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  1. Explain the pay-offs for a long forward, short forward, longput, short put, long call and short call, and set an example on howyou could use each one of these instruments as a hedge
  2. Explain the main benefits for a right issue for yourcompany

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Irving Heathcote
Irving HeathcoteLv2
28 Sep 2019

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The spot price of an asset is $2,500. The European call option on the asset with strike price $2,400 that expires in 6 months is traded at $225. The asset will pay a dividend in 3 months of $200. The default free 3-month pure discount bond is traded at $98 and the 6-month pure discount bond is traded at $95, both with face value $100. There is also a forward contract and a European put option on the asset with the same strike price as the call, both expiring in 6 months.

Answer the following:

(a) What should the forward price be and why?

(b) What should the price of the put option be?

(c) Describe the strategy you will follow and compute the profit of your strategy if the put option is traded at $205.

(d) Suppose that there are no 6-month pure discount bonds. How can you borrow synthetically over 6 months and at what interest rate if the put option is traded at $205?

(e) Plot the profit diagram and compute lhe break-even point(s) of the strategy that goes long the asset and goes short two call options on the asset.

(f) PIot the payoff diagram ofthe strategy that goes long one call and one put option on the asset. This strategy can be considered a speculation on what?

Assume you create a portfolio that consists of a long position in one 9 month call option and a short position in one 9 month put option on euros. Both the call and the put have 100,000 euros attached. The strike price for the call and put options is $1.3 and $1.4, respectively. The call and put premium is $.04 and $.03, respectively.

Calculate the profit/loss (in terms of USD) on your portfolio if the spot rate is .8 euros per dollar when the options expire. Round intermediate steps to four decimals and your final answer to two decimals. Do not use currency symbols or words when entering your response.

Consider this Put option. P= $40, X=45, D=0.80, U=1.2 Risk free Rate: 3%. T= 6months
a-) If you hold one put option today, inidicate whether you need to buy or short and how many shares of stock in order to completely hedge the risk in the long put position in next quarter i.e work for one quarter from now? (Hint: Use the binomial/ construct trees)
b-) What is today's delta with same maturity and expecise price (X) and written on the same stock as the put option from part (a) (Hint: Use put-call)
c-) How will calculate in (a) change if put is American. Dont draw trees, Just indicate.
d-) Consider long Starddle position constructed from Euro put from part (a) and european call option on XYZ Stock with same strike price and maturity. What is the annualized continously compunded expected return on the straddle over next quarter, between now and quarter from now? Assume XYZ stock has an expected continously compunded rate of 10% per year




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