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

Listed below is a list of how long it takes for bands on

Listed below is a list of how long it takes for bands on stage to complete their first song (in seconds). 538 312 327 309 344 313 318 315 325 331 312 314 What is the mean time it takes for bands on stage to complete thei ...

The black bird company plans an expansion the expansion is

The Black Bird Company plans an expansion. The expansion is to be financed by selling $53 million in new debt and $50 million in common stock. The before-tax required rate of return on debt is 7.01% and the required rate ...

Abc corp is contemplating forming a new enterprise to

ABC Corp. is contemplating forming a new enterprise to produce cell phones. The sales price would be set at 1.5 times the variable cost per unit; the variable cost per unit is estimated to be $2.50; and management estima ...

Calculate the total lift force on the arctic hut shown

Calculate the total lift force on the Arctic hut shown below as a function of the location of the opening. The lift force results from the difference between the inside pressure and the outside pressure. Assume potential ...

1 describe and contrast the role of rfdc and rfid for

1. Describe and contrast the role of RFDC and RFID for logistics and supply chain applications. 2. Discuss the relative benefits of software purchase, use of third-party providers, and use of application service provider ...

1 distinguish between concurrent and predictive validity do

1. Distinguish between concurrent and predictive validity. Do these terms refer to types of construct validity or criterion-related validity? 2. How can we tell whether a particular measure is biased against a particular ...

1 by how much will the clamping force on the joint be

1 .By how much will the clamping force on the joint be reduced? Sketch the new joint diagram, assuming maximum initial preload ? Compute the estimated maximum bolt tension and minimum clamping force under the 3,000 lbs e ...

1 what advantage does drp have over a fair share method of

1. What advantage does DRP have over a fair share method of inventory deployment? 2. Discuss the importance of collaboration in the developing of supply chain inventory strategies. Provide an example. 3. Customer-based i ...

Bull how is consumer debt different today than in the

• How is consumer debt different today than in the past? • What role do interest rates play in mounting consumer debt? • What are the typical interest rates applied to credit cards, mortgages, and other debt? • Many of t ...

Percy motors has a target capital structure of 40 of debt

Percy motors has a target capital structure of 40% of debt and 60% of common equity, with no preferred stock. The pre tax cost of debt is 9% and it's corporate tax rate is 40%. Percy CFO estimate that the companys WACC A ...

  • 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