Suppose that the US government recently announced that subsidies for fresh milk producers will be gradually phased out over the next year. Newspapers say that there are expectations of a 40% increase in the spot price of fresh milk over the next year.
Option prices on fresh milk trading on the Chicago Mercantile Exchange (CME) reflect expectations of this 40% increase in spot prices over the next year. Similarly to the rest of the market, you believe that prices will rise by 40% over the next year.
What option trades are likely to be profitable, or to be more specific, result in a positive Net Present Value (NPV)?
Assume that:
- Only the spot price is expected to increase and there is no change in expected volatility or other variables that affect option prices.
- No taxes, transaction costs, information asymmetry, bid-ask spreads or other market frictions.
A 90-day Bank Accepted Bill (BAB) has a face value of $1,000,000. The simple interest rate is 10% pa and there are 365 days in the year. What is its price now?
A project has the following cash flows:
| Project Cash Flows | |
| Time (yrs) | Cash flow ($) |
| 0 | -400 |
| 1 | 0 |
| 2 | 500 |
What is the payback period of the project in years?
Normally cash flows are assumed to happen at the given time. But here, assume that the cash flows are received smoothly over the year. So the $500 at time 2 is actually earned smoothly from t=1 to t=2.
A European put option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars.
What is an expression for the payoff at maturity ##(f_T)## in dollars from owning (being long) the put option?
Which of the following investable assets is the LEAST suitable for valuation using PE multiples techniques?
Question 545 income and capital returns, fully amortising loan, no explanation
Which of the following statements about the capital and income returns of a 25 year fully amortising loan asset is correct?
Assume that the yield curve (which shows total returns over different maturities) is flat and is not expected to change.
Over the 25 years from issuance to maturity, a fully amortising loan's expected annual effective:
Question 834 option, delta, theta, gamma, standard deviation, Black-Scholes-Merton option pricing
Which of the following statements about an option (either a call or put) and its underlying stock is NOT correct?
| European Call Option | ||
| on a non-dividend paying stock | ||
| Description | Symbol | Quantity |
| Spot price ($) | ##S_0## | 20 |
| Strike price ($) | ##K_T## | 18 |
| Risk free cont. comp. rate (pa) | ##r## | 0.05 |
| Standard deviation of the stock's cont. comp. returns (pa) | ##\sigma## | 0.3 |
| Option maturity (years) | ##T## | 1 |
| Call option price ($) | ##c_0## | 3.939488 |
| Delta | ##\Delta = N[d_1]## | 0.747891 |
| ##N[d_2]## | ##N[d_2]## | 0.643514 |
| Gamma | ##\Gamma## | 0.053199 |
| Theta ($/year) | ##\Theta = \partial c / \partial T## | 1.566433 |
Question 924 foreign exchange rate, forward foreign exchange rate, arbitrage, forward interest rate, no explanation
Suppose that the yield curve in the United States of America and Australia is flat and that the current:
- USD federal funds rate is 1% pa;
- AUD cash rate is 1.5% pa;
- Spot AUD exchange rate is 1 USD per AUD;
- One year forward AUD exchange rate is 0.97 USD per AUD.
You suspect that there’s an arbitrage opportunity.
Which one of the following statements about the potential arbitrage opportunity is NOT correct?
A stock has an expected return of 10% pa and you're 90% sure that over the next year, the return will be between -15% and 35%. The stock's returns are normally distributed. Note that the Z-statistic corresponding to a one-tail:
- 90% normal probability density function is 1.282.
- 95% normal probability density function is 1.645.
- 97.5% normal probability density function is 1.960.
What is the stock’s standard deviation of returns in percentage points per annum (pp pa)?