Important: This cover page must be signed and stapled to your assignment

YORK UNIVERSITY
Toronto, Ontario

FINE 6800

Derivative Securities

Professor Vikram Iyer

Mon 7pm
Section

Assignment # 2

Due Date: Dec 4, 2023

Personal Work Statement

I, the undersigned:
· warrant that the work submitted herein is my work and not the work of others
· acknowledge that I have read and understood the Senate Policy on Academic
Honesty
· acknowledge that it is a breach of the University Regulations to give and
receive unauthorized assistance on a graded piece of work
Name (typed or printed) University Student ID # Signature
 FINE 6800 Derivative Securities
Fall 2023
Assignment #2

Instructions:
(1) This assignment is to be done as a group. You must sign and submit
the standard cover page supplied as the first page of this assignment.
Staple your assignment prior to handing it in.
(2) This assignment is due on Dec 4, 2023.
(3) The work can be typed or handwritten. If it is handwritten and too difficult
to read due to messiness and poor handwriting, it will receive zero credit.
(4) You must show your work to receive full credit.
(5) This assignment contains 5 questions and carries a total of 30 points

Question 1 (6 marks)

The S&P 500 spot level is 3,725. The 1-year at-the-money call on is selling at $200.
The risk-free rate is 5% and the index pays a dividend yield of 4%. The S&P 500
options are European.

(a) What is the theoretical price of the 1-year at-the-money put price? (2 marks)

(b) The 1-year put is selling at $150 on the market, show how you can benefit from
this arbitrage opportunity. Show all detail. (2 marks)

(c) If the S&P 500 options were American, will there be an arbitrage opportunity? (2
marks)

Question 2 (6 marks)

Consider a 6-month bull call spread on GME with strikes of $200 and $225. GME spot
price is $215 and its volatility is 15%. The risk-free rate is 4% per annum continuously
compounded. We assume that GME is not expected to pay any dividend.

(a) Use a 6-step binomial tree to price the spread (note: up and down movements need to
match the volatility. Show all the tree parameters). (2 marks)

(b) What are the break-even point(s), the maximum profit and maximum loss for this
strategy? (2 marks)
(c) Without using the binomial tree, what is the premium of the bear put spread with the
same strike prices? Explain. (2 marks)

Question 3 (7 marks)

A European derivative instrument on IBM has the following payoff structure at the
maturity date in 3 years:

a) ST if ST < 120
b) 120 + 2 * (ST – 120) if 120 < = ST <= 160
c) 200 if 160 <= ST <= 200
d) ST if 200 <= ST where ST is the price at the maturity date.

The spot price is 154 and the volatility is 25%. The risk-free interest rate is 4% and
we consider a 6-step binomial tree.

(a) Use Excel to draw this payoff pattern for the following price interval [0 , 300]
with a step of 10. (2 marks)

(b) Based on the graph in (a), explain briefly how the premium of this derivative security
should compare to IBM spot price. (2 marks)

(c) Price this contract using a 6-step binomial tree and confirm your findings in (b). Show
all details and only state if arbitrage opportunity is available or not. (3 marks)

Question 4 (6 marks)

Consider a 1-year European put on TSLA with a strike price of $220. TSLA spot price is
$250 and its volatility is 30%. TSLA is expected to pay no dividend. The risk-free rate is
5%.

(a) Use Black-Scholes-Merton (BSM) model to price this put option. (2 marks)

(b) What is the put delta? If the short position decides to delta-hedge, what would the net
cash flow be? (2 marks)

(c) Without using BSM model, what are the 1-year 220-strike straddle price and its delta
(2 marks)
Question 5 (5 marks)

We consider the following options strategy on General Mills and its total payoff at the
expiry date of the short-term option.

Option Type Position Remaining Life Strike

1 Call Short x 1 0 60
2 Call Long x 2 0.5 70
3 Call Short x 1 0 80

For the options with a remaining life, we use BSM model to determine their values. We
assume a volatility of 35% and a risk-free rate of 5%.

(a) Compute the total payoff for S = 60, 70 and 80 for each of the three options. (2 marks)

(b) Use Excel to draw the payoff pattern for prices between $1 and $100 with a step of
$1. (3 marks)