Two-Step Tree and Butterfly Spread: Questions Essay Essay

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1. A company enters into a short hereafters contract to sell $ 5000. The current future monetary value is 250 cents per lb. The initial border is $ 3000 and the care border is $ 2000. What monetary value alteration would take to a border call? Under what fortunes $ 1500 could be withdrawn from the border history? 2. Stock is expected to pay a dividend of Tk 10 per portion in 2 months and once more in 5 months. The stock monetary value is Tk 500 and put on the line free rate of involvement is 8 % p. a. with continuously compounded for all adulthoods. An investor has merely taken a short place in a 6- month frontward contract on the stock. a. What are the forward monetary value and the initial value of the forward contract? B. Three months subsequently. the monetary value of the stock is 480 and the hazard free rate is still 8 % per annum. What are the forward monetary value and the value of the short place in the forward contract?

3. Under the footings of an involvement rate barter. a fiscal establishment has agreed to pay 10 % per annum and to have three month LIBOR in return on a notational rule of TK 100 million with payments being exchanged every three months. The barter has a staying life of 14 months. The norm of the command and offer fixed rates presently being swapped for three month LIBOR is 12 % per annum for all adulthoods. The three month LIBOR rate one month ago was 11. 8 % per annum. All rates are compounded quarterly. what is the value of the barter? 4. A four month European call option on a non-dividend paying stock is presently selling for $ 5. The stock monetary value is $ 64. the work stoppage monetary value is $ 60 and a dividend of $ 0. 80 is expected in one month. The hazard free involvement rate is 12 % per annum for all adulthoods. What chances are at that place for an arbitrager?

5. A Tk 100 million involvement rate barter has a staying life of 10 months. Under the footings of the barter. six month LIBOR is exchanged for 12 % per annum ( compounded biyearly ) . The norm of the command offer rate is being exchanged for six month LIBOR in barters of all adulthoods is presently 10 % per annum with uninterrupted intensifying. The six month LIBOR rate was 9. 6 % per annum excessively months ago. What is the current value of the barter to the party paying drifting? What is the value of the barter to the party paying fixed? 6. A call with a work stoppage monetary value of Tk 60 costs Tk 6. A put with the same work stoppage monetary value and termination day of the month costs Tk 4. Construct a tabular array that shows the net incomes from a straddle. For what scope of stock monetary values would the straddle lead to a loss. 7. Company Ten and Y have been offered the undermentioned rates per annum on a $ 5 million 10-year loan:

Company| Fixed Rate| Floating Rate|
Company X| 5. 0 % | LIBOR+ . 5 % |
Company Y| 6. 5 % | LIBOR+ 1. 0 % |

Assume that the company X requires a drifting rate loan ; company Y requires a fixed rate loan. Plan a barter that will sack a bank. moving as intermediary. 20 footing point spread and which will profit X and Y by 50 and 30 footing severally. 8. See a European call options on a non-dividend paying stock where the stock monetary value is Tk 40. work stoppage monetary value is Tk 40 and the hazard free rate is 4 % per annum. the volatility is 30 % per annum. and the clip to adulthood is three months. c. Calculate u. vitamin D and P for a two measure tree. d. Value the option utilizing a two measure tree.

9. A stock monetary value is presently Tk 50. It is known that at the terminal of the 6 months it will be either Tk 60 or Tk 42. The hazard free rate of involvement with uninterrupted combination is 12 % per annum. Calculate the value of 6 month European call option on the stock with exercising monetary value Tk 48 utilizing no arbitrage method. 10. See a European call options on a non-dividend paying stock where the stock monetary value is Tk52. work stoppage monetary value is Tk 50 and the hazard free rate is 12 % per annum. the volatility is 30 % per annum. and the clip to adulthood is three months. e. Calculate u. vitamin D and P for a two measure tree. f. Value the option utilizing a two measure tree.

11. Calculate the monetary value of a 3 month American put option on a non-dividend stock. which the stock monetary value is Tk 100. the exercising monetary value Is Tk 100 and the hazard free rate is 12 % p. a. Use the undermentioned binomial tree within a clip interval of 1 month to cipher the monetary value of the put option. Besides province the portfolio floor that will be maintained when portfolio combined with put.

12. Three put options on a stock have the same termination day of the month and work stoppage monetary values of Tk 55. Tk60 and Tk65. The market monetary values are Tk3. Tk5 and Tk 8. severally. Explain how a butterfly spread can be created. Construct a tabular array demoing the net income from the scheme. For what scope of stock monetary values would the butterfly dispersed lead to a loss? 13. See a American call option when the stock monetary value is TK 20. the exercising monetary value is Tk. 24. the clip to adulthood is six months. the volatility is 20 % per annum. the hazard free involvement rate is 5 % per annum. Two equal dividends are expected during the life of the option with ex-dividend rates at the terminal of the two months and five months. Assume the dividends are Tk. 0. 50. Use the Black’s estimate to value the option.

How high can the dividends be without the American option being worth more than the corresponding European option? 14. See a American call option when the stock monetary value is TK 18. the exercising monetary value is Tk. 20. the clip to adulthood is six months. the volatility is 30 % per annum. the hazard free involvement rate is 10 % per annum. Two equal dividends are expected during the life of the option with ex-dividend rates at the terminal of the two months and five months. Assume the dividends are Tk. 0. 50. Use the Black’s estimate to value the option. How high can the dividends be without the American option being worth more than the corresponding European option? 15. Company A. a British industry. wises to borrow U. S dollars at a fixed rate of involvement. Company B. a US multinational. wants to borrow sterling at a fixed rate of involvement. The sums required by the two companies are approximately the same at the current exchange rate. The companies have been quoted the undermentioned involvement rates:

Company| Sterling| Dollars|
Company A| 11. 0 % | 7. 0 % |
Company B| 10. 6 % | 6. 2 % |

Design a barter that will sack a bank moving as intermediary. 10 footing points per annum. Make a barter appear every bit attractive to the two companies and guarantee that all foreign exchange hazard is assumed by the company A. 16. A currency barter has a staying life of 2 old ages. It involves interchanging involvement at 14 % on ?20 million for involvement at 10 % on $ 30 million one time a twelvemonth. The term construction of involvement rates in both the United Kingdom and the United States is presently level and if the barter were negotiated today. the involvement rates exchange would be 8 % in dollars and 11 % in sterling. All involvement rate are quoted with uninterrupted combination.

The current exchange rate is $ 1. 65 per ?1. What is the value of the barter to the party paying sterling? What is the value of the barter to the party paying dollars? 17. Calculate the monetary value of a 2 month American put option on a non-dividend stock. which the stock monetary value is Tk 20. the exercising monetary value Is Tk 21 and the hazard free rate is 12 % p. a. Use the undermentioned binomial tree within a clip interval of 1 month to cipher the monetary value of the put option. Besides province the portfolio floor that will be maintained when portfolio combined with put.

18. In each cell of the undermentioned tree upper portion represents the stock monetary value and lower one the call monetary value Call Option monetary value if Strike Price is 21

It is supposed that each clip measure is 3 months long and the hazard free involvement rate is 12 % per annum. Initial value of the portfolio is 20. 934. You are asked to use dynamic plus allotment scheme in order to see portfolio by puting a portion into active plus ( such as portions ) and the remainder of the portfolio into reserved plus ( bond ) . You are asked to make full up the empty box and show necessary calculations to make full up the box. 19. On June 25. the call premium on a December 25 contract is 6. 65 cents per lb at a work stoppage monetary value of $ 1. 81. The 180 twenty-four hours involvement rate is 7. 5 % in London and 4. 75 % in New York. If the current topographic point rate is ?1 = $ 1. 8470 and put-call para holds. what is the put premium on a December 25 contract with an exercising monetary value of $ 1. 81?

Disclaimer: All the inquiries are picked from the old twelvemonth batch inquiries. There may be errors in both inquiries and solutions. So please follow it in your ain duty.

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