Here is the second problem set for EC4024, Financial Economics.

The problem set is due Monday of week 11 before class. Hand the problem sets to me directly. There won't be any extensions, etc, allowed, unless you have a very good (think medical) reason for handing it up late. This problem set is worth 10% of your final grade.

Problem sets are to be hand written, with you name and student number on each page.

Click the link below to read and/or download the problem set.

Update: Just click the 'print this page' link to get a printable version of the problem set.

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Problem Set 2 EC4024 Financial Economics

Stephen Kinsella

April 2, 2008

Please include your name and student number on each page.

Due Monday, April 14, at 4pm, in BM015, the lecture hall for this class.

Question 0

You are a trader, asked to buy and sell 150 shares of Apple, Inc on the same day. The Bid is $49.75, the offer is $50, there is a commission of $15 on the trade. What is the total transaction cost on both the buy and sell trades?

Question 1

A 6 month put option has a strike price of 1000 dollars with a premium of 70 dollars. The 6 month risk free rate is 4%.

Calculate the profit to the holder of the option if the index value in 6 months is 900 dollars. Would you go long or short this put? Why?

Question 2

Today: A call buyer acquires the right to pay $1,020 in 5 months for a commodity. What is the buyer's payoff if the price at month 5 is 1,100? And if it is 980? What would you advise the call buyer to do with their call?

Question 3

Today: A call seller is obligated to sell an index for $1,030 in 6 months if asked to do so. In 6 months, if the spot price is 1,110, what will the payoff to the seller be?

Question 4

A call option has the following characteristics:

Current stock price: $15, Exercise price: $15, Volatility: 40%, Option term: 2 years, Annual dividend: $1, Risk free interest rate: 4%.

Using the Black-Scholes model, price the option.

Question 5

A call option has the following characteristics:

Current stock price: $15, Exercise price: $15, Volatility: 70%, Option term: 2 years, Annual dividend: $1, Risk free interest rate: 4%.

Using the Black-Scholes model, price the option. Why is the price different from the one you calculated in question 4?

Question 6

You wish to sell short an asset, ABC, whose value you expect to fall. What sequence of trades should you go through to take a position and make the most of this expectation you have? Be as detailed as possible.