1. Calculate the price of a call and a put option with exercise price $10 and two periods on a stock whose initial price is $13. The stock can go up by 1.1 (u = 1.1), or down by 0.8 (d = 0.8), the risk free rate is 0.2% per period.
2. Find the number of future contracts required to hedge a $ 2 MM face value of the 127'17 cash value, 5 yr bond with 7% coupon and CF 0.8317. You hedge using the 6.5% coupon, 5 year bond with CF = 0.7488 and cash value of 121'07.
Use the face value hedge, the CF hedge, and the BPV hedge.
3. Calculate the gains or losses for the long and short position in a Eurodollar futures contract if the initial settlement price is 98.355 and the final settlement price is 97.9350. Use the standard Eurodollar futures contract of 1 million dollars at 90 days.
4. Easy questions:
a. Explain the effect on the prices of call and put options of a change in the risk free rate.
b. If a firm decides to increase dividends, what will happen to the price of the call and put options whose underlying asset is the firm stock?
Binomial
q = (1 + r - d)/(u - d)
c = (Cu*q + Cd*(1-q))/(1+r)
p = (Pu*q + Pd*(1-q))/(1+r)
Black Scholes With dividends
portfolio
or