1- Define Call and Put Options. Discuss the uses of both long call and long put from hedgers perspective

2- Describe the process of investing in options using market identification and basis.

3-

May 17, 2014

You went long S&P 500 Call JUNE2014 1810.00 (Weekly 1) at $8.90

May 26, 2014

You mark to market today. The S&P 500 Call JUNE2014 1810.00 (Weekly 1) at $6.10

ii) Find out how much profit or loss you made in these nine days using the market price listed above.

What is the annual rate of return of this investment?

See option montage below for Google stock expiring June 6 2014. Interpret the Greeks (Delta, Vega, Theta, Rho and Gamma) for Call and Put. What do you think the market is saying about Googles price movement in near future?

Call F0614C527500

Last 10.7

Chg 1.45

Bid 9.6

Ask 10.7

Th. Val. 10.15

Imp. Vol. 18.8472

Delta 0.52231

Gam. 0.016294

CVol 8

Open Int 2

Expiration Date 6-Jun-14

Root Sym GOOGL

Strike 527.5

Put R0614C527500

Last 10.9

Chg 2.5

Bid 8.2

Ask 9.2

Th. Val. 8.7

Imp. Vol. 17.5921

Delta -0.47737

Gam. 0.017456

CVol 1

Open Int 20

Expiration Date 6-Jun-14

Root Sym GOOGL

Strike 527.

Solve the following problem:

Consider the PHLX 122 Sep EUR European call option. The option has a premium of 4.41 U.S. cents per EUR. The option will expire in 98 days (T-t) in years is equal to 98/365=. 0.2685 year. We will use September futures Ft($/EUR)=$112.53. The rate r is estimated 0.5375 percent. The estimated volatility is 15.985 percent.

Use Black Scholes formula from the book to answer the following questions:

i) Find values of d1 and d2.

ii) Use N(d1=.0933)= .5372 and N (d2=.0064)=.5025 to find BS Call price.

iii) Is the market fairly priced?

Define swaps. Give four distinct uses of swaps with examples. Make sure to illustrate the cases with graphs and numerical examples whenever necessary. How are you going to implement this in Barchart? Just give the methodology not a print output from Barchart

The basis is defined as spot minus futures/options. For a long hedger basis strengthens unexpectedly. Which of the following is true

(a) The hedgers position improves.

(b) The hedgers position worsens.

(c) The hedgers position sometimes worsens and sometimes improves.

(d) The hedgers position stays the same

Suppose the basis spread, S-F, is falling. How can you use this fundamental information to take an investment decision in options and swaps? Further, does your decision contradict the normal backwardation theory of Keynes? Why or why not?

a) You use futures and/or options to hedge interest rate risk, commodity-price risk and foreign currency risk. All the time futures follow spot or options follow spot. Give one detailed example where spot follows options.

b) Explain why do we engineer financial products? Is this a passing fad? Why or why not?

c) Is the market fairly priced?

A good trader with a bad model can beat a bad trader with a good model. Critique MGs failure with reference to normal backwardation model. Be very specific in pointing out what normal backwardation model entails and what MG did.Use options markets in addition to futures market to answer the question.