Final Exam
Futures and Options Markets
期货和期权市场代考 One Excel spreadsheet which contains, for each problem, a worksheet tab with all relevant analyses and qualitative responses.
Winter 2019
Instructions: This nal exam is due on Tuesday, March 12, at 5PM. For all prob-lems, you can assume that you can trade an asset in any quantity unless otherwise speci ed. For example, one can buy 0.31 shares. There are 6 questions for a total of 60 points. This test has 9 pages.期货和期权市场代考
Resources you can use: This is a take-home exam and is to be completed in-dividually without collaboration or assistance from others. The following is a non-exhaustive list of examples of allowed and non-allowed resources. This exam is covered under the Tuck Honor Code. If you have any doubts about any speci c resources, err on dis-allowed, and feel free to ask me.
Allowed:
- Any material from class, your group project answers, and the textbook.
- Material on the internet to the extent that you are NOT collaborating or receiving assistance from other people.期货和期权市场代考
Examples: Downloading data from Bloomberg, reading articles on In-vestopedia or Wikipedia, or looking up a de nition.
Dis-allowed:
- Any material that is collaboration or direct assistance from others.
Examples: Consulting someone about the problem (or a \hypothetical” problem that is just like the problem) in any way. This includes, but is not limited to, online chat/phone/video, e-mail, or forums.期货和期权市场代考
- Other groups’ project answers, consulting a previous year’s exam, or someone’s answers to that exam.
- Consulting your own group members, classmates, or any person even outside the FOM. This includes asking for clari cation from your group-mates about their work on the group projects.
- Plagiarizing material is strictly prohibited. Obviously!
What to turn in:
One Excel spreadsheet which contains, for each problem, a worksheet tab with all relevant analyses and qualitative responses. If you used any software that is not Excel, you need to include all program les, although you should only need Excel.
For each calculation, you must show all your work clearly. A correct answer with insu cient work, or work that I cannot easily decipher, may not receive full credit.期货和期权市场代考
Some questions may ask for your thoughts in addition to calculations. A correct calculation with insu cient reasoning or explanation may not receive full credit.
Hint:
Each question is worth 10 points, but some questions are harder than others. Please make your best attempt at every question|there is partial credit and there is no penalty for wrong answers.
Problem 1 期货和期权市场代考
Consider two stocks, A and B, both non-dividend-payers today and for the foresee-able future. The price of A is $200 per share today, and the price of B is $75 per share. The continuously compounded risk-free rate is 2% per year.期货和期权市场代考
A)Consider a two-year forward contract written on the price di erence between A and B. The payo of the forward at expiry is:
Payo = (STA STB) F:
As usual, no money changes hands today. Determine the no-arbitrage forward price and the replicating strategy. (3 points)
B)Suppose that A is a zero-beta stock and the world operates according to the CAPM. By how much should the forward price on one share of A under or over-estimate the realized stock price, STA, on average? (2 points) 期货和期权市场代考
C)Consider a call on the price di erence between A and B, with payo equal to
Payo call = max(STA STB; 0);
and a put on the A minus B price di erence,
Payo put = max(STB STA; 0):
Using no-arbitrage logic, determine whether the call is worth more or less than the put, and by how much. (5 points)
Problem 2 期货和期权市场代考
A)Consider an 8-month put option on the S&P 500 struck at K = 2100. The current price is S = 2050, the risk-free rate is 3%, and the dividend yield on the index is 2%. Use a four-period binomial tree (with CRR values of u and d) to price the option using a volatility of = 15%. Value the option supposing it is American. Be sure to indicate when early exercise is optimal, if ever. (4 points.)
B)Consider the marriage problem. In the version from class, if you choose not to marry the last person, you receive zero. Suppose instead the following: if you choose not to marry the last person, your happiness from being eternally single is 0.75. With three people to go, what is your optimal strategy? (3 points.)期货和期权市场代考
C)Consider a digital call option (sometimes known as a binary call option) which entitles the option holder to $1 if the stock price equals or exceeds the strike price at expiration, and nothing otherwise. A digital put option entitles the option holder to $1 if the stock price falls below the strike at expiration.
A non-dividend-paying stock currently trades at $52. A six-month digital call option with strike 50 trades at $0.6536; a digital put option of the same strike and maturity trades at $0.3355. A six-month zero-coupon risk-free bond with face value of $100 trades at $99.50.
Determine whether there is an arbitrage opportunity. If so, demonstrate the arbitrage and calculate the arbitrage pro t. If not, show that prices are con-sistent with no-arbitrage. If there is insu cient data to determine whether there is an arbitrage, indicate why. (3 points.)
Problem 3 期货和期权市场代考
A common perception is that futures are a promising investment when the futures curve is downward-sloping.
A)Discuss the merits of this logic for equity index futures. (2 points.)
B)Discuss the merits of this logic for commodity futures. Include in your dis-cussion why you may reach a di erent conclusion than in part A above. (3 points.)期货和期权市场代考
C)Discuss the merits of this logic for VIX futures, and explain whether this logic has held using the data from Project2 CFE VIX Futures2.xlsx. Include in your discussion why you may reach a di erent conclusion than in parts A and B above. (5 points.)
Problem 4 期货和期权市场代考
A)Use the hypothetical data provided in Final DeltaHedge.xlsx to compute the daily market-making pro ts to a short 40-strike call plus delta-hedge which is rebalanced each day. Then compute the present-value of these pro ts and explain why the hedged position gained or lost money. Then compute the delta, gamma, and theta of the option Greeks for each day, and explain at which points the market-maker faced the greatest risk. Assume the stock does not pay dividends. (5 points.)
B)With 40 days to go, graph the 1-day holding period pro t of the market maker’s delta-hedged position against possible stock prices. At what level of stock price movement does the market maker lose money over the next day? (5 points.)
Problem 5
A common piece of \wisdom” is that stocks are safer in the long run. Your friend is a strong proponent. She reasons that if you have a long enough horizon, the law of large numbers works in your favor, and you will safely earn the average return on stocks. She goes on to argue that this makes stocks a better investment than bonds in the long run, as stocks will safely earn higher returns.期货和期权市场代考
You and your friend agree to discuss this issue within the context of the Black-Scholes model. You consider option prices struck on the S&P 500 total return index (this allows you to assume = 0 throughout, since the index capitalizes dividends). For the sake of discussion, you both agree that the Black-Scholes assumptions are satis ed: e.g., stock prices are log-normally distributed with constant volatility, interest rates are constant, and so on. You also both agree that the current stock price is fairly-valued.期货和期权市场代考
A)Compute Black-Scholes prices for put options struck at-the-money, where the current index level is S = 1000,
the risk-free rate is 0%, and the implied volatility is 18%, for maturities of 1 year, 3 years, 5 years, 10 years, 20 years, 50 years, and 100 years. Do these prices support the idea that stocks are safe in the long run? (2 points.)期货和期权市场代考
B)Your friend is quite good at statistics. She gures that, if the market risk premium is 5% (ann. c.c.) and prices are lognormally distributed, the following table describes: 1) the probabilities that ATM puts expire in the money, 2) the expected payo s if they do expire in the money|E(K ST jST < K)|and 3) the expected payo s of the option:
| Time to | Prob. | Expected | |
| Maturity, | Expires | Payo if | Expected |
| T | ITM | ITM | Payo |
| 期货和期权市场代考 | |||
| 1 | 0.426 | 119.2 | 50.7 |
| 3 | 0.372 | 182.6 | 68.0 |
| 5 | 0.337 | 217.9 | 73.5 |
| 10 | 0.276 期货和期权市场代考 | 269.6 | 74.5 |
| 20 | 0.201 | 322.0 | 64.6 |
| 50 | 0.092 | 384.6 | 35.4 |
| 100 | 0.030 | 422.0 | 12.7 |
| 期货和期权市场代考 |
Your friend argues the stock market is thus safe because expected payo s from long-horizon puts struck ATM are small.
You’re not sure these calculations are right, but you take them at face value. Point out why (and if) your friend’s logic is mistaken. (3 points.)
C)Your friend goes on to argue that using option prices to determine whether stocks are safer than bonds is non-sense because options \do not account for the 5% expected return on the market|the expected return could be 10% and the option price would be the same.” Comment on whether this is true and explain whether this invalidates your argument. (1 point.)期货和期权市场代考
D)Finally, your friend says your argument is not realistic because you have as-sumed a risk-free rate of zero. She proposes that you input rf= 4%.
Calculate option prices with this risk-free rate for all the T above. You will nd that the price of the 100-year ATM put option is lower than the 1-year ATM put price. Ha ha! Your friend claims victory.期货和期权市场代考
Explain the intuition in Black-Scholes for why this occurs. Then, go on to explain why the new numbers, while correctly calculated, do not support her argument. Propose an alternative calculation that corrects the aw in her logic. (4 points.)
Problem 6 期货和期权市场代考
Use the data provided in Project 2 to evaluate the performance of a strategy that purchases call options with 30 days to expiration, and holds them through expiration.期货和期权市场代考
For 96, 100, 102% K/S moneyness levels, compute the monthly alphas using the SPXT as the benchmark market return, and compare the monthly Sharpe ratio of the strategy versus the Sharpe ratio of the market. Comment on what these measures may or may not suggest about the performance of the strategy. (10 points.)
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