Post on 30-May-2018
8/14/2019 Quiz Three Solutions
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Name: _______________________________________ ID : _______________________________________
NoQuestion Answer 1 Answer 2 Answer 3 Answer 4 Ans
1
Observe the option chain for Ford on Fri-13 th October at the end ofthe question sheet. The data was taken from the CBOE.comwebsite. The stock price at the time was $8.20.If you sold 300 FOK options, how many shares should you
buy/sell to create a delta neutral strategy?
Sell 120 shares Buy 120 Shares Sell 12000 shares Buy 12000 Shares 3
2
Using the information and correct answer in question 1, assumeyou have a delta neutral portfolio. If the share price moved from$8.20 to $8.30 and the FOK option moved from 0.67 to 0.62, whatis your P&L for your delta neutral strategy?
Zero, you are hedged againstsmall share price movements
-$1,200+$1,500=$300 +$15 -$3 2
3Based on the stock and option movements in question 2, what isthe implieddelta of FOK?
-0.3 -0.4 -0.5 -0.6 3
4
Observe the option chain for Ford on Fri-13 th October at the end ofthe question sheet. The data was taken from the CBOE.comwebsite. The stock price at the time was $8.20.Which of the following strategies is delta andgamma neutral?
Long 200 FCK
Short 413 FMUSell 3461 shares
Long 200 FCK
Long 544 FMUBuy 3572 shares
Long 200 FCK
Long 413 FMUBuy 2001 shares
Long 200 FCK
Short 544 FMUSell 27776 shares
4
5
Face
Value
Maturity
(Years)
Annual Coupon
(Semi-Annual
Payment) Bond Price
100 0.25 0 98.9
100 0.5 0 97.7
100 1 0 95.25
100 1.5 8 104.00
The table above describes four treasury bonds. All mature at facevalue. Assuming continuous compounding and using the bootstrapmethod, the 18month zero-rate is calculated as (nearest decimal
place)
4.9% 5.1% 5.3% 5.5%
2
8/14/2019 Quiz Three Solutions
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NoQuestion Answer 1 Answer 2 Answer 3 Answer 4 Ans
6
Maturity
(Years)
Zero Rate
(%)
1 4.25
2 4.75
3 5.5
4 6
5 6.75
The table above describes the zero rates for a number ofmaturities. Using this data, the forward interest rate for a 1-yearloan commencing in three years time is;
7.5% 7.00% 6.5% 6.00%
1
7
What is the value of the variable myVar after running thefollowing four lines of MATLAB code?myVar = 0for i=11:-1:6
myVar=myVar+(10/i);end
4.672 8.213 2.763 7.365 4
8
Note the 1-step binomial model above. What is the value of the
put option P0?The strike price, K = 45 and the risk free rate is 5%
0.9555 1.045 1.250 1.514
1
t0=0 T=0.25
S0=45
C0=
Sd=42.5
Cd=
Su=47.5
Cu=
t0=0 T=0.25
S0=45
P0=
Sd=42.5
Pd=
Su=47.5
Pu=
8/14/2019 Quiz Three Solutions
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NoQuestion Answer 1 Answer 2 Answer 3 Answer 4 Ans
9
S0
=45
C0
dS0
Cd
uS0
Cu
u2S0
Cuu
udS0
Cud
d2S0
Cdd
t0=0 t1=0.25 T=0.5
S0
=45
C0
dS0
Cd
uS0
C
u
u2S0
Cuu
udS0
Cud
d2S0
Cdd
t0=0 t1=0.25 T=0.5
Given the 2-step binomial tree above and the followinginformation:
u = 1.05
d = 0.95
t = 0.25;
du
dep
tr
=
r = 5% (risk free rate)
K = 45 (strike price)What is the value of the european call option C0?
1.104 1.762 1.815 1.096 2
10The secondary bond market is A market place in aregulatory region other than
the region of the issuingentities domicile.
A market place of lesserimportance The market in whichsecurities are traded afterhaving been initially offeredin the primary market
A market place with lowliquidity3
8/14/2019 Quiz Three Solutions
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Answer all questions
All questions carry equal marks.
Answer 1, 2, 3 or 4 on the right-hand side Ensure you have entered your name and Student ID on the first page
Option Chains for Ford Stock Price = $8.20
Option
ID
Option
Typ
e
Strike Option
Price
Maturity Option
Delta
Option
Gamma
Option
Implied Vol.FAU CALL 7.50 1.04 Jan10 0.71 0.086 45%
FAL CALL 9.00 0.32 Jan10 0.34 0.083 42%
FMU PUT 7.50 0.32 Jan10 -0.29 0.079 49%
FML PUT 9.00 1.08 Jan10 -0.66 0.083 42%
FCK CALL 8.00 0.82 Mar10 0.60 0.215 37%FOK PUT 8.00 0.67 Mar10 -0.40 0.195 41%