FINS2624 PORTFOLIO MANAGEMENT Week 6 CAPM: The covariance of an assets returns with the market and the required return of the asset. Assumptions: * Investors are price takers * Investors have identical investment horizons * Perfect capital markets * Investors are rational mean-variance optimizers β: Measures how much risk an asset contributes in the market portfolio. * β > 1 asset contributes more risk than the average asset * β < 1 asset contributes less risk
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changes in response to a change in the value of the underlying security. The option-pricing model developed by Black and Scholes (1973) indicates that a portfolio consisting of a risky asset and call options thereon can be balanced in such a way that the returns from the portfolio will approximate to a risk free rate of return. Ascertaining the right balancing mix between the units of the underlying security and the options thereon is the central theme of Delta hedging. This paper summarizes the
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SOLUTIONS MANUAL CHAPTER 15 PUT AND CALL OPTIONS PROBLEMS Exercise (strike) price 1. A stock has an exercise (strike) price of $40. a. If the stock price goes to $41.50‚ is the exchange likely to add a new strike price? b. If the stock price goes to $42.75 is the exchange likely to add a new strike price? 15-1. a) No. For stocks over $25‚ the normal interval is $5‚ with a new strike price added at the halfway point or $42.50 (between $40 and $45). b) Yes‚ the stock price has equaled or exceeded
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exotic derivatives is presented‚ followed by the pricing alternatives of these securities. Hedging methods using static replication for some classes of exotic options are afterward discussed. Finally‚ risk management control of an active FX portfolio is studied. keywords: FX market‚ Exotic options‚ Option pricing‚ Barrier Options‚ Digital Options‚ Static Hedging‚ Dynamic Hedging. 1 Email: delia pirnog@yahoo.com Acknowledgment This paper was sponsored by UBS as part of an internship at Market
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second time period in P/L chart. Answer for question B Two hedging strategies used in the trading scenario are protective put and covered call. A protective put strategy is a combination of long stock and long put. The main objective of a protective put strategy is to shield the effects of adverse movements of the prices of shares and lower the downside risk. Buying a protective put assures an individual’s maximum cost is a certain amount which will not increase as the stock price decreases. Therefore
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spot price of the market index is $900. After 3 months the market index is priced at $920. The annual rate of interest on treasuries is 4.8% (0.4% per month). The premium (i.e. price) on the long put‚ with an exercise price of $930‚ is $8.00. What is the profit or loss at expiration for the long put? A. $2.00
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30 Assume that one‑year put options on Singapore dollars are available‚ with an exercise price of $.63 and a premium of $.04 per unit. One‑year call options on Singapore dollars are available with an exercise price of $.60 and a premium of $.03 per unit. Assume the following money market rates: U.S. Singapore Deposit rate 8% 5% Borrowing rate 9 6 Given this information‚ determine whether a forward hedge‚ money market hedge‚ or a currency options hedge would be most appropriate
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percent coupon bond is currently quoted at 89.3 and has a face value of $1‚000. What is the amount of each semi-annual coupon payment if you own three (3) of these bonds? $100.46 $200.93 $112.50 $75.00 $56.25 Question 4: 1 pts A European put option grants the holder the right to: buy the underlying asset at the exercise price on the expiration date. buy the underlying security at a stated price at any time up to and including the expiration date. sell the underlying security at the strike
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of financial options‚ you have been asked to prepare a brief report that firm’s executives can use to gain a cursory understanding of the topic. To begin‚ you gathered some outside materials on the subject and used these materials to draft a list of pertinent questions that need to be answered. In fact‚ one possible approach to the report is to use a question-and-answer format. Now that the questions have been drafted‚ you have to develop the answers. a. What is a financial option? What is the
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variate estimate of the American Put option instead of the value as implied by the tree? It is because that control variate estimate is more accurate than the implied value by the tree. The error of the binominal tree can be reduced by using it only to calculate the difference between the price of the American and the equivalent European options with the same strike and the same time to maturity. 2. Use Solver to find the implied volatilities for all put options with strike prices between $70
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