| Subject Code : | 2214AFE | Country : | Australia |
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Assignment Task:
Task:
Part A: Calculation Questions
Problem 1: Properties of Options
The price of a European put that expires in six months and has a strike price of $100 is $3.59. The underlying stock price is $102, and a dividend of $1.50 is expected in four months. The term structure is flat, with all risk-free interest rates being 8% (cont. comp.).
a. What is the price of a European call option on the same stock that expires in six months and has a strike price of $100? [1 marks]b. Explain in detail the arbitrage opportunities if the European call price is $6.1. How much will be the arbitrage profit? [3.5 marks]
c. Explain in detail the arbitrage opportunities if the European call price is $8.8. How much will be the arbitrage profit? [3.5 marks]
Problem 2: Option Valuation (18 marks)
In this question, you need to price options with various approaches. You will consider puts and calls on a share. Please read following instructions carefully:
- The spot price of this share will be determined by your student number. You need to use the last digit of your student number. The spot price of the share will be (last digit of your student number*10+6). For example, if the last digit of your student number is 5, the spot share price will be 5*10+6=56. If the last digit of your student number is 0, please replace it with 4, i.e. the spot price will be 4*10+6=46.
- The strike price of the options will be the share price you just calculated +2. For example, if the share price you calculated based on your student number is 56, the strike price of the options will be (56+2)=58.
Part B: Research component (20 marks)
Since derivatives markets have become very popular in the last fifty years, history has witnessed many spectacular examples of derivatives misuse which have resulted in large losses for financial and non-financial institutions. For this part of the assignment, you need to do some research. Identify one prominent example of a financial disaster caused by the misuse of derivatives. Explain in your own words in detail what went wrong and what was the result of the derivatives misuse.
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