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 did the cold war era contribute to the evolution of

1. How did the Cold War era contribute to the evolution of modern emergency management? 2. What disaster led to the creation of the National Flood Insurance Program? 3. Describe the events of the 1970s that led to the cr ...

Specialty retailerwith this case we review the cash flow of

SPECIALTY RETAILER With this case, we review the cash flow of several specialty retail stores. The companies reviewed and the year-end dates are as follows: 1. Abercrombie & Fitch Co. (52-week fiscal year ended January 2 ...

1 which of the gaps in figure 3- 1 do you think represents

1. Which of the gaps in Figure 3- 1 do you think represents the major problem for most firms? How can a company attempt to eliminate the knowledge gap? The communications gap? 2. Compare and contrast the customer service ...

Two astronauts with masses m1 and m2 say good-bye and push

Two astronauts with masses m1 and m2 say good-bye and push each other off in the space. The initial velocity of both was v0, and after the push-off the astronaut with the mass m1 moves with the velocity v1 in the same di ...

Go to turbotaxintuitcomtax-tools and click tax refund

Go to turbotax.intuit.com/tax-tools/ and click "Tax Refund Calculator" to answer the following questions: a. Assume that your filing status is single, you are not head of household, and you are 35 years old. Compute your ...

Read one practical article of how psychology affects

Read one practical article of how psychology affects spending behavior. Easily retrieve possible articles by doing an online search using the terms "psychology" and "spending." Summarize the main points of the article.

Use the normal distribution of fish lengths for which the

Use the normal distribution of fish lengths for which the mean is 11 inches and the standard deviation is 4 inches. Assume the variable x is normally distributed. A. What % of the fish are longer then 12 inches B. If 400 ...

1 an article in a financial publication observes the higher

1. An article in a financial publication observes: "The higher the expected volatility in stock prices, the higher the prices of put and call options will be." Briefly explain the reasoning behind this observation. 2. An ...

1 what is a factorial design why are factorial designs used

1. What is a factorial design? Why are factorial designs used more frequently than one-way designs? 2. How many independent variables are involved in a 3 x 3 factorial design? How many levels are there of each variable? ...

1 when should investors invest in money market securities2

1. When should investors invest in money market securities? 2. List the reasons for investing in Treasury securities (notes and bonds). 3. What are the advantages of inflation-indexed Treasury securities?

  • 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