Assignment: Problem Set

Use data from the following table to answer questions 1, 2, and 3.

Option Quote
	Call	Put
Expiration	Strike	Last	Volume	Open Interest	Last	Volume	Open Interest
Jan	190	4.40	815	5697	1.75	507	2496
Feb	190	6.75	402	2808	3.00	3553	10377
Apr	190	8.85	107	1866	5.20	527	2177
Jul	190	10.95	15	645	8.54	6	1142
Jan	195	0.01	2451	11718	0.70	4090	8862
Feb	195	3.65	1337	11902	5.00	860	3156
Apr	195	5.90	1785	2928	7.30	934	1141
Jul	195	8.45	13	5773	10.85	22	3419
Jan	200	1.10	1248	2966	5.55	637	6199
Feb	200	1.61	1053	5530	8.09	546	967
Apr	200	3.70	629	3236	10.05	375	1903
Jul	200	6.10	80	1257	--	--	1105

1. Calculate the payoff and profit at expiration for the February 190 calls, if you purchase the option at the stated price and at expiration the stock price is $195.

2. Calculate the payoff and profit at expiration for the February 195 puts, if you purchase the option at the stated price and at expiration the stock price is $195.

3. Calculate the payoff and profit at expiration for the February 200 calls, if you purchase the option at the stated price and at expiration the stock price is $203.

4. On January 1, the listed spot and futures prices of a Treasury bond were 93.8 and 93.13. You purchased $100,000 par value Treasury bonds and sold one Treasury bond futures contract, also $100,000 face value. One month later, the listed spot price and futures prices were 94 and 94.09, respectively. Determine the change in the value of your combined position.

5. The risk-free rates in the United States and in the United Kingdom are 4% and 6%, respectively. The spot exchange rate between the dollar and the pound is $1.60/BP. Based on the current spot exchange rate and interest rates in the U.S. and UK, determine the appropriate 1-year futures rate.

6. a. You have an asset that produces quarterly fixed cash inflows of $10,000, but you anticipate rising interest rates. Explain how you could enter a swap contract to take advantage of rising rates, and increased cash flows, without selling the asset and investing in a higher-paying asset. Diagram the swap, including the notional principal and payments, assuming a swap fixed rate of 4%.

b. Over the first quarter the swap is in force, the floating rate (LIBOR) rises to 4.1%. List the size and direction of all three cash flows to the swap.

Assignment: Problem Set Use data from the following table to answer questions 1, 2, and 3. Option Quote Call Expiratio n Jan Feb Apr Jul Jan Feb Apr Jul Jan Feb Apr Jul Strik e 190 190 190 190 195 195 195 195 200 200 200 200 Last Volume 4.40 6.75 8.85 10.95 0.01 3.65 5.90 8.45 1.10 1.61 3.70 6.10 815 402 107 15 2451 1337 1785 13 1248 1053 629 80 Put Open Interest 5697 2808 1866 645 11718 11902 2928 5773 2966 5530 3236 1257 Last Volume 1.75 3.00 5.20 8.54 0.70 5.00 7.30 10.85 5.55 8.09 10.05 -- 507 3553 527 6 4090 860 934 22 637 546 375 -- Open Interest 2496 10377 2177 1142 8862 3156 1141 3419 6199 967 1903 1105 1. Calculate the payoff and profit at expiration for the February 190 calls, if you purchase the option at the stated price and at expiration the stock price is $195. 2. Calculate the payoff and profit at expiration for the February 195 puts, if you purchase the option at the stated price and at expiration the stock price is $195. 3. Calculate the payoff and profit at expiration for the February 200 calls, if you purchase the option at the stated price and at expiration the stock price is $203. 4. On January 1, the listed spot and futures prices of a Treasury bond were 93.8 and 93.13. You purchased $100,000 par value Treasury bonds and sold one Treasury bond futures contract, also $100,000 face value. One month later, the listed spot price and futures prices were 94 and 94.09, respectively. Determine the change in the value of your combined position. 5. The risk-free rates in the United States and in the United Kingdom are 4% and 6%, respectively. The spot exchange rate between the dollar and the pound is $1.60/BP. Based on the current spot exchange rate and interest rates in the U.S. and UK, determine the appropriate 1-year futures rate. 6. a. You have an asset that produces quarterly fixed cash inflows of $10,000, but you anticipate rising interest rates. Explain how you could enter a swap contract to take advantage of rising rates, and increased cash flows, without selling the asset and investing in a higher-paying asset. Diagram the swap, including the notional principal and payments, assuming a swap fixed rate of 4%. b. Over the first quarter the swap is in force, the floating rate (LIBOR) rises to 4.1%. List the size and direction of all three cash flows to the swap