Derivatives (2)
\nRespond to each of the following questions (notice that there are main questions and sub-questions below some of the main questions \u2013 don\u2019t miss any!)<\/p>\n
Suppose you enter into a long 6-month forward position at a forward price of $60. What is the payoff in 6 months for prices of $50, $55, $60, $65, and $70?
\nSuppose that instead you buy a 6-month call option with a strike price of $60. What is the payoff in 6 months at the same prices for the underlying asset?
\nComparing the payoffs of parts (a) and (b), which contract should be more expensive (i.e., the long call or long forward)? Why is this so?
\nSuppose you enter into a short 6-month forward position at a forward price of $60. What is the payoff in 6 months for prices of $50, $55, $60, $65, and $70?
\nSuppose you buy a 6-month put option with a strike price of $60. What is the payoff in 6 months at the same prices for the underlying asset?
\nComparing the payoffs of parts (a) and (b), which contract should be more expensive (i.e., the long put or short forward)? Why is this so?
\nUse the following premiums for S&P options with 6 months to expiration:
\nStrike Call Put<\/p>\n
$950 $120.405 $51.777<\/p>\n
1000 93.809 74.201<\/p>\n
1020 84.470 84.470<\/p>\n
1050 71.802 101.214<\/p>\n
1107 51.873 137.167
\nAssume you buy a 1,000-strike S&P call, sell a 1050-strike S&P call, sell a 1,000-strike S&P put, and buy a 1050-strike S&P put.<\/p>\n
a. Using a table, verify that there is no S&P price risk in this transaction.
\nb. What is the initial cost of the position?
\nc. What is the value of the position after 6 months?
\nd. What is the implicit interest rate in these cash ?ows over 6 months?<\/p>\n
Here is a quote from an investment website about an investment strategy using options:
\nOne strategy investors are applying to the XYZ options is using \u201csynthetic stock.\u201d A synthetic stock is created when an investor simultaneously purchases a call option and sells a put option on the same stock. The end result is that the synthetic stock has the same value, in terms of capital gain potential, as the underlying stock itself. Provided the premiums on the options are the same, they cancel each other out so the transaction fees are a wash. (as cited in McDonald, 2013, question 3.19)
\nSuppose, to be concrete that the premium on the call you buy is the same as the premium on the put you sell, and both have the same strikes and times to expiration.<\/p>\n
a. What can you say about the strike price?
\nb. What term best describes the position you have created? What is the shape of the profit diagram?
\nc. Suppose the options have a bid-ask spread. If you are creating a synthetic purchased stock and the net premium is zero inclusive of the bid-ask spread, where will the strike price be relative to the forward price?
\nd.If you create a synthetic short stock with zero premium inclusive of the bid-ask spread, where will the strike price be relative to the forward price?
\ne. Do you consider the \u201ctransaction fees\u201d to really be \u201ca wash\u201d? Why or why not?
\nComplete your response in 3-5 pages using Microsoft Word or Excel. For calculations, you must show work to receive credit.<\/p>\n","protected":false},"excerpt":{"rendered":"
Derivatives (2) Respond to each of the following questions (notice that there are main questions and sub-questions below some of the main questions \u2013 don\u2019t miss any!) Suppose you enter into a long 6-month forward position at a forward price Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-19073","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/19073","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=19073"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/19073\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=19073"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=19073"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=19073"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}