ACT245:DerivativesPracticeTest(InpreparationforTestII)

1.TheS&Rindexcurrentlyhasapriceof1300.Thepriceofasixmonthforwardcontractis 1320.Whatannualinterestrate(compoundedcontinuously)isimpliedbythisforwardprice?The S&Rhasnodividend. 2.TheS&Rindexcurrentlyhasapriceof1300.Thepriceofathreemonth1320strikeputis 81.41.Theannualinterestrateis4%compoundedcontinuously.AbuysthisputandBenters intoalongforwardcontract.Inthethreemonths,AandBhavethesameprofit.Whatistheprice oftheindexinthreemonths? 3.Thecurrentvalueofastockis S0 = 25 ,andthecontinuouslycompoundedriskfreerateis4%. Thepriceofasixmonth26strikecallis1.7152andthepriceofasixmonth26strikeputis 2.5726.Findthecontinuouslycompoundeddividendyield . 4.InvestorCbuystheS&Rindexattime0for1100andbuysan1100strikeputwith T = 0.25 for apriceof81.51.Iftheinterestrateis4%,whatishisminimumprofit? 5.Thecurrentspotrateforcornis1.60perbushel.Thesixmonthforwardpriceis1.50per bushel.Thecontinuouslycompoundedannualrateis3.5%.FarmerBrownhastotalfixedand variablecostsof1.44perbushel,andplanstoproduce100,000bushelsfor144,000.Asix monthputwithastrikepriceof1.52perbushelisavailableatapriceof0.12.Whatarethe minimumandmaximumprofitsforFarmerBrowninsixmonthsifheishedgedwithapurchase ofthisput? 6.CompanyXYZmakesanaircraftwhichcosts80,000,000tomanufacture.Itwillbecompleted insixmonths.Atthattimeitwillselleitherfor90,000,000withprobability0.5or74,000,000with probability0.5.Thecompanydecidestoenterintoaforwardcontracttoselltheunitfor 85,000,000insixmonths.Thecompanyhasa40%taxrate,andnotaxbenefitforlosses.What isthecompaniesexpectedprofitaftertax? 7.Astockhasacurrentpriceof S0 = 25 .Theannualcontinuousinterestrateis3%.Ifthe expirationtimeforaforwardcontractis T = 0.25 andtheforwardpriceis25.15,whatisthe continuousdividendyield ? 8.TheS&Rindexhasaspotpriceof S0 = 1100 .Thecontinuousinterestrateis3%andthe continuousdividendyieldis0%.Theoneyearforwardpriceis1133.50.Whichofthefollowing positionsresultsinasyntheticlongforwardcontract? a. Selltheindexshortfor1100andlendtheproceedsat r = 3% . b. Selltheindexshortfor1100andborrow1000at r = 3% .

c. Borrow1100at r = 3% andbuytheindex. d. Borrow1000at r = 3% andselltheindexshort. e. Noneofthese. 9.Youcanbuyasixmonth40strikeeuropeancallfor7.30andasixmonth40strikeeuropean putonthesamestockfor4.31.Thecontinuouslycompoundedriskfreerateis5%.Whatvalue mustthestockhaveinsixmonthsforthecallpayofftoequaltheputprofit? 10.ThenondividendpayingS&Rindexhasacurrentvalueof1100.Thecontinuously compoundedriskfreerateis3.5%.Asixmonthforwardcontractisavailableforaforwardprice of1118.Whichofthefollowingistrue? a. b. c. d. e. Thereisanarbitrageprofitin6monthsof1.42. Thereisanimmediatearbitrageprofitof1.42. Thereisanarbitrageprofitin6monthsof2.38. Thereisanimmediatearbitrageprofitof2.38. Thereisnoarbitrage.

11.TheS&Rindexcurrentlyhasapriceof1100.Thepriceofathreemonth1120strikeputis 71.32.Theannualinterestrateis3.5%compoundedcontinuously.Whatistheprofitonthisput inthreemonthsifthespotpricethenis1080? 12.Yourhomehasavalueof340,000.Yourannualinsurancepremiumis6000andyour deductibleis25000.Ifyoulookatyourinsuranceasaputoption,whatisthestrikeprice? 13.Aninsurancecompanysellssinglepremiumdeferredannuitycontractswithreturnlinkedto astockindex,thetimetvalueofoneunitofwhichisdenotedbyS(t).Thecontractsoffera minimumguaranteereturnrateofg=2%.Attimezero,asinglepremiumofamount ispaidby thepolicyholder,and y isdeductedbytheinsurancecompany.Inoneyeartheinsurance companywillpaythepolicyholder (1 y)max( ST , 1 + g) ,where S0 = 100 .Youaregiventhe 0 followinginformation: i. Dividendsareincorporatedinthestockindex.Thatis,thestockindexisconstructedwith alldividendsreinvested. ii. ThepriceofaoneyearEuropeanputoption,withastrikepriceof$102,onthestock indexis$15.80. Determiney,sothattheinsurancecompanydoesnotmakeorlosemoneyonthiscontract? 14.InvestorCbuystheS&Rindexattimezerofor1300andbuysa1300strikeputwithT=0.25 forapriceof71.85.Iftheinterestrateisr=3.5%,whatishisminimumprofit? 15.Nearmarketclosingtimeonagivenday,theeuropeancallandputpricesforastockare availableasfollows:
S

Strike 40 50 55

CallPrice 11 6 3

PutPrice 3 8 11

T=0.5.r=4%.Longtwocalloptionswithstrike40short6calloptionswithstrike50lend2long somecallswithstrike55.The$2shelendsisobtainedfromthesaleandpurchaseofthe options.WhatisherprofitatT=0.5ifthepriceofthestockis52atthattime? 16.InvestorFsellsa1300strikeS&Rputfor71.85anda1300strikeS&Rcallfor83.18.r=3.5% andT=3months.Whatishismaximumprofit? 17. S0 = 40, r = 3%, = 1% .Youobserveaoneyearprepaidforwardpriceof39.60.Createan arbitrage(ifpossible).\ 18. S0 = 1300, r = 3%, = 0% .Theoneyearforwardpriceis1339.59.Youenterintoaforward salecontractandbuytheindex.Whichofthefollowingisthisequivalentto? a. b. c. d. e. Ashortsaleoftheindex Purchaseofaoneyearzerocouponbondwithr=3% Areversecashandcarryhedge Acashandcarryarbitrage Noneofthese

19.TheS&Dindexpaysdividendsatacontinuouslycompoundedrateof . S0 = 1000, r = 4% . Youcanpurchaseathreemonth1050strikeeuropeancall32.47anda3month1050strike europeanputfor74.52.Findthethreemonthforwardprice. 20. S0 = 40, = 0%, r = 4% .InvestorAbuysasixmonth41strikeputfor3.48.InvestorBenters intoasixmonthshortforwardcontracttosellthatstockfortheforwardprice40.81.Atwhat stockpricedothetwoinvestorshavethesameprofitinsixmonths? 21.Aninvestorbuysa30strikeputanda30strikecallonastock.Bothoptionshavethesame expirationdate.Whichofthefollowingisthemostlikelyreasonfortakingthisposition? a. b. c. d. e. Toprofitfromanexpectedincreaseinthestockprice. Toprofitfromanexpecteddecreaseinthestockprice. Toprofitfromhighvolatilityinthestockprice. Toprofitfromlowvolatilityinthestockprice. Tocreateasyntheticforwardsale.

22.Youbuya35strikeputandwritea45strikecallonastock.Theoptionshavethesame expiration.Graph(roughly)theprofit. 23. S0 = 40 .Thepriceofa35strikecallis6.13.Thepriceofa45strikecallis0.97.Buyn 35strikecalls,sellm45strikecalls.Whatration/mgivesyouazeropremium? 24.Youwritea35strikeputanda45strikecallonastock. T = 0.25, r = 4% .Theputcosts0.44 andthecallcosts0.97.Whatisyourmaximumprofit? 25. S0 = 35, r = 4%, = 2% .Youobserveaoneyearprepaidforwardpriceof34.20.Whichofthe followingistrue? a. Noarbitragepossible b. Youcancreateanarbitragebybuyingoneprepaidforwardandsellingoneshareofthe stockshort c. Youcancreateanarbitragebysellingoneprepaidforwardandbuyingoneshareofthe stock d. Youcancreateanarbitragebybuyingoneprepaidforwardandselling e2% sharesofthe stockshort e. Youcancreateanarbitragebysellingoneprepaidforwardandbuying e2% sharesofthe stock 26. S0 = 30, = 1%, r = 4%, K = 30, T = 0.25 . Investment CallOption PutOption Whichofthefollowingistrue? a. b. c. d. e. Thereisanarbitragewithanimmediategainof0.024pershare. Thereisanarbitragewithanimmediategainof0.036pershare. Thereisanarbitragewithafuturegainof0.026pershare. Thereisanarbitragewithafuturegainof0.029pershare. Thereisnoarbitrage. Price 1.60 1.40

27.Foreachofthefollowing,givethenameoftheportfolioanddrawaroughsketchofthepayoff function. I. Buya40strikeputandsella45strikecall. II. Writeaputfor40andbuyacallfor45.

III. Buyacallfor40andsellacallfor45. IV. Writeacallfor40andbuyacallfor45. V. Buyacallfor40andbuyacallfor45. 28. S0 = 40, = 0%, r = 4%, T = 6months .Abuysa41strikeputfor3.48.Bentersashort forwardcontracttosellfor40.81.After6months, P ayoff A = P ayoff B .Find ST . 29.Aninvestorbuysa30strikecallandsellsa35strikecall.Bothoptionshavethesame expiration.Whatisthemostlikelyreasonfortakingthisposition? a. b. c. d. e. Toprofitfromanexpectedincreaseinthestockprice. Toprofitfromanexpecteddecreaseinthestockprice. Toprofitfromhighvolatilityinthestockprice. Toprofitfromlowvolatilityinthestockprice. Tocreateasyntheticforwardsale.

30.Buya35strikeput.Buya45strikecall.Graphthepayofffunction. 31. S0 = 40, r = 4%, T = 0.25, K = 35 . Investment CallOption PutOption Price 6.13 0.44

Whatisthepriceofaforwardcontracttobuythestockinthreemonthsfor35? 32. S0 = 1300, r = 5%, = 0%, T = 0.5 .Youobserveasixmonthforwardpriceof1340.What arbitrageprofitcanbemadeinsixmonths?