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Mang3020 Class 2 (Q) - 2

This document contains 6 questions related to futures, options, forwards, and their pricing. Question 1 involves calculating the forward price and value of a 1-year forward contract on a stock initially priced at $40. Question 2 asks about arbitrage opportunities from a futures contract priced above the index. Question 3 involves calculating futures and forward prices based on interest rates and the DJIA index value. The remaining questions ask about positions, exercise conditions, and profits related to put and call options.

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Poon Long-San
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101 views

Mang3020 Class 2 (Q) - 2

This document contains 6 questions related to futures, options, forwards, and their pricing. Question 1 involves calculating the forward price and value of a 1-year forward contract on a stock initially priced at $40. Question 2 asks about arbitrage opportunities from a futures contract priced above the index. Question 3 involves calculating futures and forward prices based on interest rates and the DJIA index value. The remaining questions ask about positions, exercise conditions, and profits related to put and call options.

Uploaded by

Poon Long-San
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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MANG3020

Futures and Options


Class 2
2014/2015

Question 1
A one-year long forward contract on a non-dividendpaying stock is entered into when the stock price is $40
and the risk-free rate of interest is 10% per annum with
continuous compounding.
a) What are the forward price and the initial value of the
forward contract?
b) Six months later, the price of the stock is $45 and the
risk-free interest rate is still 10%. What are the forward
price and the value of the forward contract?

Question 2
Suppose that the risk-free interest rate is 10% per annum
with continuous compounding and that the dividend
yield on a stock index is 4% per annum. The index is
standing at 400, and the futures price for a contract
deliverable in four months is 405. What arbitrage
opportunities does this create?

Question 3
The current value of the Dow Jones Industrial Average is
11,200. The dividend yield is 3.00% per annum,
assuming continuous compounding and a 365-day year.
The interest rate is 10% with annual compounding.
a) Calculate the continuously compounded interest rate.
What is the 60-day Dow Jones Industrial Average futures
price?
b) Suppose that an investor held a long position of a 60day Dow Jones Industrial Average forward contract.
Afterwards, the Dow slides down and a week later ends
at 10,500. What is the 53-day forward price?

c) What is the value of the forward contract to the long


position a week later (with 53 days left)? Assume that the
forward contracts payoffs are determined by multiplying
the above results by $10.

Question 4
An investor sells a European call option and buys a
European put option with the same strike price and
maturity. Describe the investor's position.

Question 5
An investor buys a European put option on a share for
$3. The strike price is $40. Under what circumstances
will the option be exercised? Under what circumstances
will the investor make a profit? Draw a diagram showing
the variation of the investors profit with the stock price
at the maturity of the option.

Question 6
Assume that a European call option to buy a share for
$100 costs $5 and is held until maturity. Under what
circumstances will the option be exercised? Under what
circumstances will the holder of the option make a
profit? Draw a diagram showing how the profit from a
long position in the option depends on the stock price at
maturity of the option.

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