Essay on Derivatives Study Guide

1541 Words Feb 6th, 2013 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 futures contract is a cash-settled contract. : False
4. An American option can be exercised at any time during its life. : True
5. A put option will always be exercised at maturity if the strike price is greater than the underlying asset price. : True
6. The fact that the exchange is the counter-party to every futures contract issued is important because it eliminates interest rate risk. : False
7. Index arbitrage is a strategy which exploits differences between actual index
futures
The necessary condition for early exercise is that we prefer to receive something sooner rather than later. With a dividend paying call and a non-dividend paying put, what do we receive?Answer: With the call and the put we receive the dividend on the stock and the interest on the strike, respectively.
3. Manchester United Corp. common stock is priced at \$74.20 per share. The company just paid its \$1.10 quarterly dividend. Interest rates are 6.0% (continuously compounded). A \$70.00 strike European call, maturing in 6 months, sells for \$6.50. How much arbitrage profit/loss is made by shorting the corresponding European put, which is priced at \$2.50?Answer: No-arbitrage price of Put = C + Ke-r×T – (S0 – PV(D))
= 6.50 + 70 e(-0.06/2) – (74.20 – 1.10 e(-0.06/4) - 1.10 e(-0.06/2))
= 2.38
P/L = 2.50 – 2.38 = 0.12 profit
4. 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

Related Documents

• Essay Phil 201 Study Guide

STUDY GUIDE: LESSON 2 The Importance of Philosophy in General Lesson Overview Having discussed what philosophy is, we now consider why it is important to study philosophy. We will divide our discussion into 2 parts: (1) Why is it important for all persons in general and (2) Why is it specifically important for Christians to study philosophy? We begin, in true philosophic fashion, by examining the question itself: what we do mean by philosophy being important and we introduce the idea of the…

Words: 2466 - Pages: 10
• Essay Auo 1 Study Guide

Ashley Richardson 11/15/2013 Western Governors University AUO1 – Auditing and Information Systems Additional Study Questions/ Study Guide 1. Accounting Information Systems Competency 302.1.1: Nature and Purpose The student understands the nature and purpose of information systems. * What is the difference between transaction processing systems, management information systems, and decision support systems? 2. Transaction processing systems - document financial activities…

Words: 12300 - Pages: 50
• Essay Application Of A Study Guide

The materials the students needed were the packet, their textbook, and a writing utensil. My mentor teacher does not make study guides for the students but instead does section reviews on the main ideas. The summative chapter test is based off these section reviews. The students use these review packets as the study guides. Therefore, they do not need to create a study guide, because they have been creating it in class as they move along through the chapter. I created the questions for chapter 5…

Words: 798 - Pages: 4
• Essay American Revolution and Study Guide

Chapter 2 Study Guide Questions “The Planting of English America” 1. Discuss English treatment of the Irish and its consequence (10pts) 2. What lessons do you think English colonists learned from their early Jamestown experience? Focus on matters of fulfilling expectations, financial support, leadership skills, and relations with the Indians. What specific developments illustrate that the English living in the plantation colonies tried to apply these lessons? (25 pts) 2. Compare and contrast…

Words: 5405 - Pages: 22
• Study Guide Essay

MG1016 – Managing Information with Technology UG study guide for 2012/13 MG1016 – Managing Information with Technology UG study guide for 2012/13 Date last updated: [08/08/12] Date approved by module reviewer: Date checked by PG pathway leader: [10/09/12] Date last updated: [08/08/12] Date approved by module reviewer: Date checked by PG pathway leader: [10/09/12] Introduction You should read this study guide carefully and also ensure that all the links have…

Words: 3864 - Pages: 16
• Midterm Study Guide Essay

Psychology 244 Instructor: L.J. Harris PSYCHOLOGY 244 FINAL EXAMINATION Spring, 2012 Study Guide Organization of Examination and Samples of Questions that could be made into Multiple-Choice and True-False Questions All questions will come from the lectures and the assigned chapters and parts of chapters in the text. The questions will be organized (as shown below) into the same main headings and subheadings used in the Lecture Notes, although some subheadings are different…

Words: 5709 - Pages: 23
• Macbeth Study Guide Essay

Macbeth Study Guide Macbeth Study Guide Act 1 1. What reason can you think of as why Macbeth is first introduced to us through the witches? E.g.To tell us, that Macbeth was a good guy before he’s darkest wish has been prophesied or for tolled. We learn how Macbeth deals with the prophecy towards the witches have told him 2. Explain what you think is meant by the paradoxical: Fair is foul, foul is fair. E.g. Good is bad, bad is good towards the witches? Macbeth is a fair man who appears…

Words: 1016 - Pages: 5
• Final Study Guide Essay

Final Exam Study Guide Psychological Test & Measurement 1 Psychological tests a pertain only to overt behavior b always have right or wrong answers c do not attempt to measure traits d measure characteristics of human behavior 2 The specific stimulus on a test to which a person responds overtly is called a(n) a overt event b answer c item d scale 1 3 Jeremy lost his job very unexpectedly last year, and for a short while he was not as confident as usual This change in his level of confidence…

Words: 5126 - Pages: 21
• Essay Socm Study Guide

Anatomy – the study of internal and external structures and the physical relationship between body parts. Physiology – the study of how living organisms p0erform the vital functions. Microscopic Anatomy – study of structures that can not be seen by the naked eye. Cytology – analyzes the internal structure of individual cells. Histology – the study of tissues Gross Anatomy – considers features visible with the unaided eye. Surface Anatomy – refers to the study of general form…

Words: 30419 - Pages: 122
• Essay Study Guide

Midterm Study Guide 1. Ideal world vs. real world according to Badaracco. a. Ideal world: i. You believe in the mission of the organization ii. You are committed to your professional responsibilities iii. Your work world and personal values are aligned and you are fueled with intensity and passion. b. Real world: iv. It’s tough to sustain commitment (take a vacation) v. Self-interest sometimes takes over (reflect, renew, etc.)…

Words: 1673 - Pages: 7