SECTION B

Q1. Assume that the Japanese yen is trading at a spot price of 92.04 cents per 100 yen.
Further assume that the premium of an American call (put) option with a striking price of 93
is 2.10 (2.20) cents. Calculate the intrinsic value and the time value of the call and put
options.

Solution: Premium - Intrinsic Value = Time Value

Call: 2.10 - Max[92.04 – 93.00 = - .96, 0] = 2.10 cents per 100 yen
Put: 2.20 - Max[93.00 – 92.04 = .96, 0] = 1.24 cents per 100 yen
OR
Given:

Spot Price = 92.04 cents per 100 yen

Call Premium = 2.10 cents
Put Premium = 2.20 cents
Strike Price = 93 cents
Q2. The stock price of a company today is $30. Suppose that, a year from now, the stock
is worth either $45 or $15. Assume that the risk-free rate between today and a year from now
is 10% annually. Consider a European call option written on one share of this company,
which has a $34 strike price and which matures a year from now. What is the value of this
call option?

ANS: $6

Q3. You are given the following: • The current price to buy one share of XYZ stock is 500. •
The stock does not pay dividends. • The continuously compounded risk-free interest rate is
6%. • A European call option on one share of XYZ stock with a strike price of K that expires
in one year costs 66.59. • A European put option on one share of XYZ stock with a strike
price of K that expires in one year costs 18.64. Using put-call parity, calculate the strike price,
K.

66.59 – 18.64 = 500 – Kexp(–0.06) and so K = (500 – 66.59 + 18.64)/exp(–0.06) = 480.

Q4. List down all the differences between forward contract and future contract

Feature Forward Contracts Futures Contracts

Customizable between parties. Terms Standardized contracts traded on
Standardization negotiated. organized exchanges.
Over-the-counter (OTC), directly
Trading Venue between parties. Traded on organized exchanges.
Counterparty Lower counterparty risk due to
Risk Higher counterparty risk. centralized clearinghouse.
Customizable to any size agreed upon Standardized contract size determined
Contract Size by parties. by the exchange.
Marking to Typically no daily marking to market. Marked to market daily, with gains and
Market Settlement at contract end. losses settled daily.
Less liquid due to OTC trading and More liquid due to standardized
Liquidity lack of standardization. contracts and exchange trading.
Flexibility More flexible terms and conditions. Less flexible due to standardized terms.
Physical delivery may or may not occur Can be settled through physical
Delivery based on agreement. delivery or cash settlement.
Less regulated with terms determined More regulated with oversight from
Regulation by parties. regulatory bodies.
Lower transaction costs, but potentially Higher transaction costs, but lower
Costs higher credit risk. credit risk due to clearinghouse.