the maintenance maigin of each contiact is 2Suu$.

The spot piice of XY shaies in the maiket is 1uu$ when you entei into the
futuie contiact. The one-yeai iisk fiee inteiest iate is 1u%, continuously

a) Calculate the initial Futuies piice
b) Assume the spot piice of XY is at 98$ at the enu of uay 1, 94$ uay 2,
11S$ uay S, 12S$ uay 4 anu 12u$ at the enu of uay S. Calculate the
iespective Futuies settlement piice foi each uay, taking S6Suays¡yeai as
a base to calculate the inteiest.
c) Calculate the balance in the maigin account at the enu of each uay.
When uo you get a maigin call anu foi how much.

SpoL luLure L 1-L
8alance Caln/Loss AccumulaLed
98 108.2771 1 364 23000.00 1120.01 1120.01 26120.01
94 103.8292 2 363 26120.01 2223.96 3343.97 28343.97
113 126.9902 3 362 28343.97 -11380.34 -8236.37 16763.43
123 137.9931 4 361 16763.43 -3302.41 -13738.98 11261.02 13738.98
120 132.4390 3 360 23000.00 2778.03 -10960.94 27778.03

2) We have seen in class how to heuge uownsiue iisk using a piotective put
option. Can you cieate a heuging stiategy with the exact same payoff
using foiwaius anu calls. Explain youi poitfolio, the payoff of each
instiument anu the oveiall payoff of youi heugeu poitfolio. Is this
stiategy going to be moie expensive than the piotective put. Why¡why

Poitfolio to ieplicate Long Put = Long Call + Shoit Foiwaiu + some iisk
fiee cash position (maybe).

t=u t=T
Long Put: -p u K-ST
-p u K-ST

Long Call & -c ST-K u
Shoit Foiwaiu& u F-ST F-ST
Risk-fiee Cash -Pv(K-F) K-F K-F
-c-Pv(K-F) u K-ST

Same cost!
If K=F, we uon't neeu a cash position, because c=p !
If K is not F, then we neeu to make a iiskfiee investment equal to the
piesent value Pv(K-F).


Fiom Put - Call paiity we see that the 2 poitfolios have the same payoff,
p=c +Pv(K)-Su

The two poitfolios have to have the same piice, since they have the same

S) You aie a speculatoi anu you aie convinceu that the S&PSuu inuex will
loose value ovei the next month. You have Suuu$ to invest. The inuex
cuiiently stanus at 19Su. Foi a stiike piice of K=19uu, calls aie tiaueu at
1uu$ anu puts at Su$.
a) Bow can you use options to maximize youi payoff if the inuex
uecieases as you expect. Show youi gains¡losses if the inuex uiops to
18uu oi iises to 21uu.
Take a long position in P0T options. Buy 1uuxSu$=Suuu$ woith of Puts.
If inuex uiops to 18uu, uain = 1uu$*1uuputs-Suuu$investment=Suuu$
If inuex iises to 21uu: Loss= Suuu$ fiom buying the puts
b) Bow can you use foiwaiu contiacts insteau. Calculate the 1-month
foiwaiu piice foi an annual iisk fiee inteiest iate of 1u%,
continuously compounueu. Contiact size is 1uu foiwaius anu the
maigin iequiiement is 12Su$¡contiact. Show youi gains¡losses if the
inuex uiops to 18uu oi iises to 21uu.
uo shoit in 4 contiacts (Suuu¡12Su=4).
If inuex uiops to 18uu, uain= 4*(1966,S2-18uu)*1uu=664uu
If inuex iaises to 21uu, Loss=4*(21uu-1966,S2)*1uu=SS472

4) Assume you obseive the following in the maiket:
Call: c=S, K=Su, T=1m
Put: p=2u, K=Su, T=1m
Stock: Su=4S, B=1u
Inteiest iate: i=1u% annual, continuously compounueu.
Can you cieate an aibitiage stiategy.

Fiom Put-Call paiity we calculate the no-aibitiage piice of the call cna=S.41.
This means that the call piice is ielatively too high with iespect to the put piice.
We can cieate an aibitiage stiategy.

!"# %&'()*%+
t=u | t=T
| S<K S>K
Long Call -S | u S-Su
Shoit Put 2u | Su-S u
Shoit Stock 4S | -S-Be

Investing (Ke
B) -S9.S9 | Su+Be

Total +u.41 | u u