MANG3020

Futures and Options

Class 2
2014/2015

Question 1
A one-year long forward contract on a non-dividendpaying stock is entered into when the stock price is $40
and the risk-free rate of interest is 10% per annum with
continuous compounding.
a) What are the forward price and the initial value of the
forward contract?
b) Six months later, the price of the stock is $45 and the
risk-free interest rate is still 10%. What are the forward
price and the value of the forward contract?

Question 2
Suppose that the risk-free interest rate is 10% per annum
with continuous compounding and that the dividend
yield on a stock index is 4% per annum. The index is
standing at 400, and the futures price for a contract
deliverable in four months is 405. What arbitrage
opportunities does this create?

Question 3
The current value of the Dow Jones Industrial Average is
11,200. The dividend yield is 3.00% per annum,
assuming continuous compounding and a 365-day year.
The interest rate is 10% with annual compounding.
a) Calculate the continuously compounded interest rate.
What is the 60-day Dow Jones Industrial Average futures
price?
b) Suppose that an investor held a long position of a 60day Dow Jones Industrial Average forward contract.
Afterwards, the Dow slides down and a week later ends
at 10,500. What is the 53-day forward price?

c) What is the value of the forward contract to the long

position a week later (with 53 days left)? Assume that the
forward contracts payoffs are determined by multiplying
the above results by $10.

Question 4
An investor sells a European call option and buys a
European put option with the same strike price and
maturity. Describe the investor's position.

Question 5
An investor buys a European put option on a share for
$3. The strike price is $40. Under what circumstances
will the option be exercised? Under what circumstances
will the investor make a profit? Draw a diagram showing
the variation of the investors profit with the stock price
at the maturity of the option.

Question 6
Assume that a European call option to buy a share for
$100 costs $5 and is held until maturity. Under what
circumstances will the option be exercised? Under what
circumstances will the holder of the option make a
profit? Draw a diagram showing how the profit from a
long position in the option depends on the stock price at
maturity of the option.