Derivative

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Derivative

© All Rights Reserved

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2.1 Multiple Choice

1) The spot price of the market index is $900. A 3month for!ard contract on this index is priced

at $930. "hat is the profit or loss to a short position if the spot price of the market index rises to

$920 #$ the expiration date%

A) $20 &ain

') $20 loss

C) $10 &ain

() $10 loss

Ans!er) C

2) The spot price of the market index is $900. A 3month for!ard contract on this index is priced

at $930. The market index rises to $920 #$ the expiration date. The annual rate of interest on

treasuries is 2.*+ ,0.2+ per month). "hat is the difference in the pa$offs #et!een a lon& index

in-estment and a lon& for!ard contract in-estment% ,Assume monthl$ compoundin&.)

A) $10..*

') $2*./9

C) $20.*0

() $*3.20

Ans!er) '

3) The spot price of the market index is $900. A 3month for!ard contract on this index is priced

at $930. The annual rate of interest on treasuries is 2.*+ ,0.2+ per month). "hat annuali1ed rate

of interest makes the net pa$off 1ero% ,Assume monthl$ compoundin&.)

A) *..+

') ../+

C) 11.2+

() 13.2+

Ans!er) (

*) The spot price of the market index is $900. After 3 months2 the market index is priced at $920.

An in-estor has a lon& call option on the index at a strike price of $930. After 3 months2 !hat is

the in-estor3s profit or loss%

A) $10 loss

') $0

C) $10 &ain

() $20 &ain

Ans!er) '

1

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/) The spot price of the market index is $900. After 3 months the market index is priced at $920.

The annual rate of interest on treasuries is 2.*+ ,0.2+ per month). The premium on the lon& put2

!ith an exercise price of $9302 is $..00. "hat is the profit or loss at expiration for the lon& put%

A) $2.00 &ain

') $2.00 loss

C) $1.9/ &ain

() $1.9/ loss

Ans!er) C

0) The spot price of the market index is $900. After 3 months the market index is priced at $920.

The annual rate of interest on treasuries is 2.*+ ,0.2+ per month). The premium on the lon& put2

!ith an exercise price of $9302 is $..00. At !hat index price does a lon& put in-estor ha-e the

same pa$off as a short index in-estor% Assume the short position has a #reake-en price of $930.

A) $921.90

') $930.00

C) $93..0/

() $9*0.00

Ans!er) C

8) All of the positions listed !ill #enefit from a price decline2 except)

A) 9hort put

') :on& put

C) 9hort call

() 9hort stock

Ans!er) A

.) The spot price of the market index is $900. The annual rate of interest on treasuries is 2.*+

,0.2+ per month). After 3 months the market index is priced at $920. An in-estor has a lon& call

option on the index at a strike price of $930. "hat profit or loss !ill the !riter of the call option

earn if the option premium is $2.00%

A) $2.00 &ain

') $2.00 loss

C) $2.01 &ain

() $2.01 loss

Ans!er) C

9) The spot price of the market index is $900. After 3 months the market index is priced at $91/.

The annual rate of interest on treasuries is 2.*+ ,0.2+ per month). The premium on the lon& put2

!ith an exercise price of $9302 is $..00. Calculate the profit or loss to the short put position if the

final index price is $91/.

A) $1/.00 &ain

') $1/.00 loss

C) $0.9/ &ain

() $0.9/ loss

Ans!er) (

2

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10) 7f $our homeo!ner3s insurance premium is $12000 and $our deducti#le is $20002 !hat could

#e considered the strike price of the polic$ if the home has a -alue of $1202000%

A) $11.2000

') $1202000

C) $1182000

() $1222000

Ans!er) A

11) A put option is purchased and held for 1 $ear. The 6xercise price on the underl$in& asset is

$*0. 7f the current price of the asset is $30.*/ and the future -alue of the ori&inal option premium

is ,$1.02)2 !hat is the put profit2 if an$2 at the end of the $ear%

A) $1.02

') $1.93

C) $3.//

() $/.18

Ans!er) '

12) The premium on a lon& term call option on the market index !ith an exercise price of 9/0 is

$12.00 !hen ori&inall$ purchased. After 0 months the position is closed2 and the index spot price

is 90/. 7f interest rates are 0./+ per month2 !hat is the Call 5a$off%

A) $2.0*

') $12.00

C) $12.30

() $1/.00

Ans!er) (

13) The premium on a call option on the market index !ith an exercise price of 10/0 is $9.30

!hen ori&inall$ purchased. After 2 months the position is closed2 and the index spot price is

1082. 7f interest rates are 0./+ per month2 !hat is the Call 5rofit%

A) $9.30

') $9.39

C) $12.01

() $22.00

Ans!er) C

2.2 9hort Ans!er 6ssa$ ;uestions

1) The spot price of the market index is $900. A 3month for!ard contract on this index is priced

at $930. (ra! the pa$off &raph for the short position in the for!ard contract.

Ans!er)

3

Cop$ri&ht 4 2013 5earson 6ducation2 7nc.

2) An in-estor has a lon& call option on the market index at a strike price of $930. At expiration

the index price is $920. 6xplain the profit and loss.

Ans!er) The lon& call in-estor has the ri&ht2 not the o#li&ation2 to exercise. Thus2 she !ill elect

to let the option expire unexercised and reali1e no profit or loss.

3) The spot price of the market index is $900. After 3 months the market index is priced at $920.

The annual rate of interest on treasuries is *..+ ,0.*+ per month). The premium on the lon& put2

!ith an exercise price of $9302 is $..00. (ra! the pa$off &raph for the lon& put position at

expiration. 7nclude strike price2 #reake-en price2 and max loss.

Ans!er)

*) (e-elop the pa$off ta#le for the pre-ious <uestion2 usin& at least fi-e different possi#le index

prices2 in addition to the strike price and #reake-en price.

Ans!er)

/) As !ith Chr$sler Corp. man$ $ears a&o2 the &o-ernment occasionall$ &uarantees loans. "hat

option is the &o-ernment &rantin& and to !hom in a loan &uarantee%

Ans!er) The &o-ernment is &i-in& the #anks ,or lenders) a put option. 7f the #orro!er defaults

,thus the price of the loan drops) the #anks ma$ exercise their put options and sell the loans to

the &o-ernment.

2.3 Class (iscussion ;uestion

1) 6n&a&e the class in a con-ersation a#out auto insurance. "h$ do people feel their premium is

!asted if the$ do not file a claim% 9teer the class to!ards an understandin& of put options and

potential &ain should a loss occur. 7t ma$ also #e #eneficial to ask students to relate insurers3

poolin& of losses !ith the concept of risk mana&ement.

*

Cop$ri&ht 4 2013 5earson 6ducation2 7nc.

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