This question is on open interest and trading volume of derivatives.

a. How is open interest different than trading volume? On a trading day, can trading volume exceed open interest?

b. Why does the open interest usually decline during the month preceding the delivery month?

Question 2

Use the Black-Scholes model to value a call option on the following stock:

Time to expiration 6 months Standard deviation 50% per year Exercise price $50 Stock price $50 Interest rate 3%

You can solve this question either by formula or by Excel. If by Excel, attach Excel file with your submission or insert the Excel sheet in the space below showing all cells of your inputs and results. d1 = 0.2192 N(d1) = 0.5868 d 2 = –0.1344 N(d 2) = 0.4465

Xe r T = 49.2556

C = $50 × 0.5868 – 49.2556 × 0.4465 = $7.34

( I got the answer here, please add the formula and calculation please)

Question 3

A stock price is currently $100. You believe it has 50% chance of increasing to $120 and a 50% chance of decreasing to $80. The risk-free rate of interest is 10%. Valuate a call option with strike price of $100 and one year to maturity with the two-state stock price model

a) Construct a binomial tree with the payoff of the option payoff following the class example.

b) Construct a replicating portfolio of stock and bond (with the risk free rate of return) that will have the same payoff as the option described in a). What should be the price of this call option then?

Question 4

Your friend, Dawg, quit school 2 years ago and moved to Florida to become an orange farmer. Admiring your wisdom acquired from your Fin475 class, he contacted you this year to help him with some risk management decisions.

a. He told you he is going to harvest 200,000 pounds of oranges this October if the weather is normal. You did your research and find no futures contracts of orange trading at any exchanges but there are contracts for condensed orange juice