Chapter 5: Q5B (page 512)
You purchase one IBM September 160 put contract for a premium of $2.62. What is your maximum possible profit? (See Figure 15.1)
$15,748
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All else being equal, will a call option with a high exercise price have a higher or lower hedge ratio than one with a low exercise price?
Several Investment Committee members have asked about interest rate swap agreements and how they are used in the management of domestic fixed-income portfolios.
a. Define an interest rate swap, and briefly describe the obligation of each party involved.
b. Cite and explain two examples of how interest rate swaps could be used by a fixed income portfolio manager to control risk or improve return.
We showed in the text that the value of a call option increases with the volatility of the stock. Is this also true of put option values? Use the put-call parity relationship as well as a numerical example to prove your answer.
Suppose you are attempting to value a one-year maturity option on a stock with volatility (i.e., annualized standard deviation) ofσ= .40. What would be the appropriate values for u and d if your binomial model is set up using the following?
a. 1 period of one year
b. 4 sub-periods, each 3 months
c. 12 sub-periods, each 1 month
Joan Tam, CFA, believes she has identified an arbitrage opportunity for a commodity as indicated by the information given in the following exhibit:
a. Describe the transactions necessary to take advantage of this specific arbitrage opportunity.
b. Calculate the arbitrage profit.
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