Question 4. (This question has two parts: I andII)

A condor spread has four options with four strike prices: longtwooptions with extreme strikes and short two options with the strike prices in the middle,andviceversa.Thewingsofthecondor,thelargestflyinglandbird in the western hemisphere, inspire thename.

Thereisacondorspreadbybuyingcallswithstrikeprices1=17.50and

4=25andsellingcallswithastrikeprices2=20and3=22.5.

Part I.

Please analyse the payoff of the condor using the following table:

Condor Spread

17.50

17.5 < 20

20 < 22.5

22.5 < 25

> 25

Long a call with

1=17.50

Short a call with

2=20

Short a call with

3=22.5

Long a call with

4=25

Condor Payoff

(6 Marks)

Part II.

The prices of four call option with different strike prices are 5.50, 3.50, 2 and 1. What is the maximum profit of above Condor spread? Under what circumstance that the above Condor spread can achieve maximum profit. Show your working process.

(6Marks)

(Total 6 + 6 = 12 Marks)

MAF308 Derivative and Fixed Income Securities Trimester Two 2020 Examination

Question 5. (This question has three parts: I, II andIII)

A stock is expected to pay a dividend of $2 per share in 2 months and in 5 months. The stock price is $100, and the risk-free rate of interest is 10% per annum with continuous compounding for all maturities.

An investor has just taken a short position in a 6-months forward contract on the stock.

Part I.

What is a fair forward price specified in the above forward contract to let its value be zero at initiation?

(4 Marks)

Part II.

Three months later, the price of the stock is $96 and the risk-free rate of interest is 9.75% per annum continuous compounding. What are the fair forward price for the same underlying and same maturity as above?

(4 Marks)

Part III.

Continue with Part II, for the investor, what is the value of her position in the forward contract?