Problem Set 1 Directions: Show all your work. Circle your answer choice. This problem set consists of 10 questions worth 12 points. 1. (1 points) Nike is currently trading at a quote of $621.35-$621.40. What is your profit or loss if you buy and immediately sell 1,250 shares if each transaction costs 0.25% to execute? Round to the nearest penny. 2. (1 points) Your friend offers you the opportunity to make $10.00 if you roll a die and it lands on a 1. If it does not land on 1, then you owe him $3.00. What is the expected profit of this bet? Why should you or should you not accept your friend's offer? 3.(1 point) IBM is expected to trade at $95/share at expiration. A 30-day European long call option with a strike price of $70 costs $27.00. What is the intrinsic value of this option? What is the profit/payoff on this option contract? 4. (2 points) British Airways would like to cross-hedge their jetfuel costs using oil futures. One oil futures contract delivers 1,000 barrels of oil and 1 barrel of oil holds 42 gallons. Every day, British Airways offers 1 flight from Miami, FL to Athens, Greece. This flight requires 36,000 gallons of fuel (1 gallon of fuel per second!). The correlation between jet fuel and oil is 0.90. The standard deviation of jet fuel and oil futures prices is 0.20 and 0.40, respectively. How many oil futures contracts should British Airways purchase to hedge their jet fuel costs for 1-year worth of flights? 5. (2 points) Solve for X. Fx1/4 = 5x2 * [e48 *eX]X 6. (1 point) Explain the difference between European-style options and American-style options. All else equal, which option style should be worth more and why? 7. (1 point) Explain at least 2 differences between hedging with a forward contract and hedging with an options contract? 8. (1 point) Explain at least 3 differences between a forward and futures contract. 9. (1 point) The S&P 500 index is currently trading at 2,970. If the risk-free rate is 3.50% and the dividend yield is 1.90%, then what is the 15-month forward price? 10. (1 point) An investor needs British pounds 18 months from today. The spot exchange rate is GBP/USD 1.5510. If the British-denominated interest rate is 2.25% and the U.S. risk-free rate is 2.00%, then what is the price of the 18-month forward contract