Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The current futures price of a stock is $15 per share. One month later, when the futures option expires, the futures price could have risen

The current futures price of a stock is $15 per share. One month later, when the futures option expires, the futures price could have risen to $16.5 per share or declined to $14 per share. The strike price is $14.5. The risk-free rate is 6%.

1.What is the value of long futures contract (per share) at the option maturity? (1 mark)

2.To price a futures call option, we construct a risk-free portfolio including a long position consisting of delta shares of futures and a short position on one call futures option. Please solve for delta. (2 marks)

3.What is the value of the risk-free portfolio at the maturity? (1 mark)

4.What is the value of the risk-free portfolio at time zero? (1 mark)

5.What is the cost of futures contract at time zero? (1 mark)

6.Please solve the futures call option premium based on the fact that at time zero, the cost of acquiring a portfolio is equal to the value of the portfolio.

7.

(1 mark)

8.What is the risk neutral probability for pricing the futures option in this case?(2 marks)

9.What is the growth rate of futures prices in risk neutral world?(1 mark)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Public Finance and Public Policy

Authors: Jonathan Gruber

4th edition

1429278455, 978-1429278454

More Books

Students also viewed these Finance questions