Cfa Qa
Cfa Qa
Cfa Qa
Q&A
14-06-2015
C0 +
X / (1+r) t
] = P0 + S 0
Fiduciary call
Protective put
First, calculate what the put option should be selling for, given the other
prices:
P+S ,
4.50+74.09 3.80+75
78.59
78.80
The fiduciary call (the left side of the equation) is relatively underpriced,
and the
protective put (the right side) is relatively overpriced.
Therefore, the arbitrage strategy is to buy the fiduciary call (and pay
$78.59) and short-sell the protective put (and receive $78.80). T
The arbitrage profits from this trade are $78.80 $78.59, or $0.21 per
share.
The net cash flow at maturity will be zero, so weve produced cash flow of
$0.21 today with no cash outflow obligation in the futurethats what we
call an arbitrage profit.
(-
= 1-0.55=
$30x1.333=$4
0.0
$30x0.7500=$
22.5
The probabilities of an up-move and a downmove are calculated based on the size of the
moves and the risk-free rate as:
1+ Rf
D/ U D
Next, determine the payoffs to the option in each state. If the stock
moves
up to $40, a call option with an exercise price of $30 will pay off $10.
If the stock moves down to $22.50, the call option will be worthless.
The option payoffs are illustrated in the following figure.
Let the stock values for the up-move and down-move be S1+ and S1 and for the call values, c1 + and c1One period call option with X= $30
u=
0.55
D=
0.45
Today
One Year
P63:Example:
Valuing a one-period put option on a stock
Use the information in the previous two examples to calculate the
value of a put option on the stock with an exercise price of $30.
Calculating delta
Delta, the change in the price of an option for a
one-unit
change in the price of the underlying security:
Delta
call = C1 C0 / S1 S0 = C / S
C = change in the price of the call over a short time interval
S = change in the price of the underlying stock over a short time
interval
Calls
A. Buy 1,000 options
shares
B. Buy 1,000 options
2,857 shares
C. Sell 1,000 options
350 shares
Stock
Short 350
Short
Buy
SWAP
1. T he current U.S. dollar ($) to Canadian dollar (C$)
exchange rate is 0.7. In a $1 million plain vanilla
currency swap, the party that is entering the swap to
hedge existing exposure to a C$-denominated fixedrate liability will:
A. In the middle.
B. At the end, when the largest
payments are due.
C. At the beginning, because all the
payments remain.
Bond to issue
purchase
A. 9% fixed, 50 million
million
B. 9% fixed, 50 million
million
C. LIBOR, 112 million
million
Bond to
LIBOR, $33
LIBOR, $75
9% fixed, $33