Question 1: Trading Strategies Involving Options

A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net gain (after the cost of the options is taken into account)? Show all working in detail including the strategy, cost and payoff of the options and total payoff. (5 marks)

Question 2: Swaps

The cost to IBM and KDB of accessing either fixed rate yen or the floating rate dollar market for a new debt issue is as follows:

CompanyFixed rate Yen AvailableFloating rate Dollar Available

KDB4.9%Libor + 0.80%

IBM4.5%Libor + 0.25%

Suppose IBM would like to borrow fixed rate yen, whereas KDB would like to borrow floating rate dollars. Answer part (a), (b) (c) and (d) below:

(a)Identify the overall spread (basis point) of the swap and at what rate should each party borrow to create the swap? IBM has comparative advantage in which rate? (3 marks)

(b)What is the fixed rate Yen at which IBM can borrow through interest rate/currency swap if KDB can borrow at IBM?s floating rate of Libor+0.25%? (2 marks)

(c)Assuming a notional principle equivalent to $125 million and a current exchange rate of Yen105/$, what do these possible cost savings translate into in Yen terms (total value)? (2 marks)

(d)Assuming that Bank of American is the intermediary and charges a fee of 8 basis points to arrange the swap. If IBM realises all the saving from the swap then what is IBM borrowing cost and what is the cost savings translate into Yen terms? (3 marks)

Assignment 2 [30 October, 4pm] Introduction to Derivative Securities - INVE3000 Penalty will apply for late submission. Assignment should be submitted in the box provided in building 402 - level 5 Finance department administrations [Bentley Campus only]. Note assignment should contain cover page (available on Blackboard) and stamp of submission date. Question 1: Trading Strategies Involving Options A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net gain (after the cost of the options is taken into account)? Show all working in detail including the strategy, cost and payoff of the options and total payoff. (5 marks) Question 2: Swaps The cost to IBM and KDB of accessing either fixed rate yen or the floating rate dollar market for a new debt issue is as follows: Company Fixed rate Yen Available Floating rate Dollar Available KDB 4.9% Libor + 0.80% IBM 4.5% Libor + 0.25% Suppose IBM would like to borrow fixed rate yen, whereas KDB would like to borrow floating rate dollars. Answer part (a), (b) (c) and (d) below: (a) Identify the overall spread (basis point) of the swap and at what rate should each party borrow to create the swap? IBM has comparative advantage in which rate? (3 marks) (b) What is the fixed rate Yen at which IBM can borrow through interest rate/currency swap if KDB can borrow at IBM's floating rate of Libor+0.25%? (2 marks) (c) Assuming a notional principle equivalent to $125 million and a current exchange rate of Yen105/$, what do these possible cost savings translate into in Yen terms (total value)? (2 marks) (d) Assuming that Bank of American is the intermediary and charges a fee of 8 basis points to arrange the swap. If IBM realises all the saving from the swap then what is IBM borrowing cost and what is the cost savings translate into Yen terms? (3 marks) Assignment 2 [30 October, 4pm] Introduction to Derivative Securities - INVE3000 Penalty will apply for late submission. Assignment should be submitted in the box provided in building 402 - level 5 Finance department administrations [Bentley Campus only]. Note assignment should contain cover page (available on Blackboard) and stamp of submission date. Question 1: Trading Strategies Involving Options A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net gain (after the cost of the options is taken into account)? Show all working in detail including the strategy, cost and payoff of the options and total payoff. (5 marks) Solution: The butterfly spread includes purchasing one hundred options with strike prices $70 & $60 and sell two hundred options with $65 (central strike price). The highest gain is when the stock price equivalents to $65 (central strike price). Then, payoffs from the options will $500, 0, and 0, correspondingly. The payoff would be $500 in total. The setting-up cost to butterfly spread will: $11 100 + $18 100 - $14 200 = $100 (The gain is $400 ($500 $100) In contrast, the butterfly spread includes purchasing one hundred options with strike prices $70 & $60 and sell two hundred with $65 (central strike price). The highest loss is when the stock price is greater than $70 or less than $60. Then, total payoff from the option will equal to zero. The setting-up cost to the butterfly spread will: $11 100 + $18 100 - $14 200 = $100 (Here would be $100 loss) I know you are paying over $20 for this task but I am receiving only $12.50 from coursehero. Can we proceed through PayPal to avoid this high commission? I am working on your 2 nd question..... If you agree than please reply me at: mr.tayyab143@gmail.com I am waiting for your reply..... Question 2: Swaps The cost to IBM and KDB of accessing either fixed rate yen or the floating rate dollar market for a new debt issue is as follows: Company Fixed rate Yen Available Floating rate Dollar Available KDB 4.9% Libor + 0.80% IBM 4.5% Libor + 0.25% Suppose IBM would like to borrow fixed rate yen, whereas KDB would like to borrow floating rate dollars. Answer part (a), (b) (c) and (d) below: (a) Identify the overall spread (basis point) of the swap and at what rate should each party borrow to create the swap? IBM has comparative advantage in which rate? (3 marks) (b) What is the fixed rate Yen at which IBM can borrow through interest rate/currency swap if KDB can borrow at IBM's floating rate of Libor+0.25%? (2 marks) (c) Assuming a notional principle equivalent to $125 million and a current exchange rate of Yen105/$, what do these possible cost savings translate into in Yen terms (total value)? (2 marks) (d) Assuming that Bank of American is the intermediary and charges a fee of 8 basis points to arrange the swap. If IBM realises all the saving from the swap then what is IBM borrowing cost and what is the cost savings translate into Yen terms