Posted: November 26th, 2015

finance assignment

(1)           Describe the payoffs to the following options positions:

a)             Long put

b)             Short call

(2)           Describe the characteristics of a long futures contract and a long call option.  What are the differences and similarities between the two positions? Explain under what circumstances/expectations will investors use these positions.

(3)           In class we discussed a strategy where an investors buys a bond plus a call option (the guaranteed principal strategy).  Can you do a similar analysis for the options strategies described below and explain the reasons why an investor will be interested in the strategy?  For each of these strategies, please build a simple P/L table or graph showing the payoffs to each component and to the strategy.

a)             Investor buys 100 shares of Apple stock at $115 per share and 100 put options on Apple with a strike of $115 and January 2017 maturity (approx. 1 year maturity).  Assume that the investor plans to close all positions (i.e. she will sell the stock and the options will mature) in January 2016.  Assume that the put option value per option is $14.50.

b)             Investor buys 100 shares of Apple stock at $115 per share and writes (i.e. short position) 100 call options on Apple with a strike of $115 and January 2017 maturity (approx. 1 year maturity).  Assume that the investor plans to close all positions (i.e. she will sell the stock and the options will mature) in January 2016.  Assume that the call option value per option is $13.70.

(4)           Price the following at-the-money call options.  S = 100, K=100.  Try to use a calculator instead of EXCEL to make sure you understand the calculations.  For the N(d1) and N(d2) functions you can use NORMSDIST on EXCEL.

a)             T = 3 months

r = 2%

Sigma = 30%

b)             T = 3 months

r = 2%

Sigma = 30%

            What do you conclude about the effect of Sigma on option value?  Explain the effect of Sigma on option value that you observe.

(5)         Describe the basic operation of a bank.  Some people may regard banking as a low risk boring business – do you agree?  Explain.

(6)         Banks are required to hold a certain minimum amount of equity capital – the requirement is referred to as Capital Adequacy. Explain the reasons behind imposing such a requirement and why such a requirement is unique to banks.

(7)         What is the role of reserve requirements in banking?  You can watch the following you tube video clip from a classic holiday movie “It’s a Wonderful Life” to explain the role of withdrawals from bank accounts: https://www.youtube.com/watch?v=iPkJH6BT7dM

(Another interesting you tube clip from the movie “Trading Places” on futures trading and daily settlement is: https://www.youtube.com/watch?v=RLySXTIBS3c)

(8)         Describe Retirement Accounts.  Explain the features of retirement accounts and the role they play in Financial Markets.