Both Forward And Futures Contracts Are Traded On Contracts Case Study

1541 Words 7 Pages
1. Both forward and futures contracts are traded on exchanges. : False
2. Futures contracts are standardized; forward contracts are not. : True
3. The S&P500 index futures contract is a physical delivery contract. The pork bellies
…show more content…
Suppose European put prices are given by

What no-arbitrage property is violated? What spread position would you use to effect arbitrage? Demonstrate that the spread position is an arbitrage.
Answer: The difference in put premiums is greater than the difference in strike prices. We could engage in arbitrage by selling the 55-strike put and buying the 50-strike put, which is a bull spread.

5. (10 points) Let S=40, K=40, r=8% (continuously compounded), σ=30%, =0, T=0.5 years, and number of binomial periods=2. Compute the prices of American call and put options.

Payoff for
 Long forward = Spot price at expiration – Forward price
 Short forward = Forward price – Spot price at expiration
A call option gives the owner the right but not the obligation
…show more content…
buy the underlying asset at a predetermined price during a predetermined time period
• Strike (or exercise) price: the amount paid by the option buyer for the asset if he/she decides to exercise
• Exercise: the act of paying the strike price to buy the asset
• Expiration: the date by which the option must be exercised or become worthless
• Exercise style: specifies when the option can be exercised
 European-style: can be exercised only at expiration date
 American-style: can be exercised at any time before expiration
 Bermudan-style: can be exercised during specified periods
Payoff/Profit of a Purchased Call
• Payoff = Max [0, spot price at expiration – strike price]
• Profit = Payoff – future value of option premium
Payoff/profit of a purchased (i.e., long) put
 Payoff = max [0, strike price – spot price at expiration]
 Profit = Payoff – future value of option premium
Put-Call Parity
• The net cost of buying the index using options must equal the net cost of buying the index using a forward contract
• Call (K, t) – Put (K, t) = PV (F0,t – K)
 Call (K, t) and Put (K, t) denote the premiums of options with strike price K and time t until expiration, and PV (F0,t ) is the present value of

Related Documents