$4.

32
Present value
t0
t1
t2
t3
t4
t5
t6
t7
t8
t9
t10
t11
t12
t13
t14
t15
t16
t17
t18
t19
t20

0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5

Ejercicio 2
Caso 1
t0
t1
t2
t3
t4
t5
t6

0.12
-1000
-900
-1000
-900
-1000
-900
-1000
-900
-1000
-900
-1000
-900
1000
900
($3,604.78) ($3,604.78)

Ejercicio 3
s1
s2

6.3% anual
6.9% anual

tasa de descuento en d(0,2)?

0.1111111111

Ejercicio 4
Spot y forward rates
Spot rates
s1
s2

forward rate f(1,2)

6.3% anual
6.9% anual

1.142761
1.063
1.07503387

7.5%

1 Term structure of interest rates and swap valuation

Suppose the current term structure of interest rates, assuming annual compounding, is as follows:
s1
7.00%

s2
7.30%

s3
7.70%

s4
8.10%

What is the discount rate d(0,4)? (Recall that interest rates are always quoted on an annual basis u
stated otherwise.)

Please submit your answer rounded to three decimal places. So for example, if your answer is 0.45
you should submit an answer of 0.457.
d(0,4)

0.732

2 Swap Rates
Suppose a 6-year swap with a notional principal of $10 million is being
configured. What is the fixed rate of interest that will make the value
of the swap equal to zero. (You should use the term structure of interest rates from Question 1.)

Please submit your answer as a percentage rounded to two decimal places. So for example, if your
is 4.567% or equivalently 0.04567, then you should submit an answer of 4.57.
1
s1
7.00%
d(0,i)

2
s2
7.30%

3
s3
7.70%

0.9345794393 0.868561462 0.800484432

d(0,M)

0.602874102

0.397125898
4.606931886

r=

4
s4
8.10%
0.73231381

8.62%

3 Hedging using futures

Suppose a farmer is expecting that her crop of oranges will be ready for
harvest and sale as 150,000 pounds of orange juice in 3
months time. Suppose each orange juice futures contract is for 15,000
pounds of orange juice, and the current futures price is F0=118.65 cents-per-pound.

Assuming that the farmer has enough cash liquidity to fund

any margin calls, what is the risk-free price that she can guarantee herself.

F0
K
T

centavos por
118.65 libra
17797500
0.25 AO

4 Minimum variance hedge

Suppose a farmer is expecting that her crop of grapefruit will be ready for
harvest and sale as 150,000 pounds of grapefruit juice in 3
months time. She would like to use futures to hedge her risk but unfortunately there
are no futures contracts on grapefruit juice. Instead she will use orange juice futures.
Suppose each orange juice futures contract is for 15,000
pounds of orange juice and the current futures price is F0=118.65 cents-per-pound.
The volatility, i.e. the standard deviation, of the prices of
orange juice and grape fruit juice is 20% and 25%, respectively,
and the correlation coefficient is 0.7. What is the approximate number
of contracts she should purchase to minimize the variance of her payoff?

Please submit your answer rounded to the nearest integer. So for example, if your calculations resu
10.78 contracts you should submit an answer of 11.
S
F
P
N=

0.25
0.2
0.7
9

point 5.
Call Options
Consider a 1-period binomial model with R=1.02, S0=100,
u=1/d=1.05. Compute the value of a European call option on the stock
with strike K=102. The stock does not pay dividends.

Please submit your answer rounded to two decimal places. So for example, if your answer is 3.4567
you should submit an answer of 3.46.

R
S0
D
U
K

= 1.02;
= 100.00;
= 1.05;
= 1.00;
= 102.00;

uS0 = U * S0;
dS0 = D * S0;
Cu = uS0 - K;
Cd = 0;
H = ( ( Cu - Cd ) / ( uS0 dS0 ) );
HdS0 = H * dS0;
PV = ( ( HdS0 / ( 1 + R ) ) );
HS0 = H * S0;
C = HS0 - PV;
return C;
}

1.02
100
1.05 0.952380952
1
102
28.5
14.10891089
15.89108911

nual compounding, is as follows:

s5
8.40%

s6
8.80%

ways quoted on an annual basis unless

or example, if your answer is 0.4567 then

being
ue

nterest rates from Question 1.)

mal places. So for example, if your answer

swer of 4.57.
5
s5
8.40%

6
s6
8.80%

0.668118641 0.602874102 4.606931886

ady for

5,000

5 cents-per-pound.

e herself.

eady for

nfortunately there

range juice futures.

cents-per-pound.

mber
payoff?
example, if your calculations result in

stock

example, if your answer is 3.4567 then

Quiz Instructions: Option Pricing in the Multi-Period

Binomial

Questions 1-8 should be answered by building a 15-period binomial model whose parameters should be calibrated to a BlackScholes geometric Brownian motion model with:
and a dividend yield of

T=.25 years, S0=100, r=2%, =30%

c=1%.

Hint
Your binomial model should use a value of

u=1.0395.... (This has been rounded to four decimal places but you should not d

any rounding in your spreadsheet calculations.)

Submission Guidelines

Round all your answers to 2 decimal places. So if you compute a price of 12.9876 you should submit an answer of 12.99.

1.
Quiz instructions
Compute the price of an American call option with strike K=110 and maturity T=.25years.

point 2.
Quiz instructions
Compute the price of an American put option with strike K=110 and maturity T=.25years.

point 3. Quiz instructions

Is it ever optimal to early exercise the put option of Question 2?
Yes
No

point 4.
Quiz instructions
If your answer to Question 3 is "Yes", when is the earliest period at which it might
be optimal to early exercise? (If your answer to Question 3 is "No", then you should
submit an answer of 15 since exercising after 15 periods is not an early exercise.)

point 5.
Quiz instructions
Do the call and put option prices of Questions 1 and 2 satisfy put-call parity?
Yes
No

point 6.
Quiz instructions
Compute the fair value of an American call option with strike K=110 and maturity
n=10 periods where the option is written on a futures contract that expires after
15 periods. The futures contract is on the same underlying security of the previous
questions.

point 7.
Quiz instructions
What is the earliest time period in which you might want to exercise the American
futures option of Question 6?

point 8.
Quiz instructions
Compute the fair value of a chooser option which expires after n=10 periods. At
expiration the owner of the chooser gets to choose (at no cost) a European call option
or a European put option. The call and put each have strike K=100 and they mature
5 periods later, i.e. at n=15.

Answer
2.53

1.65

12.3

12.3

yes

No

2.5623 1. Price of the American call option is 2.53.

2. Price of the American put option is 12.30.
3. Yes, it is ever optimal.

12.3
2.6

1.65

6.67

11.88
106.6667

Risk neutral price

135.34

ption is 2.53.
ption is 12.30.

http://www.chegg.com/homework-help/questions-and-answers/1-compute-price-america
5.5
2.56

13.68

12.33

wers/1-compute-price-american-call-option-strike-k-110-maturity-t-25-years-2-compute-price-amer-q10012905

ompute-price-amer-q10012905

Quiz Instructions: Term Structure Models I

Questions 1-6 should be answered by building an

n=10-period binomial model for the short-rate, ri,j. The

lattice parameters are: r0,0=5%, u=1.1, d=0.9 and q=1q=1/2.

Questions
Question: Quiz Instructions: Term Structure Models I Questio...
Quiz Instructions: Term Structure Models I Questions 1-6 should be answered by building an n=10-period
binomial model for the short-rate, ri,j. The lattice parameters are: r0,0=5%, u=1.1, d=0.9 and q=1q=1/2.

1
Quiz instructions
Compute the price of a zero-coupon bond (ZCB) that matures at time t=10 and that has
face value 100.
Submission Guideline:Give your answer rounded to 2 decimal places. For example, if you
compute the answer to be 73.2367%, submit 73.24.
2
Quiz instructions
Compute the price of a forward contract on the same ZCB of the previous question where
the forward contract matures at time t=4.
Submission Guideline:Give your answer rounded to 2 decimal places. For example, if you
compute the answer to be 73.2367%, submit 73.24.

3
Quiz instructions
Compute the initial price of a futures contract on the same ZCB of the previous two
questions. The futures contract has an expiration of t=4.
Submission Guideline:Give your answer rounded to 2 decimal places. For example, if you
compute the answer to be 73.2367%, submit 73.24.
4
Quiz instructions
Compute the price of an American call option on the same ZCB of the previous three
questions. The option has expiration t=6 and strike =80.
Submission Guideline:Give your answer rounded to 2 decimal places. For example, if you
compute the answer to be 73.2367%, submit 73.24.
5
Quiz instructions

Compute the initial value of a forward-starting swap that begins at t=1, with maturity
t=10 and a fixed rate of 4.5%. (The first payment then takes place at t=2 and the final
payment takes place at t=11 as we are assuming, as usual, that payments take place in
arrears.) You should assume a swap notional of 1 million and assume that you receive
floating and pay fixed.)
Submission Guideline:Give your answer rounded to the nearestinteger. For example, if
you compute the answer to be -220,432.23, submit -220432.
6
Quiz instructions
Compute the initial price of a swaption that matures at time t=5 and has a strike of 0. The
underlying swap is the same swap as described in the previous question with a notional of
1 million. To be clear, you should assume that if the swaption is exercised at t=5 then the
owner of the swaption will receive all cash-flows from the underlying swap from times t=6
to t=11 inclusive. (The swaption strike of 0 should also not be confused with the fixed rate
of 4.5% on the underlying swap.)

Submission Guideline:Give your answer rounded to the nearestinteger. For example, if

you compute the answer to be -220,432.23, submit -220432.

8/19/2016

Answer 1
2-Jun

61.62

129.38

129.28

2.21

33374

122270