Ask Question, Ask an Expert

+61-413 786 465

info@mywordsolution.com

Ask Basic Finance Expert

problem 1: Describe how you would hedge a short position in a European (plain vanilla) call with six weeks to maturity if the spot price is 60, the strike is 65 and σ = 0.3, r = 0.1. You rehedge every week. Suppose that the stock will follow the given path for the end-of-week prices: 63, 59, 64, 68, 64, 67. Describe how your hedging position modifies every week and what trades you must put in to do so. Suppose there are no transaction costs. Find out the hedging cost?

problem 2: The given prices are observed in the market for an option: (all options are on the same underlying with similar maturity time).

A) Stock trades at S0 = 100. 
B) A straddle with K = 100 trades at 7.9. 
C) A strip with K = 100 trades at 12.1. 
D) A strap with K = 100 trades at 11.6. 
E) A strangle with K1 = 95 and K2 = 105 trades at 5.0. 
F) A butterfly spread with K1 = 95, K = 100 and K2 = 105 trades at 2.1.

Describe a risk-free strategy to make money in this market (just trading the above instruments)

problem 3: The European asset-or-nothing option that expired at time T pays its holder the asset value S(T) at time T is S(T) > K and pays 0 or else. Find out the no-arbitrage cost of such an option as a function of parameters s, T, K, r, σ. Find out its Delta.

problem 4: You buy 1000 six months ATM call options on the non-dividend paying asset with spot price 100, following a lognormal proves with volatility 30%. Suppose that the interest rates are constant at 5%.

A) How much do you pay for the options?
B) What Delta-hedging position do you have to take?
C) One the next trading day, the asset opens at 98. Determine the value of your position (the option and shares position)?
D) Had you not Delta-hedged, how much would you have lost due to the reduction in the price of asset?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M9443

Have any Question? 


Related Questions in Basic Finance

Assignment - custom cabinets inc case answer the following

Assignment - Custom Cabinets, Inc. CASE Answer the following questions. 1. Should there be additional overtime, and if so, how much? 2. Should additional laminate be purchased, and if so, how much? 3. Should additional w ...

A 1000 par value bond was issued 15 years ago at a 12

A $1,000 par value bond was issued 15 years ago at a 12 percent coupon rate. It currently has 15 years remaining to maturity. Interest rates on similar obligations are now 8 percent. Assume Ms. Bright bought the bond thr ...

Your company is considering a new project that will require

Your Company is considering a new project that will require $950,000 of new equipment at the start of the project. The equipment will have a depreciable life of 9 years and will be depreciated to a book value of $297,500 ...

Assume that real risk-free rate r 100 the maturity risk

Assume that real risk-free rate (r*) = 1.00%; the maturity risk premium is found as MRP = 0.20%×(t - 1), where t = years to maturity; the default risk premium for AT&T bonds is found as DRP = 0.07%×(t - 1); the liquidity ...

Looking for how to calculate on excelhomework

Looking for how to calculate on Excel. Homework assignment: Calculating annuity present values. Beginning three months from now, you want to be able to withdraw $2,500 each quarter from your bank account to cover college ...

Question - assume that your father is now 40 years old that

Question - Assume that your father is now 40 years old, that he plans to retire in 20 years, and that he expects to live for 25 years after he retires, that is until he is 85. He wants a fixed retirement income that has ...

The common stock of abc inc has been trading in a narrow

The common stock of ABC INC. has been trading in a narrow price range for the past month, and you are convinced it is going to stay in that range in the next three months. The current price of the stock is $100 per share ...

Summit record company is negotiating with two banks for a

Summit Record Company is negotiating with two banks for a $139,000 loan. Fidelity Bank requires a compensating balance of 14 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Ba ...

Marlene decides to take the investors offer she buys the

Marlene decides to take the investor's offer. She buys the business and begins paying the $5,000 monthly payments to the investor. Shortly thereafter, she realizes what a bargain she found. She's learned that, because of ...

A check cashing company will give you 101 in cash and you

A check cashing company will give you $101 in cash and you repay them $120 in two weeks. What is the effective annual rate of interest for this arrangement?

  • 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

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As