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

A recent survey at a major corporation found that employees

A recent survey at a major corporation found that employees who regularly participated in the company fitness program tended to have fewer sick days than employees who did not participate. However, because the study was ...

Examine the following pairs of puts which differ only by

Examine the following pairs of puts, which differ only by exercise price. Determine if any violate the rules regarding relationships between American options that differ only by exercise price. a. August 155 and 160 b. O ...

When the adjustable mirror on the michelson interferometer

When the adjustable mirror on the Michelson Interferometer is moved 20 wavelengths, how many fringe pattern shifts would be counted?

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 ...

Question 1 outline the differences between common stock and

Question 1: Outline the differences between common stock and preferred stock? Question 2: What are the differences between capital projects that are independent, mutually exclusive, and contingent? Question 3: Cortez Art ...

1 what factors must one consider when deciding on the

1. What factors must one consider when deciding on the appropriate underlying asset for a hedge? 2. For each of the following hedge termination dates, identify the appropriate contract expiration. Assume the available ex ...

1 what are the techniques by which experimenters attempt to

1. What are the techniques by which experimenters attempt to control extraneous variables within an experimental design? 2. What methods are used to help ensure that experiments are internally valid? 3. How are manipulat ...

1 design an observational study of your own including the

1. Design an observational study of your own, including the creation of a set of behavioral categories that would be used to code for one or more variables of interest to you. Indicate the decisions that you have made re ...

Consider the following values noin1 28 million cap rate 75

Consider the following values. NOIn+1: $2.8 million. Cap rate: 7.5%. Brokerage commission: 3%. Remaining mortgage balance: $12 million. Remaining book value: $14 million. Total depreciation taken: $4.9 million. Recapture ...

Discuss the ethics of an advertisementon its website figure

Discuss the ethics of an advertisement. On its website (Figure 18), a company promises to deposit cash into a customer's bank account within 24 hours. In small groups, discuss tactics this company uses to persuade its au ...

  • 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

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

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