Financial Derivatives Financial Derivitives a Term Paper

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The Black-Scholes-Merton model assumes (circle one)

The return from the stock in a short period of time is lognormal

The stock price at a future time is lognormal

The stock price at a future time is normal

None of the above

11. Volatility can be defined as (circle one)

The standard deviation of the return, measured with continuous compounding, in one year

The variance of the return, measured with continuous compounding, in one year

The standard deviation of the stock price in one year

12. A stock price is $100. Volatility is estimated to be 20% per year. What is the an estimate of the standard deviation of the change in the stock price in one week (circle one)

$0.38

$2.77

$3.02

$0.76

13. To create a range forward contract in order to hedge foreign currency that will be paid a company should (Circle one)

Buy a put and sell a call on the currency with the strike price of the put higher than that of the call

Buy a put and sell a call on the currency with the strike price of the put lower than that of the call

Buy a call and sell a put on the currency with the strike price of the put higher than that of the call

Buy a call and sell a put on the currency with the strike price of the put lower than that of the call

14. Suppose that General Motors Acceptance Corporation issued a bond with 10 years until maturity, a face value of $1,000, and a coupon rate of 7% (annual payments). The yield to maturity on this bond when it was issued was 6%.

a. What was the price of this bond when it was issued? $1,000.

b. Assuming the yield to maturity remains constant, what is the price of the bond immediately before it makes its first coupon payment?1000.

c. Assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment? $930.

15. What is the price of a five-year, zero-coupon, default-free security of 4.8% with a face value of $1,000? $48.

16. Draw the diagram that tells you if you buy a Bond what its relationship is to Call Yield, Yield to Maturity, and Yield to a Call. A bond can be "recalled" at its maturity date if the percentage rate has gone down because it can be refinanced at a lower cost, if the percentage rate has gone up, you would do nothing because it is now a better deal. Yield to Maturity is the rate of return expected if the bond is held until maturity. Yield to a Call is when you redeem the bond at the callable date, which is before maturity.

17. Using a binomial tree, what is the price of a $40 strike 6-month call option, using 3-month intervals as the time period? Assume the following data: S = $37.90, r = 5.0%, ? = 0.35

2.50

2.76

2.92

3.08

18. Compute ? For the following call option. The stock is selling for $23.50. The strike price is $25. The possible stock prices at the end of 6 months are $27.25 and $21.75.

A) 0.4091

B) 0.6822

C) 0.8433

D) 0.9216

19. Using a binomial tree, what is the price of a $40 strike 6-month put option, using 3-month intervals as the time period? Assume the following data: S = $37.90, r = 5.0%, ? = 0.35

A) $3.52

B) $3.66

C) $3.84

D) $3.91

20. What is the delta on a $25 strike put? Assume S = $24.00, ? = 0.35, r = 0.06, the stock pays a 2.0% continuous dividend and the option expires in 40 days?

A) 0.582

B) 0.602

C) 0.662

D) 0.702 although when I put this data into a calculator online, I came up with 0.9984 as the answer.

21. Assume S = $33.00, ? = 0.32, r = 0.06, div = 0.01. You short 100 $35 strike calls at 68 days until expiration. Under a delta hedge position, what is your overnight profit/loss if the stock rises to $34.50?

A) $9.23 loss

B) $9.23 gain

C) $7.62 loss

D) $7.62 gain

22. A European call option on…[continue]

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