How much will a company buy 1000 units of a commodity?
Handout Question 2: A company will buy 1000 units of a certain commodity in one year. It decides to hedge 80% of its exposure using futures contracts. The spot price and the futures price are currently $100 and $90, respectively. The spot price and the futures price in one year turn out to be $112 and $110, respectively.
What is the initial value of the forward/future price initially?
LONG: (F0-K)e^-rT SHORT: (K-Fo)e^-rT Futures and Forwards: - 0 value initially!! - When contract is made, they base contract price (K) off of F0 price, which becomes K - So, F0=K for initial contract price - Means initial value of Forward/Future = 0
What are the underlying securities?
- Options Underlying Securities The underlying assets include: - Stocks and Bond - Currencies - Interest rates - Mortgages - Commodities: pork bellies and orange juice
How to invest USD in bank?
3. INVEST USD in bank If Market F0 = 0.66... means overpriced! 1. SHORT the forward contract 2. BUY AUD (you borrow USD from US bank and convert to AUD) 3. BORROW USD from bank Futures Prices on Commodities Storage costs are treated as negative income The futures price is therefore (pic) - where U is the present value of all storage costs
What is the value of a 2 month European put option on the stock with a strike price of $49?
$2.23What is the value of a two-month European call option with a strikeprice of $49? Use no-arbitrage arguments. i.e., The value of the option is therefore $2.23.
What is the price of a European put option that expires in 6 months and has a strike price of $30?
Problem 10.14. What is the price of a European put option that expires in six months and has a strike price of $30? In other words the put price is $2.51.
What is the price of a European call option on a non dividend paying stock?
The price of a European call option on a non-dividend-paying stock with a strike price of $50 is $6. The stock price is $51, the risk-free rate (all maturities) is 6% and the time to maturity is one year.
How high can the dividends be without the American option being worth more than the corresponding European option?
16.6 cents per shareIt follows that the dividend can be as high as 16.6 cents per share without the American option being worth more than the corresponding European option.
What is the payoff for a call option with a strike price of $50 if the underlying stock price at expiration is $85?
What is the payoff for a call option with a strike price of $50 if theunderlying stock price at expiration is $85? price is $80 on expiration, the put buyer will:get a payoff of$20.
What will you do if you want to close position of European options before the expiry date?
Closing a European Option Early Instead, investors can sell the option contract back to the market before its expiration. Option prices change based on the movement and volatility of the underlying asset and the time until expiration.
What is the price of a one year European put option on the stock with a strike price of $50?
The price of a stock is $40. The price of a one-year European put option on the stock with a strike price of $30 is quoted as $7 and the price of a one-year European call option on the stock with a strike price of $50 is quoted as $5.
What is the price of a European put option on a non dividend paying stock when the stock price is $69?
What is the price of a European put option on a non-dividend-paying stock when the stock price is $69, the strike price is $70, the risk-free interest rate is 5% per annum, the volatility is 35% per annum, and the time to maturity is six months? In this case,, , , , and . or $6.40. Problem 13.15.
What information do we need to determine the value of stock using the zero growth model?
The zero-growth model assumes that the dividend always stays the same, i.e., there is no growth in dividends. Therefore, the stock price would be equal to the annual dividends divided by the required rate of return. It is the same formula used to calculate the present value of perpetuity.
Why American calls on a non dividend paying stock should not be exercised early?
For an American call (on a stock without dividends), early exercise is never optimal. The reason is that exercise requires payment of the strike price X. By holding onto X until the expiration time, the option holder saves the interest on X.
Should you exercise an American call option on a non dividend paying stock before maturity?
An American Call Option on a non-dividend-paying stock should never be exercised prior to expiration, so an American call option on a non- dividend paying stock has the same value as its European counterpart. However, an American put option may be rationally early-exercised, no matter there is dividend paying or not.
Why an American option is always worth at least as much as a European option on the same asset with the same strike price and exercise date?
Explain why an American option is always worth at least as much as a European option on the same asset with the same strike price and exercise date. The holder of an American option has all the same rights as the holder of a European option and more. It must therefore be worth at least as much.
How do you value a European put option?
Similarly, the value of a European put option at the expiration is equal to the greater of zero or the difference between the exercise price and the underlying price.
What is the price of a European call option?
Pricing a European Call Option Formula d1 = [ln(P0/X) + (r+v2/2)t]/v √t and d2 = d1 – v √t. P0= Price of the underlying security. X= Strike price.
What is the value of a call on the expiration date?
When a call option expires in the money, it means the strike price is lower than that of the underlying security, resulting in a profit for the trader who holds the contract. The opposite is true for put options, which means the strike price is higher than the price for the underlying security.
When interest rates and futures prices for an asset are uncorrelated and forwards are less liquid than futures It is most likely that the price of a forward contract is?
He will have the option exercised against him at $94 by the person who is long the put option. When interest rates and futures prices for an asset are uncorrelated and forwards are less liquid than futures, it is most likely that the price of a forward contract is: less than the price of a futures contract.
Is derivative a contract?
A derivative is a contract, not a product!
Is Mark to Market basis only for futures?
Mark-to-market basis is only relevant to futures contracts, not forwards contracts!!
What is dividend value?
A. value of the dividends received from the asset.
What does "c" mean in interest rates?
C. the greater the price increase from a decrease in interest rates.