1. Assume that you want to secure a purchase at strike price and you have the following information on hand: Strike = $ 50 Put = $ 6 Call = $ 7 Probable market values at maturity: 30, 40, 50, 60, 70 a) Show the net results that you would obtain under each market value when performing a purchase synthetic forward. b) Show the net flows you would obtain under each market value when performing purchase synthetic forward.

1. Assume that you want to secure a purchase at strike price and you have the following information on hand: Strike = $ 50 Put = $ 6 Call = $ 7 Probable market values at maturity: 30, 40, 50, 60, 70 a) Show the net results that you would obtain under each market value when performing a purchase synthetic forward. b) Show the net flows you would obtain under each market value when performing purchase synthetic forward.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Consider a forward contract on a stock that pays dividends at specific times ti, where 0 < t1 < t2 < ... < tn < T. Suppose that the dividend is a fixed amount: Di at fixed times ti. Show that in this case, the forward contract price is given by
I Select the three (3) correct answers: A) Long futures Profit = Pt - FO B Profit Profit and Pt are inversely related. Long futures Profit = FO - Pt Profit and Pt are directly related. (E) The graph reflects an upward sloping curve. Fo - PT
Provide a numerical example of an arbitrage strategy for situations where the forward is trading above, and below the theoretical forward price.
1) Using the Black and Scholes formula, for each payoff compute the price, delta and probability of being exercised: 1a) A call, K=90, So=100, T=0.25, o=0.2 and r=0.01. 1b) A put, K=37, So=35, T=0.3, o=0.3 and r=0.02. 1c) A call, K=23, So=24, T=5 months, o=24% and r=2%. 1d) A call, K=95% of So, So=50, T=9 months, o=50% and r=3%. 1e) A put, K=97% of So, So=95, T=1 year, o=D30% and r=2%. 1f) An "at-the-money" straddle, So=95, T = 3 months, o=35% and r=2%.
Suppose you have the follow information about Intrinsic Co. and the market. What is the Beta of Intrinsic Co.? Probability 0.48 0.35 0.17 a) 1.39 Ob) 1.13 c) 1.00 d) 1.26 Intrinsic Co. Returns 15.4% 17.9% 21.5% Market Returns 9.1% 10.8% 13.5%
Consider the following two scenarios whereby the cost-of-carry model is violated. You are required to select appropriate missing words and fill in question 1. a. long b. spot c. over priced d. short arbitrage e. under priced f. long arbitrage g. futures h. short Question 1 a. If ft >S0 (1 + rf - d)^t, then the( ) is ( )relative to ( ) or equivalently, the quoted futures price is higher than what it should be. Thus, the correct arbitrage strategy should be: ( ) the futures contract and ( )the spot market. This strategy is also known as ( ). b. If ft <S0 (1 + rf - d)^t, then the( ) is ( )relative to ( ) or equivalently, the quoted futures price is lower than what it should be. Thus, the correct arbitrage strategy should be: ( ) the futures contract and ( )the spot market. This strategy is also known as ( ).
Figure 2 (a) Financial engineering deals with the design of new assets. Draw the payoff (at t=1) of the following butterfly spread: payoff of portfolio Purchase 1 call with exercise price a Sell 2 calls with exercise price (atb)/2 Purchase 1 call with exercise price b as a function of the underlying stock price S at t=1 where a=120 and b=140. (b) An individual agent thinks that there is a high probability that the Dow Jones will have a payoff (or points) between a=34,000 and b-36,000 at t=1. 1=nd Design a digital option (see Figure 1) as a sequence of calls on the Dow that converges to a pure bet on getting $1 on the interval [34,000, 36,000]. ie, if the Dow lies between SE[34,000, 36,000] at t=1, then the portfolio of calls pays off exactly $1. The payoff is 0 otherwise. a+8 Figure 1 (Digital option) payoff a=34,000 b-36,000 S. Hint: You have to modify the sell strategies of a butterfly spread to obtain a payoff as given in Figure 2 and then adjust n and 8 appropriately.
Which of the following is included inthe risk-free rate? O A. the default premium O B. the expected inflation premium O C. the liquidity premium O D. the maturity premium O E. All of the above are included in the risk-free rate. Reset Selection
The premium on a call option is primarily a function of the difference in spot price S relative to the strike price X, the length of time until expiration T, and the volatility of the currency o. C = f(S-X, T, o) For each characteristic of a call option, use the table to indicate whether that would lead to a higher call option premium or a low call option premium (all else equal). Characteristic A lower spot price relative to the strike price A shorter time before expiration A higher level of volatility for the currency Higher Call Option Premium O Lower Call Option Premium When using a call option to hedge payables in an international currency, a U.S. based MNC can lock in the to obtain the needed foreign currency. maximum minimum amount of dollars needed
The price level you choose for price protection on a call option is referred to as: A. The strike price B. The option premium C. The time value D. The intrinsic value
Suppose stock A's return is related to the market return by: RetA=0.6*Market Return + 0.04* (Market Return)² What is the change in stock A given a change in the market return? Suppose stock B's return is related to the market return by: RetB=0.6*Market Return What is the difference in returns between A and B if the market return is 5%? What is the difference if the market return is -5%?
The NPV profile: O A. shows the payback period the point at which NPV is positive. O B. shows the internal rate of return the point at which NPV is zero. OC. shows the NPV over a range of discount rates. O D. B and C are correct.

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