1- Define Call and Put Options. Discuss the uses of both long call and long put
ID: 2769956 • Letter: 1
Question
1- Define Call and Put Options. Discuss the uses of both long call and long put from hedger’s perspective
2- Describe the process of investing in options using market identification and basis.
3-
May 17, 2014
You went long S&P 500 Call JUNE2014 1810.00 (Weekly 1) at $8.90
May 26, 2014
You mark to market today. The S&P 500 Call JUNE2014 1810.00 (Weekly 1) at $6.10
ii) Find out how much profit or loss you made in these nine days using the market price listed above.
What is the annual rate of return of this investment?
See option montage below for Google stock expiring June 6 2014. Interpret the Greeks (Delta, Vega, Theta, Rho and Gamma) for Call and Put. What do you think the market is saying about Google’s price movement in near future?
Call
F0614C527500
Last
10.7
Chg
1.45
Bid
9.6
Ask
10.7
Th. Val.
10.15
Imp. Vol.
18.8472
Delta
0.52231
Gam.
0.016294
CVol
8
Open Int
2
Expiration Date
6-Jun-14
Root Sym
GOOGL
Strike
527.5
Put
R0614C527500
Last
10.9
Chg
2.5
Bid
8.2
Ask
9.2
Th. Val.
8.7
Imp. Vol.
17.5921
Delta
-0.47737
Gam.
0.017456
CVol
1
Open Int
20
Expiration Date
6-Jun-14
Root
Sym
GOOGL
Strike
527.
Solve the following problem:
Consider the PHLX 122 Sep EUR European call option. The option has a premium of 4.41 U.S. cents per EUR. The option will expire in 98 days (T-t) in years is equal to 98/365=. 0.2685 year. We will use September futures Ft($/EUR)=$112.53. The rate r is estimated 0.5375 percent. The estimated volatility is 15.985 percent.
Use Black Scholes formula from the book to answer the following questions:
i) Find values of d1 and d2.
ii) Use N(d1=.0933)= .5372 and N (d2=.0064)=.5025 to find BS Call price.
iii) Is the market fairly priced?
Define swaps. Give four distinct uses of swaps with examples. Make sure to illustrate the cases with graphs and numerical examples whenever necessary. How are you going to implement this in Barchart? Just give the methodology not a print output from Barchart
The basis is defined as spot minus futures/options. For a long hedger basis strengthens unexpectedly. Which of the following is true
(a) The hedger’s position improves.
(b) The hedger’s position worsens.
(c) The hedger’s position sometimes worsens and sometimes improves.
(d) The hedger’s position stays the same
Suppose the basis spread, S-F, is falling. How can you use this fundamental information to take an investment decision in options and swaps? Further, does your decision contradict the normal backwardation theory of Keynes? Why or why not?
a) You use futures and/or options to hedge interest rate risk, commodity-price risk and foreign currency risk. All the time futures follow spot or options follow spot. Give one detailed example where spot follows options.
b) Explain why do we engineer financial products? Is this a passing fad? Why or why not?
c) Is the market fairly priced?
“A good trader with a bad model can beat a bad trader with a good model.” Critique MG’s failure with reference to normal backwardation model. Be very specific in pointing out what normal backwardation model entails and what MG did.Use options markets in addition to futures market to answer the question.
Call
F0614C527500
Last
10.7
Chg
1.45
Bid
9.6
Ask
10.7
Th. Val.
10.15
Imp. Vol.
18.8472
Delta
0.52231
Gam.
0.016294
CVol
8
Open Int
2
Expiration Date
6-Jun-14
Root Sym
GOOGL
Strike
527.5
Explanation / Answer
Calls
Puts
Buyers
Right to buy stock if exercised
Right to sell stock if exercised
Sellers
Obligation to sell stock if assigned
Obligation to buy stock if assigned
2. A hedging strategy usually refers to the general risk management policy of a financially and physically trading firm how to minimize their risks. As the term hedging indicates, this risk mitigation is usually done by using financial instruments
3. Since we are at long position, reduction in price of S&P 500 Call JUNE2014 1810.00 will result in loss
Total loss in ninedays = 500 (6.10 – 8.90)
= - $ 1400
4.
Yearly Rate of Return =
End of the year value - beginning of the year value
beginning of the year value
= 500 (6.10 – 8.90)
= .314
Calls
Puts
Buyers
Right to buy stock if exercised
Right to sell stock if exercised
Sellers
Obligation to sell stock if assigned
Obligation to buy stock if assigned
2. A hedging strategy usually refers to the general risk management policy of a financially and physically trading firm how to minimize their risks. As the term hedging indicates, this risk mitigation is usually done by using financial instruments
3. Since we are at long position, reduction in price of S&P 500 Call JUNE2014 1810.00 will result in loss
Total loss in ninedays = 500 (6.10 – 8.90)
= - $ 1400
4.
Yearly Rate of Return =
End of the year value - beginning of the year value
beginning of the year value
= 500 (6.10 – 8.90)
= .314
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