In-Class Exercise 9

Today:
1. Forwards
2. Call option
3. Put option
In Class Exercises:
MATH 370 Z – Lecture 9
Derivatives
1. Jason enters into a long forward based on Asset A, with forward price of $85. He also
enters into a short forward based on Asset B, with a forward price of $95. At a spot price of
S for both assets, his payoffs under the two contracts would be the same. At a spot price of
S+$8, his payoff under Contract A would be X.
Determine X.
2. You are given the following information:
Spot price of market index today = $1500
Forward price of nine-month forward contract on market index = $1540
Spot price of market index nine months from today = $1560
A $1000 face value nine-month zero-coupon bond is selling for $963.39
Find the difference, nine months from today, between the profits associated with a long
index strategy versus a long forward strategy.
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3. Curley buys a one-year 50-strike European call option from Moe for a premium of $7.43.
The risk-free interest rate is 6.5% effective. For what spot price at expiration is Moe’s
profit 0?
4. Arnold buys a one-year 125-strike European call for a premium of $16.86. He also sells a
100-strike call on the same underlying asset for a premium of $31.93. The spot price at
expiration is $110. The effective annual interest rate is 3.5%. What is Arnold’s total profit
at expiration for the two options?
5.We are given the following information about derivatives for a certain underlying asset:
Forward price = $163.13
150-strike European call premium = $23.86
150-strike European put premium = $11.79
The risk-free annual effective rate of interest is X. Determine X.
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