BFI304 Derivatives

Question 1

Kinsteel Bhd’s equity price today is RM7.00.

 

60-day call	60-day put
6.60 call = 0.80	6.60 put = 0.10
7.00 call = 0.40	7.00 put = 0.30
7.60 call = 0.09	7.60 put = 0.90

 

Required:

(a) State the options which are profitable and calculate their intrinsic values.    

 

 

 

(b) State the options which breakeven.               

 

 

(c) Is the 90-day cost of option be larger or smaller than the cost of option above if it was

(i)      a call option  

(ii)     a put option     

 

 

 

Question 2

Calculate the intrinsic value and time premium for 60-day call and put options in question 1.       

 

 

 

Question 3

John believes the FBM KLCI is going to trade between 770 and 900 points. Explain a suitable option trading strategy for this situation. Draw the payoff graph and positions.                              

 

 

            

Question 4

The FBM KLCI and index options possess the following values :

 

FBM KLCI = 730 points

740 call = 7 points

740 put = 2 points

 

The spot index can be traded. The risk-free rate is 5% per annum. The options expire in 60 days.

Required:

(a) Prove that there is mispricing.                 

 

 

(b) Propose a suitable arbitrage strategy and calculate the arbitrage profit

                                                                                                 

    

(c) Draw a graph of arbitrage strategy and the relevant positions.             

 

 

(d) Prove that this arbitrage is riskless.            

 

 

 

Question 5

Calculating implied volatility can be difficult if you don’t have a spreadsheet handy. Fortunately, many tools are available on the web to perform the calculation; for example, www.option-price.com contains several option calculators, including one for implied volatility. Using daily price data from finance.yahoo.com, calculate the annualised standard deviation of the daily percentage change in a stock price. For the same stock, use these websites to find the implied volatility. Option price data can be retrieved from www.cboe.com . Recalculate the standard deviation using 3 months, 6 months and 9 months of daily data. Which of the calculations most closely approximates implied volatility ? What time frame does the market seem to use for assessing stock price volatility ?