7QQMM207 Financial Derivatives – Mock Mid Term

Test

SECTION A – Answer All Questions

Question 1
What is a Call Option?
[10 marks]

Question 2
What is the definition of Delta when talking about option prices?
[10 marks]

Question 3
Define Vega in the context of option pricing.
[10 marks]

Question 4
Using Put Call Parity, a protective call is equivalent to what simple
options position?

[10 marks]

End of SECTION A
SECTION B – Answer All Questions

Question 5
The spot price of an underlying is $100 and its volatility is 20%. The interest
rate is 5% with continuous compounding. What is the fair price for a three-
month call option with a strike price of $105? Explain in details the procedure
you use.
[20 marks]

Question 6
Discuss how you would use a two-step binomial tree to evaluate a European
call option.
[20 marks]

Question 7
A trader buys a call option with a strike price Kc = $50 and a put option with a
strike price Kp = $45. The call and the put options have the same maturity. The
price of the call option is c = $5 and the price of the put option is p = $6. Draw
a diagram of the trader’s profit  as a function of the price of the underlying ST.
What is the maximum loss the trader can incur? What is the maximum profit
the trader can make?
[20 marks]

End of SECTION B