Your line manager wants to demonstrate the pricing of futures and options to the investment committee at Midland Pensions and requires you to prepare supporting calculations in your report for hispresentation. These calculations should essentially demonstrate derivative pricing using the No Arbitrage Principle. To do so, you choose to demonstrate the pricing of futures and options contract on BP listed on Eurex Exchange.

Required:

A. Estimate the fair price of any BP futures contract on Eurex using the cost of carry model. You are required to cover the following too:a. provide (select and make assumptions) any missing inputs.b. explain all the inputs in your pricing model and justify each.c. compare the price from your cost of carry model against the actual price at the day close and explain any underlying reasons for the under-pricing or over-pricing. (8 marks)

B. 1). Estimate the prices of both a BP call and a BP put option trading on Eurex Exchange using two and three period binomial option pricing models as well as the BSM model. You must cover the following:a. provide (select and make assumptions) any missing inputs.b. explain all the inputs in your pricing model and justify each.c. evaluate whether the call and the put options are over or under-valued based on the price estimates from your calculations compared to their actual prices on EurexExchange.(12 marks)

2). For the two period binomial model, demonstrate that the estimated price of the callis fair using the hedge portfolio calculations over the two period and adjusting the hedge ratio accordingly. (4 marks)