FIN 4021 Homework 1 (2015)

| September 29, 2018

1. (4pt)An
investor enters into a short forward contract to sell 150,000 British pounds
for US dollars at an exchange rate of 1.4000 US dollars per pound. How much
does the investor gain or lose if the exchange rate at the end of the contract
is (a) 1.3700 and (b) 1.4200? (c)Draw the investor’s payoff diagram on this forward. Make sure that you
distinguish your payoff chart from that of your counterparty’s if you are
drawing both within the same chart.

2. (4pt)A
trader enters into a short cotton futures contract when the futures price is 50
cents per pound. The contract is for the delivery of 55,000 pounds. How much does the trader gain or lose if the cotton price at the end of
the contract is (a) 48.20 cents per pound and (b) 51.45 cents per pound? (c)Draw
the trader’s payoff diagram on
this futures contract. Make sure that you distinguish your payoff chart from
that of your counterparty’s if you are drawing both within the same chart.

3. (10pt)Suppose
that you write a put contract with a strike price of $40 and an expiration date
in 3 months. The current stock price is $42 and the contract is on 100 shares. (a)Draw profit diagram for yourself and your
counterparty, assuming that the put contract you wrote was sold for $3.5. Make
sure that you distinguish your payoff chart from that of your counterparty’s if
you are drawing both within the same chart. (b) Are you in long or short
position on the underlying asset? (c)Are you in long or short position on the
option?

4. (8pt)Suppose
that a March call option to buy a share for $70 costs $2.50 and is held until
March. Draw profit diagram
for both parties of the transaction. Make sure that you distinguish your payoff
chart from that of your counterparty’s if you are drawing both within the same
chart.

5. (14pt)A
stock’s price is $29. An investor buys one call option contract on the stock
with a strike price of $32 and sells a call option contract on the stock with a
strike price of $32.50. The market prices of the options are $2.75 and $1.50,
respectively. The options have the same maturity date. Draw a chart that
describes all the following
a) investor’s profit/loss from the
call option he/she bought
b) investor’s profit/loss from the
call option he/she sold
c) investor’s total profit/loss
from his position.
In your chart, mark and write the
spot prices where the slope of the profit/loss changes.

Challenge(5pt)

Companies A and B have been offered the following
rates per annum on a $20 million
5-year loan:
.png”>
Company
A requires a floating-rate loan; company B requires a fixed-rate loan. Design a
swap that will net a bank, acting as intermediary, 0.1% per annum and that will
appear equally attractive to both companies.
Hint:Company
A should end up borrowing at a Floating rate of LIBOR-0.3% and Company B should
end up borrow at a Fixed Rate of 6.0%.

Get a 30 % discount on an order above $ 100
Use the following coupon code:
RESEARCH
Order your essay today and save 30% with the discount code: RESEARCHOrder Now
Positive SSL