Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

This assignment focuses on the basics of futures and options. The futures problems deal with ‘fair’ valuation of futures contracts and how the information from market prices can be used. The first two problems deal with gold futures and foreign exchange futures. The options problems deal with payoff (profit) diagrams and basic strategies.

Though you could answer these problems without knowing the detailed specification of the contracts, in reality when you trade in these markets you must familiarize yourself with the market’s operations and contract specifications.

Futures:

Q1) Suppose the spot price of gold is $1700 per ounce. The futures price for delivery in six months is $1712, while the futures price for delivery in one year is $1720. The interest rate on 6-month loans is 1.00 percent (on an annual basis).

a) Ignoring transactions costs, does this represent an arbitrage opportunity? Why?

b) What is the implied interest rate for the first six months?

c) What is the implied forward rate six months hence? (Recall computing forward rates from bonds with different maturities)

d) Suppose the spot price of gold is, instead, $1706 per ounce. Assuming gold can be sold short at a transactions cost of $3 per ounce, describe an arbitrage strategy. What are the arbitrage gains, if any?

Q2) Suppose the spot price for Euro is $1.30, the futures price for delivery in 6 months is $ 1.29675. Assume that the 6 month borrowing/lending rate in Euro is 1.5 percent (annually, continuous compounding) and the corresponding rate in $ is 1.0 percent (annually, continuous compounding). (This is an FX application using the same cost of carry model).

a) Assume no transactions costs, do the above prices represent an arbitrage opportunity? Why?

b) What are the implied interest rates in Europe and the U.S.?

Q3) Compute the ‘fair’ value of the two nearest to expiration futures contracts on the Hang - Seng Index (HSI) using HSI as the underlying asset

Answer the following problems:

a) What interest rate and dividend yield did you use?

b) Did the futures contract settle above or below HSI?

c) What are the transaction costs in index arbitrage activity?

d) What are the implied interest rates using the settlement prices?

e) What are the issues in doing index arbitrage (e.g. short selling)?

Options:

Q1) The first simple exercise that you should try is to draw payoff diagrams of various strategies. Get the web page http://www.cboe.com/DelayedQuote/QuoteTable.aspx for the closing prices of SPY options, or use the quotes on Bloomberg or Yahoo Finance.
Alternatively, use http://www.hkex.com.hk/rulereg/futrsksys/seriesprices.asp for prices of options trading on HKEX.
Here are a few possible strategies:

a) Buy the near term ATM (at-the-money) straddle.

b) prepare the near term ATM call spread.

c) Buy the near term ATM put spread.

d) prepare the near term ATM butterfly spread.

e) Buy 1 basket (SPX), Buy 1 near term ATM put

f) Buy 1 near term ATM put; prepare 1 near term ATM call

g) Buy an ATM put spread; Buy an ATM call spread.

Q2)  What strategy will assure a profit if options on gold are priced as follows:

C(K= 1750, T1 = Apr ) > C(K= 1750, T2= June)
C(K= 1770, T1 = Apr ) > C(K= 1750, T1= Apr.)
C(K= 1750, T1 = Apr ) > C(K= 1770, T2= June)
C(K= 1750, T1 = Apr ) < C(S – PV(K))
P(K= 1750, T1 = Apr ) > C(K= 1750, T1= Apr)

Q3) The following three call options on gold, all expiring in three months, sell for:

    Exercise price            Option Price
    $1700                         $88
    $1750                         $57
    $1800                         $32

Consider the following position:

buy 1 call with K = 1700
sell (prepare) 2 calls with K = 1750
buy 1 call with K = 1800

What would be the values at expiration of such a spread for various prices of spot gold? What investment would be required to establish the spread? Given information about the prices of the $1700 and $1800 options, what could you predict about the price of the $1750 option?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M91091

Have any Question? 


Related Questions in Basic Finance

1 how do the industrial patterns observed for dividend

1. How do the industrial patterns observed for dividend payouts compare with the patterns observed for capital structures? For example, are industries characterized by high dividend payouts also characterized by high lev ...

1 what is meant by value-added services why are these

1. What is meant by value-added services? Why are these services considered essential in a customer success program? 2. How could a company use the four-stage process of cost-effectiveness, market access, market extensio ...

1 define amortization list the five types discussed2 why do

1. Define amortization. List the five types discussed. 2. Why do the monthly payments in the beginning months of a CPM loan contain a higher proportion of interest than principal repayment?

Develop a three- to five-page analysis on the projected

Develop a three- to five-page analysis on the projected return on investment for your college education and projected future employment. This analysis will consist of two parts. Part 1: Describe how and why you made the ...

Show how to combine a currency swap paying swiss francs at

Show how to combine a currency swap paying Swiss francs at a floating rate and receiving Japanese yen at a floating rate with another currency swap to obtain a plain vanilla swap paying Swiss francs at a floating rate an ...

Name some of the problems created by incorrect torque how

Name some of the problems created by incorrect torque ? How much preload do we want, in general? How much torque versus initial preload can you expect to encounter when tightening a group of unlubricated, as received, st ...

1 define security interest and how it has been used in real

1. Define security interest and how it has been used in real estate finance since the Industrial Revolution. 2. What is meant by the term collateral? By hypothecation? 3. What is the purpose of a promissory note? Of a mo ...

1 what procedure is used in your state to handle a pledge

1. What procedure is used in your state to handle a pledge of collateral for a mortgage loan? 2. Explain the relationship and purpose of a promissory note and the two primary forms of security instruments. 3. In a forecl ...

Suppose your firm had issued a 12 percent annual coupon

Suppose your firm had issued a 12 percent annual coupon, 15-year bond, callable at par at the 8th year. It is now two years later, so the bonds are not callable for another 6 years. At this time, new bonds could be issue ...

1 in talking to brad you mentioned the increasing threat of

1. In talking to Brad, you mentioned the increasing threat of identity theft. Brad seems concerned and after asking him several questions, you determine the following: a. For convenience, Brad has his driver's license nu ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen