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Homework Exercise 7 - Derivatives




Question;Investment;Analysis & Portfolio Management;AD;717 OL;Homework;Exercise 7 - Derivatives;1) On June 21, 2011, the GE?s stock closed at;$18.81 per share. The accompanying table;lists the prices for GE?s exchange-traded options. Using this data, calculate the payoff and the;profit for each of the following September expiration options, assuming that at;the September expiration the value of;the stock was $17.72.;a) Call option X = $17;b) Put option x;= $17;c) Call option x = $19;d) Put option x;= $19;e) Call option x;= $15;f) Put option x;= $21;2. It is mid July. You believe that Walmart stock which is;currently priced at $53.00 will appreciate significantly over the next several;months. A long-term equity call option;(LEAPS) with an expiry in mid January and a strike price of $52.50 is available;at a price of $2.50. You have $10,600 to;invest. You consider 4 alternatives;a) Use your entire amount of funds to buy the;stock outright;b) Use the entire amount to purchase the stock;on margin. Assume that the minimum;margin requirement is 50% and that you will pay 7% (annually) on borrowed;funds.;c);Use the entire amount of funds to buy LEAPS call options with the January;expiry date.;d);Buy options for 200 shares and use the;rest of the money to buy government bills paying 1% per year. (hence figure on;6 months of interest).;For;simplicity ignore any brokerage charges Calculate the net gain or loss from;each strategy as of mid January assuming that the price of stock is;Gain / Loss from Investment in Walmart;Investment Strategy;Stock Price in Mid January;$45;$50;$55;$60;Stock;Outright;Stock;on Margin;All;Options;Options;Bills;3) One of the financial instruments that;attracted so much hostile fire in the analysis of the recent financial crisis;were ?Synthetic Collateralized Debt Obligations? (synthetic cdos) which used;?synthetic debt? as its collateral.;Describe how you could use a combination of risk free investments and;derivatives to create the same pay-off / risk profile as if you were holding;a corporate bond, say for IBM. Explain how the pay-off / risk profile is the;same (a) if the company remains afloat and pays all of its debt obligations on;time or (b) if the company defaults on its debt obligations.;4) A stock is currently priced at $50. The risk;free interest rate is 10% per year. What;is the value of a call option on the stock with a strike price of $45 due in one;year?;a) Using the Binomial valuation approach, assume;that at the end of one year the value of the stock could either have increased;to $60 or decreased to $40.;b) Using the Black-Scholes model, assume that;the annual volatility (standard deviation) of the stock price is 25%.;5) On June 29, 2010 the S&P 500 stood at;1308.44. The one year futures price on;the index was 1278.7. The 1 year risk;free rate was 0.238%. Using the;Spot-Futures Parity relationship, calculate the annualized expected dividend;yield from the S&P 500 Index.;6) Futures contracts for copper are traded on;the COMEX exchange. The standard;contract is 25000 pounds. The initial;margin is $5738 per contract and the maintenance margin is $4250 per;contract. The 6 month futures price is;$4.321 per pound. The spot price today;is $4.204. What will be the annualized rate of;return for an investor purchasing copper futures under the following spot;prices at maturity?;Spot Price at Maturity;$4.25;$4.30;$4.35;$4.40;Spot Value of 1 contract at Maturity;Futures price of 1 contract (today);Net Gain / Loss;6 month rate of return;Annualized Rate of Return;7) Joan Tam, CFA, believes she has identified an arbitrage;opportunity for a commodity as indicated by the following information;Current;Spot Price: $120;Futures;Price (1 Year): $125;Interest;Rate (1 Year): 8%;Initial;Margin to purchase Futures $7.50;a) Describe the strategy and transactions that;Joan should use to take advantage of this arbitrage opportunity.;b) Calculate the arbitrage profit;c) Verify the arbitrage profit by calculating the;initial cash flows (when the transactions are entered into) and the profits for;each of the spot prices at time T indicated below;Initial Cash Flow;Spot Price at Time T;116;120;124;128;132;GE;Exchange Traded Options;Gen El (GE);Underlying stock price*: 18.81;Expiration;Strike;Call;Put;Option Price (Last);Volume;Open;Interest;Option Price (Last);Volume;Open;Interest;Dec;10.........;0.08;217;3322;Sep;13......;870;0.06;20;6070;Dec;13.........;0.15;8;2114;Jul;14;4.6;29;827......;204;Jul;15;3.7;1;1;0.02;210;15799;Sep;15;4;1;1280......;13893;Dec;15;4;1;409;0.3;380;3581;Jul;16......;542;0.03;222;3347;Aug;16......;597;0.12;191;1932;Sep;16;3.04;353;1919;0.2;375;78449;Dec;16......;250;0.49;690;4915;Jul;17;1.95;86;2503;0.06;124;11300;Aug;17;2.08;25;1150;0.23;362;21499;Sep;17;2.18;349;4196;0.34;1089;29426;Dec;17;2.45;15;479;0.72;105;16755;Jul;18;0.99;3537;7192;0.17;11672;26979;Aug;18;1.3;626;4138;0.41;1773;12694;Sep;18;1.38;376;12832;0.58;2698;40944;Dec;18;1.79;120;2683;1.03;2594;10423;Jul;19;0.35;36899;61396;0.53;9103;32734;Aug;19;0.65;2031;16488;0.78;3856;21731;Sep;19;0.77;4565;25395;0.96;101;64748;Dec;19;1.22;274;7206;1.51;1046;13989;Jul;20;0.06;4781;22943;1.19;222;19283;Aug;20;0.25;4649;28705;1.47;15;17267;Sep;20;0.38;4856;31045;1.56;32;36015;Dec;20;0.76;962;11433;2.06;67;9845;Jul;21;0.01;169;25400;2.15;20;2592;Aug;21;0.08;348;10613......;1990;Sep;21;0.15;786;24122;2.41;509;9623;Dec;21;0.45;2224;11789;2.87;1;1250;Jul;22;0.01;1318;9329......;592;Aug;22;0.03;195;3487;3.18;1;1189;Dec;22;0.24;909;7256......;948;Sep;22.5;0.04;417;34725;3.75;4;20599;Jul;23......;3399;4.21;2;904;Aug;23;0.02;25;1712......;441;Dec;23;0.12;590;12298......;977;Sep;24;0.02;118;7820......;1069;Dec;24;0.07;20;3177;5.35;1;1454;Aug;25......;92;6.4;10...;Sep;25......;7223;6.36;186;1088;Dec;25;0.04;250;5511......;602;Sep;30......;2756;11.35;76;1240;*Underlying stock price represents listed exchange price only. It may;not match the composite closing price.;Source: Wall Street;Journal


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