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1.a) Explain the differences between a forward contract and a futures contract (30%) (b) Assume a forward contract on one share of Tesco stock with a time-to-maturity egual to ten months.The current value of Tesco stock is 295 per share,and Tesco is known to pay a dividend of 6 in three months' time and a dividend of 3 in six months'time. The continuously-compounded interest rate is 1% per annum.Calculate the arbitrage-free forward price. (15%) (c There are two call options on an underlying stock with the same expiry date. The strike prices are 50 and 60 respectively.The option prices are 8 and 3 respectively Using these two options,explain how a bear spread can be created. Plot and comment on the payoff function and profit/loss at maturity. Why would a trader invest in a bear spread? (30%) (d) Using immediate excercise payoff to explain the meaning of at-the-money, in-the-money and out-of-the-money options. What is the relationship between the strike price and the moneyness of call and put options? (15%) (e) What is the relationship between the pricing factors(underlying price,strike price,time to maturity,volatility, risk free rate and a call option price with non-dividend payment? (10%) 

          1.a) Explain the differences between a forward contract and a futures contract
(30%)
(b) Assume a forward contract on one share of Tesco stock with a time-to-maturity egual to
ten months.The current value of Tesco stock is 295 per share,and Tesco is known to
pay a dividend of 6 in three months' time and a dividend of 3 in six months'time. The
continuously-compounded interest rate is 1% per annum.Calculate the arbitrage-free
forward price.
(15%)
(c There are two call options on an underlying stock with the same expiry date. The strike
prices are 50 and 60 respectively.The option prices are 8 and 3 respectively
Using these two options,explain how a bear spread can be created. Plot and comment
on the payoff function and profit/loss at maturity. Why would a trader invest in a bear
spread?
(30%)
(d) Using immediate excercise payoff to explain the meaning of at-the-money, in-the-money
and out-of-the-money options. What is the relationship between the strike price and
the moneyness of call and put options?
(15%)
(e) What is the relationship between the pricing factors(underlying price,strike price,time
to maturity,volatility, risk free rate and a call option price with non-dividend payment?
(10%)
Show more…
1a explain the differences between a forward contract and a futures contract 30 b assume a forward contract on one share of tesco stock with a time to maturity egual to ten monthsthe current 37864

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Horngren’s Cost Accounting
Horngren’s Cost Accounting
Srikant M. Datar, Madhav V. Rajan 16th Edition
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1.a) Explain the differences between a forward contract and a futures contract (30%) (b) Assume a forward contract on one share of Tesco stock with a time-to-maturity egual to ten months.The current value of Tesco stock is 295 per share,and Tesco is known to pay a dividend of 6 in three months' time and a dividend of 3 in six months'time. The continuously-compounded interest rate is 1% per annum.Calculate the arbitrage-free forward price. (15%) (c There are two call options on an underlying stock with the same expiry date. The strike prices are 50 and 60 respectively.The option prices are 8 and 3 respectively Using these two options,explain how a bear spread can be created. Plot and comment on the payoff function and profit/loss at maturity. Why would a trader invest in a bear spread? (30%) (d) Using immediate excercise payoff to explain the meaning of at-the-money, in-the-money and out-of-the-money options. What is the relationship between the strike price and the moneyness of call and put options? (15%) (e) What is the relationship between the pricing factors(underlying price,strike price,time to maturity,volatility, risk free rate and a call option price with non-dividend payment? (10%)
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1-which-of-the-following-is-true-a-forward-contracts-have-no-default-risk-b-forward-contracts-are-marked-to-market-daily-c-forward-contract-buyers-and-sellers-do-not-know-who-the-counterpart-32817

Which of the following is true? a. Forward contracts have no default risk. b. Forward contracts are marked to market daily. c. Forward contract buyers and sellers do not know who the counterparty is. d. Futures contracts require an initial margin requirement to be paid. e. Futures contracts are only traded over the counter. 2. A long contract requires that the investor a. sell securities in the future. b. buy securities in the future. c. hedge in the future. d. close out his position in the future. 3. In most of the world's futures trading markets/exchanges, trading occurs using a. floor brokers and specialists. b. electronic trading platforms. c. open-outcry auctions. d. dealers trading from inventory. 4. Because the exchange serves as the counterparty to each trade, buyers and sellers of futures contracts are required to post margin. A daily mark to market occurs to adjust the margin accounts for changes in the value of the contract. If you are long futures, price changes over time will cause your margin account to decrease, which may lead to required payment of additional margin if the account reaches its maintenance margin level. a. increases; initial margin b. increases; maintenance margin c. decreases; initial margin d. decreases; maintenance margin 5. A forward contract to exchange cash flows based on the level of a specific interest rate index is called a(n) a. forward rate agreement (FRA). b. interest rate forward. c. futures contract. d. forward option.

Derrick D.
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1. For two options, a call and a put, holding everything else constant, what will happen to the option price when: 1. volatility increases; 2. risk-free rate increases? A. Both call and put prices go down when volatility increases; both call and put prices go up when risk-free rate increases. B. Call price goes up and put price goes down when volatility increases; call price goes down and put price goes up when risk-free rate increases. C. Both call and put prices go up when volatility increases; call price goes down and put price goes up when risk-free rate increases. D. Both call and put prices go up when volatility increases; call price goes up and put price goes down when risk-free rate increases. 2. For a European call option, spot price is $100, strike price is $90, interest rate is 5%, maturity is 3 months, which of the following is a valid range for the option price? A. ($11.12, $100) B. ($9.34, $100) C. ($11.12, $90) D. ($9.34, $90) 3. Two options are written on the same underlying stock, which does not pay any dividend. Strike price is $100. Interest rate is 8%. Maturity is 4 months. Spot price is $100. Put premium is $4. Call premium is $5.6. Does there exist an arbitrage opportunity? If so, what is the arbitrage strategy in terms of your position in the call and put options? A. Yes. Long call, short put. B. Yes. Long put, short call. C. No. D. Undetermined. 4. A calendar spread using calls consists of a long call (E) with a maturity of 2 months, and a short call (F) with a maturity of 1 month. The strike price is the same and is $100. After a month, spot price becomes $105. Which of the following statement is correct? A. You gain from E and lose from F; overall profit tends to be negative B. You gain from F and lose from E; overall profit tends to be negative C. You gain from E and lose from F; overall profit tends to be positive D. You gain from F and lose from E; overall profit tends to be positive

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Transcript

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00:01 So from the questions that we have here for the first one says which of the following issue a forward contracts have no default risk b forward contracts are marked to market daily c forward contract buyers and sellers do not know who the counterpart is and d future contract require an initial margin requirement to be paid and a futures contract are only traded they are only traded over the counter so let's look at the correct answer so the correct answer is that the futures contract require an initial margin to be paid to request an initial margin to be paid with the second one a loan contract requires that the investor and the correct answer is b b buy securities in the future and the third one in most of the world's futures trading markets or exchange is trading or case using and the correct…
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