I have question on assignment 3 question 2 and 3. I dont know how to deal with these

Student's Name: ____________________ Student's ID: _________________ McGill University DERIV Assignment#1 Maximum Points: 25 HAND IN (NO EMAILING) THIS ASSIGNMENT. NO OTHER FORM OF ASSIGNMENT SUBMISSION WILL BE ACCEPTED OR GRADED. SHOW REASONABLE DETAILS OF CALCULATIONS. ELSE, NO CREDIT ANSWER IN THE DESIGNATED SPACES BELOW (Expand/Shrink the space for each question if needed) and MAY BE AWARDED. _____________________________________________________________________ Question # 1 (10 Points): Consider the following futures position. Please fill out the worksheet. _____________________________________________________________________ Question # 2 (5 Points): A Hedge Fund of stocks has taken long position in some internet stocks and short position in some other internet stocks, hoping to exploit perceived mispricing among internet stocks. Overall, its portfolio is valued at $400 million and its beta is estimated at: -0.85. The Hedge Fund wishes to reduce the impact of market movements on the performance of its stock bets within the internet sector over the next six-month horizon. As such, it is targeting a beta of -0.20. The S&P 500 Index is currently at 2,010 and the six-month maturity S&P Index Futures Price is 2,051. The S&P 500 Index Futures values each index point at $250. How many LONG or SHORT index futures contracts (rounded to nearest integer) are needed? 1 Student's Name: ____________________ Student's ID: _________________ McGill University DERIV Assignment#1 Maximum Points: 25 _____________________________________________________________________ Question # 3 (10 Points): It is now January 2015. A company anticipates that it will buy 1.75 million barrels of light sweet crude oil in July 2015 and buy 2.20 million barrels in January 2016. NYMEX Light Sweet Crude futures contracts (1 contract is for 1,000 barrels or 42,000 gallons) are available for hedging price risk. Company decided to hedge 72% of its July 2015 exposure and 82% of its January 2016 exposure, and to use at all times futures contracts maturing in less than 9 months. (a) State the appropriate strategy for hedging each of its future spot transactions separately and then state the futures trades overall that are called for now. [Mention the contract month, number of contracts and the position (LONG/SHORT). Round the number of contracts to the nearest integer]. (b) Considering all futures positions, what was the total cumulative gain or loss on all the futures positions combined as of July 2015? (c) What price/barrel did the company effectively realize for its July 2015 and January 2016 transactions? 2 Student's Name: ____________________ Student's ID: _________________ McGill University DERIV Assignment#2 Maximum Points: 25 HAND IN (NO EMAILING) THIS ASSIGNMENT. NO OTHER FORM OF ASSIGNMENT SUBMISSION WILL BE ACCEPTED OR GRADED. SHOW REASONABLE DETAILS OF CALCULATIONS. ELSE, NO CREDIT ANSWER IN THE DESIGNATED SPACES BELOW (Expand/Shrink the space for each question if needed) and MAY BE AWARDED. _____________________________________________________________________ Question # 1 (10 Points): Consider the following market price information about bonds. Fill up the four shaded cells for 2 points each. Fill up the other cells for the sake of completeness and if the entire set of cells is correct, you earn 2 more points. _____________________________________________________________________ Question # 2 (5 Points): Say, at the end of 2013, BX Gold Inc. entered into a commitment to sell 1.4 million ounce of gold @$1,100/ounce at the end of 2015 and to sell a second lot of 1.8 million ounces @$1,175/ounce at the end of 2016. As of the end of 2014, say the spot price of gold is $1,300/ounce, and the continuously compounded risk-free rate is 6% (ignore other carrying costs). Calculate the end of 2014 total value of BX Gold's forward sale commitments. 3 Student's Name: ____________________ Student's ID: _________________ McGill University DERIV Assignment#2 Maximum Points: 25 _____________________________________________________________________ Question # 3 (10 Points): Consider the following information about the market and about MoC Inc's Swap Portfolio comprising of two existing swap positions. Calculate the current market value of MoC Inc's Swap Portfolio. [Need to imply some missing information] 4 Student's Name: ____________________ Student's ID: _________________ McGill University DERIV Assignment#3 Maximum Points: 25 HAND IN (NO EMAILING) THIS ASSIGNMENT. NO OTHER FORM OF ASSIGNMENT SUBMISSION WILL BE ACCEPTED OR GRADED. SHOW REASONABLE DETAILS OF CALCULATIONS. ELSE, NO CREDIT ANSWER IN THE DESIGNATED SPACES BELOW (Expand/Shrink the space for each question if needed) and MAY BE AWARDED. _____________________________________________________________________ Question # 1 (5 Points): A stock price is currently $100. It is known that at the end of one year, it will be either $155.27 or $64.40. The continuously compounded risk-free interest rate is 5.16% per annum and the stock will pay no dividends over the next year. Consider a oneyear maturity power option with payoff at maturity= [Max (0, S T $110)]0.7. If the power option is actually selling in the market at $5.30, what trades (underlying asset, power option, risk-free lending/borrowing) are needed now for a zero equity and zero initial cash flow arbitrage? _____________________________________________________________________ Question # 2 (10 Points): Consider the following information for a Structured Note. Using the Binomial Model, calculate the value (now at t=0) of the Structured Note with all its features included. Calculate separately the value (now at t=0) of the Callable/Redeemable (whichever is the case here) feature by itself. 5 Student's Name: ____________________ Student's ID: _________________ McGill University DERIV Assignment#3 Maximum Points: 25 _____________________________________________________________________ Question # 3 (10 Points): Consider all option positions at the unit level, not contract level. Any individual option position must be for at least one unit although fractional positions (e.g., 1.25, 1.50, 2.12, etc.) are permissible. Any strategy involving more than one strike and/or one type (call, put) must involve exactly one unit for at least one of the individual option positions. You expect that the stock will exhibit fluctuations around the current level until option expiration, and most likely it will end up, by option expiration, very close to the current level. While this expectation is by no means guaranteed to realize, you think the chances of the stock making a large move to the downside by expiration is highly unlikely. Your objective is to earn speculative profit and you are highly risk tolerant. Based on your belief, you wish to make a risky bet such that your profit will be reduced by $1 for every dollar by which the stock price at maturity exceeds the current level and your profit will be reduced by $2.50 for every dollar by which the stock price at maturity falls short of the current level. What are the individual stock and/or option positions under the most suitable strategy? Calculate the break-even underlying asset price(s) at maturity, and the maximum profit and the maximum loss potentials (must indicate these on a profit diagram). 6 Student's Name: ____________________ Student's ID: _________________ McGill University DERIV Assignment#4 Maximum Points: 30 HAND IN (NO EMAILING) THIS ASSIGNMENT. NO OTHER FORM OF ASSIGNMENT SUBMISSION WILL BE ACCEPTED OR GRADED. SHOW REASONABLE DETAILS OF CALCULATIONS. ELSE, NO CREDIT ANSWER IN THE DESIGNATED SPACES BELOW (Expand/Shrink the space for each question if needed) and MAY BE AWARDED. _____________________________________________________________________ Question # 1 (10 Points): Consider the following information: Asset Price, S $320 Option Time to Maturity (year), T 1.00 Volatility (% per year) 34.00 Risk-Free Rate (% per year) 5.00 Dividend Yield (% per year) 0.00 (a) Calculate the No-Arbitrage (BSM) value of standard ATM Straddle. (b) Suppose the market price of this straddle is $68.15. What trades are needed in the Call and Put options, the underlying asset and risk-free lending/borrowing for a zero-equity zero future cashflow (in the sense of dynamic replication) riskless arbitrage? _____________________________________________________________________ Question # 2 (10 Points): ZPLN share is now selling at $465 with an expected return () of 30% and volatility () of 40%, both per annum. Three month (0.25 year) maturity option prices for ZPLN are given below. Consider a standard (not ratio) Call Butterfly Credit Spread using the strikes $418.50, $465 and $511.50. Separately calculate the actual, not risk neutral, probability, % (rounded to the nearest two decimal places) of: (a) loss (i.e., negative profit), and (b) P&L more than +$5? 7 Student's Name: ____________________ Student's ID: _________________ McGill University DERIV Assignment#4 Maximum Points: 30 _____________________________________________________________________ Question # 3 (10 Points): A client of your bank wants to buy a structured with the note payoff at maturity (T) linked to the asset price (ST) at that time. The client wishes to incorporate/embed into the note the dollar payoff (not profit) of a standard LONG strangle on the asset with K1=$85 and K2=$115. If the dollar payoff of the standard long strangle is $X, then the note payoff at maturity will be A+ B$X; A=$70, B=0.90. (a) What is the current (t=0) fair value of the Note? (b) For the Note to sell at par now, what needs to be the value of A in the payoff function? 8