MMock Exam Flashcards
On January 8, 2019, the price of an ASML share was €138; At that time, a three-month ASML call option with an exercise price of € 140 could be purchased for € 6.70. The risk-free interest rate at that time was 1% on an annual basis.
Based on the put-call parity, what would be the price for an ASML put option with the same strike price and term as the call option? (You can assume that ASML does not pay a dividend).
- value call + PV (exc.price) = value put + value share
6.70 + 140/1,010.25 = value put + 138
Value put = 8.35
On January 8, 2019, the price of an ASML share was €138; At that time, a three-month ASML call option with an exercise price of € 140 could be purchased for € 6.70. The risk-free interest rate at that time was 1% on an annual basis.
Suppose someone buys this call option ASML on January 8, 2019. At what price ASML on the expiration date does this investment yield neither profit nor loss?
- 146.70. At this price, the investment of 140 (exercise price plus 6.70 for the purchase of the call) is equal to the value of the share.
On January 8, 2019, the price of an ASML share was €138; At that time, a three-month ASML call option with an exercise price of € 140 could be purchased for € 6.70. The risk-free interest rate at that time was 1% on an annual basis.
What will happen to the price of the ASML call option if
a. the risk-free return falls?
3a. falls, because investing in options becomes less interesting compared to the purchase of the shares themselves, because of the smaller interest advantage.
On January 8, 2019, the price of an ASML share was €138; At that time, a three-month ASML call option with an exercise price of € 140 could be purchased for € 6.70. The risk-free interest rate at that time was 1% on an annual basis.
What will happen to the price of the ASML call option if
b. the ASML share price falls?
3b. falls, because the right to buy something for a certain price decreases in value if the underlying asset becomes cheaper).
On January 8, 2019, the price of an ASML share was €138; At that time, a three-month ASML call option with an exercise price of € 140 could be purchased for € 6.70. The risk-free interest rate at that time was 1% on an annual basis.
What will happen to the price of the ASML call option if
c. the volatility of the ASML stock price increases?
3c. rises, because the probability that the underlying value increases is greater.
On January 8, 2019, the price of an ASML share was €138; At that time, a three-month ASML call option with an exercise price of € 140 could be purchased for € 6.70. The risk-free interest rate at that time was 1% on an annual basis.
Someone owns 100 ASML shares and decides to write a call option on his shares.
- Why would anyone choose such a strategy?
- With this strategy you have secured (in case of rising or constant prices) a certain fixed return (minimum 138 + 6.70 is 144.70 per share). With falling prices you will of course lose on your shares, but you earned the premium of 6.70 per share (because the option will not be excercised).
Suppose you buy a 4% bond with a face value of €1,000.
The remaining term for this bond is exactly one year (maturing in one year)
The price for this bond is €900.
Assume that the one-year risk-free rate of return is 4%.
Suppose there is a chance that at the end of the year, only 50% of the promised interest and principal will be paid. This chance is 10%.
- What is the promised yield to maturity for this bond?
- 900 = 1040/1 +IRR
IRR = (1040/900) -1 = 0.155556 (= 15.56%).
Suppose you buy a 4% bond with a face value of €1,000.
The remaining term for this bond is exactly one year (maturing in one year)
The price for this bond is €900.
Assume that the one-year risk-free rate of return is 4%.
Suppose there is a chance that at the end of the year, only 50% of the promised interest and principal will be paid. This chance is 10%.
- What is the expected return for this bond?
- expected return (payoff) = 0.9 x 1040 + 0.1 (0.5 x 1040) = 988
900 = 988/1+IRR
IRR = (988/900) – 1 = 0.097777778 (= 9.78%).
Suppose you want to insure yourself against non-payment or incomplete payment of the debtor (insure against default).
- How much will this insurance cost you?
- Spread (difference between the promised yield and the risk-free return) is 0.15555556 – 0.040000 = 0.115555556
Insurance premium is: 0.11555555556 x 900 = 104.
Suppose you want to insure yourself against non-payment or incomplete payment of the debtor (insure against default).
- Show that the guaranteed rate of return is exactly equal to the risk-free return after you have taken out the insurance.
- Total yield is promised bond yield minus insurance costs = 1050 – 104 = 936
Guaranteed Return = (936/900) – 1 = 0.04 (4%) which is exactly the one-year risk-free return.
Suppose you buy a 3-month future on the AEX in January for 495.20. At that time, the AEX index is trading at 497.80. The multiplier for the AEX future is 200, ie with the purchase of one future contract you buy 200 x the index. Assume that the dividend yield on the index is 0.
- What can you say about the 3-month risk-free rate based on the information given above ?
- Based on the formula: Ft = S0(1+ rf-y)t you can deduce that if y =o the interest rate rf must be negative. In that case, Ft is lower than S0.
Suppose you buy a 3-month future on the AEX in January for 495.20. At that time, the AEX index is trading at 497.80. The multiplier for the AEX future is 200, ie with the purchase of one future contract you buy 200 x the index. Assume that the dividend yield on the index is 0.
Now, suppose the AEX 3-month future falls to 470 in the next 3 months.
- What is the profit or loss on the AEX future contract?
- You buy 200 x the index for 495.20 x 200 = 99,040.
The value of 200 x the future is 470 x 200 = 94,000 after 3 months.
Loss is 99,040 – 94,000 = 5,040.
The following information is known about the futures market for Brent oil:
Current price (spot price) January 2018: $61.35 per barrel
Future price (January 2018) for a 1-year contract: $61.05 per barrel
The 1-year interest rate is – 0.12%.
The storage costs for oil are 0.5% per barrel on an annual basis.
- Calculate the convenience yield for Brent oil using the formula for the commodity price of futures.
- Ft =S0(1+rf + (storage costs – convenience yield))t
61.05 = 61.35(1-0.0012+ 0.005 - convenience yield)1
1-0.0012 + 0.005 - convenience yield = 61.05/61.35 = 0.99511
1.0038 - convenience yield = 0.99511
Convenience yield = 1.0038 - 0.99511 = 0.00869 ( = 0.869%).
The following information is known about the futures market for Brent oil:
Current price (spot price) January 2018: $61.35 per barrel
Future price (January 2018) for a 1-year contract: $61.05 per barrel
The 1-year interest rate is – 0.12%.
The storage costs for oil are 0.5% per barrel on an annual basis.
- What will happen to the convenience yield, other things being equal, if there is a major oil shortage? Explain this in words. Consider what this means for the future price compared to the spot price?
- The convenience yield will increase, because of the increasing scarcity of oil (Having oil at your disposal now rather than in the future has now become more attractive). The futures price will become even lower compared to the spot price.
On March 1, the following spot and forward rates are known for the exchange rate of the US dollar (USD) in Indian Rupia (INR):
Spot rate: 1USD = 60 INR
The six-month forward rate is: 1USD = 65 INR.
The six-month interest rate in the US is 2% (on an annual basis) on March 1.
- Is there a forward discount or premium for the Indian Rupia against the US dollar on March 1, 2018? How much is this premium or discount on an annual basis?
- There is a forward discount (Rupia forward price is lower than the spot price).
2x (60/65 – 1) = -0.1538 (= -15.38%)