An Introduction to Derivative Securities Financial Markets and Risk Management 1st edition Robert A. Jarrow, Arkadev Chatterjee - Solutions

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Explain how the forward market for foreign exchange differs from the spot market. When will forward exchange rates be at a premium or discount to spot exchange rates?
Suppose that the following exchange rates and interest rates prevail: Spot exchange rate: $ 1 = 121 yen One- year forward rate: $ 1 = 130 yen One- year interest rates: United States = 5.54%, Japan = 6.98% Can a trader earn covered interest arbitrage profits? If not, explain why not. If
What is a derivative security? Give an example of a derivative and explain why it is a derivative.
Explain the essence of Merton Miller’s argument explaining what spurs financial innovation
Explain the essence of Ronald Coase’s argument explaining what spurs financial innovation.
Does more volatility in a market lead to more use of financial derivatives? Explain your answer
When the international banking regulators defined risk in their 1994 report, what definition of risk did they have in mind? How does this compare with the definition of risk from modern portfolio theory?
Explain the differences between market risk, credit risk, liquidity risk, and operational risk.
Briefly present Warren Buffett’s and Alan Greenspan’s views on derivatives.
During the early years of the new millennium, many economists described the past few decades as the period of the Great Moderation. For example,
Drawing on your experience, give examples of two risks that one can easily hedge and two risks that one cannot hedge.
List some major applications of derivatives.
Download Form 10-K filed by P&G from the company’s website or the US Securities and Exchange Commission’s website. Answer the following questions based on a study of this report: a. What are the different kinds of risks to which P&G is exposed? b. How does P&G manage its risks? Identify and
a. What were the explanations given for the Great Moderation? b. Does the experience of the US economy during January 2007 to December 2010 still justify characterizing this as a period of Great Moderation? Report (1) quarterly values for changes in the gross domestic product, (2) quarterly values
Evaluate the following statement: “Hedging and speculation go hand in hand in the derivatives market.”
What risks does a business face?
Explain why financial futures have replaced agricultural futures as the most actively traded contracts.
Explain why derivatives are zero-sum games.
Explain why all risks cannot be hedged. Give an example of a risk that cannot be hedged.
What is a notional variable, and how does it differ from an asset’s price?
Explain how derivatives give traders high leverage.
The interest rate is 5 percent per year. Compute the six-month zero-coupon bond price using a simple interest rate.
What are the roles of the primary dealers in the US Treasury market?
What is the when-issued market with respect to US Treasuries? What role does this market play in helping the US Treasury auction securities?
What is the difference between on- the- run and off- the- run Treasuries?
What is a repurchase agreement? Explain your answer with a diagram of the transaction.
What is a Treasury STRIPS? What benefits do the trading of Treasury STRIPS provide?
Explain how bbalibor is computed by the BBA.
What is a Eurodollar deposit, and what is a TED spread?
What is the difference between Treasury bills, notes, and bonds? What are TIPS, and how do they differ from Treasury bills, notes, and bonds?
You bought a stock for $40, received a dividend of $1, and sold it for $41 after five months. What is your annualized arithmetic rate of return?
Using the standard demand–supply analysis of microeconomics, explain how a uniform price auction can generate more or less revenue than a discriminatory auction
The interest rate is 5 percent per year. Compute the six-month zero-coupon bond price using a compound interest rate with monthly compounding.
Suppose that you are planning to enroll in a master’s degree program two years in the future. Its cost will be the equivalent of $160,000 to enroll. You expect to have the following funds:• From your current job, you can save $5,000 after one year and $7,000 after two years. • You
The interest rate is 5 percent per year. Compute the six-month zero-coupon bond price using a continuously compounded interest rate.
The interest rate is 5 percent per year. Compute the six-month zero-coupon bond price using a banker’s discount yield (the zero-coupon bond is a US T-bill with 180 days to maturity)
What is a fixed-income security?
Compute the present value of the preceding cash flows.
Compute the future value of the preceding cash flows after three years.
What would be the fair value of the preceding cash flows after two years?
Explain the difference between a stock and a bond.
The SEC regulates American stock markets. However, NYSE members have committees that carry out a host of self-regulatory activities. NYSE members are profit seeking—why would they self-regulate themselves, when regulations only raise their cost of doing business?
Why does a dealer offer to trade only a fixed amount at the bid and ask prices?
You are a dealer and post a price of $50.00 to $50.50 for a stock. The buy orders outweigh sell orders, and your inventory is dwindling. How should you adjust the bid and the ask prices, and why?
What is the difference between an arbitrageur, a hedger, and a speculator?
What is program trading? Algorithmic trading?
What is the difference between a stock trading ex-dividend and cum-dividend?
Suppose that a stock pay a $5 dividend at time t. The dividend is announced at time (t – 1), when the stock trades cum-dividend at a price of $100. What should be the ex-dividend price at time t? Explain your answer.
Explain how to sell a stock short, assuming that you do not own the underlying stock. Why would one short sell a stock?
Consider the following data: YBM’s stock price is $100. The initial margin is 50 percent, and the maintenance margin is 25 percent. If you buy two hundred shares borrowing 50 percent ($10,000) from the broker, at what stock price will you receive a margin call?
If the stock price is $105 and the company had paid in the previous year two quarterly dividends of $0.50 each and two more of $0.55 each, then what is the dividend yield?
Explain the difference between an exchange and an OTC market.
Explain the difference between a broker and a dealer.
Explain the difference between a bid and an ask price.
Explain the difference between a market order and a limit order.
A forward market is trading for future purchase of a commodity, while a spot market is trading for immediate purchase. Is the stock market a spot or forward market?
For the stock market, can there be a difference between the total number of shares issued by a company and the total number of shares held by investors in the market? If yes, explain why.
Explain the difference between execution and settlement.
Define a forward contract. If a forward contract on gold is negotiated at a forward price of $1,487 per ounce, what would be the payoff on the maturity date to the buyer if the gold price is $1,518 per ounce and to the seller if the gold price is $1,612 per ounce?
For forward and futures contracts, what is the difference between physical delivery and cash settlement?
Why does a futures contract have zero value when it is first written?
What is marking-to-market for a future? Why is this marking-to-market important for reducing counterparty risk?
Explain why a futures contract is a zero-sum game between the long and short positions.
Are forward contracts new to financial markets? Explain.
Can you think of a reason why forward prices and futures prices on otherwise identical forward and futures contracts might not be equal?
What is the OTC market for trading derivatives? How do OTC market’s differ from exchanges?
When holding a futures contract long, if you do not want to take delivery of the underlying asset, what transaction must you perform? Explain.
If you are short a futures contract, why do you not have to borrow the futures contract from a third party to do the short sale?
Is the futures price equal to the value of the futures contract? If not, then what is the value of a forward contract when it is written? Explain.
Define a futures contract.
Is the forward price equal to the value of a forward contract? If not, then what is the value of a forward contract when it is written? Explain.
Discuss the similarities and differences between forward and futures contracts.
What are the costs and benefits to a corn grower trading a forward contract? If she is expecting a harvest in three months, should she buy or sell the derivative?
Which contract has more counterparty risk, a forward contract or a futures contract? Explain your answer.
Discuss the benefits of standardization of a futures contract.
What are the two roles that a clearinghouse plays in the case of a futures contract?
Ang, Bong, Chong, and Dong are trading futures contracts. Carefully identify the trading volume and open interest for each trader from the following transactions:• Ang buys five October silver futures from Bong.• Chong sells nine December silver futures to Bong.• Dong buys ten October silver
Suppose you are a trader specializing in futures on corn, wheat, oats, barley, and other agricultural commodities. From the following list, which risks do you face (mark each with a yes or no): credit risk, market risk, liquidity risk, settlement risk, operational risk, legal risk.
Explain the differences between an option’s delivery and expiration dates.
Why is an American option worth at least as much as an otherwise similar European option? Is there an exercise strategy that one can use to turn an American option into a European option? Explain.
“Because a call is the right to buy and a put is the right to sell, a long call position will be canceled out by a long put position.” Do you agree with this statement? Explain your answer.
The short position in a put option has the obligation to buy if the option is exercised. Isn’t this counter to the notion that a short position indicates a “sell”? Explain your answer.
The following option prices are given for Sun star Inc., whose stock price equals $50.00:Compute intrinsic values for each of these options and identify whether they are in the money, at-the-money, or out of the money.
Do you agree with the following statement: “An out-of-the-money option has an intrinsic value of zero and vice versa”? Explain your answer.
Because options are zero-sum games, the writer’s payoffs are just the negatives of the sellers. Demonstrate the following (by algebraic arguments or by using numbers): a. The call seller’s payoff at expiration is −max(0, S – K) = min(0, K – S) b. The put seller’s payoff is −max(0, K
Explain the differences between European and American options. How do the names relate to the geographical continents?
What is the difference between a market buy order and a limit order? When would you use a market versus a limit order?
Explain the differences between call and put options. Are they just the exact opposites of each other?
Explain the differences between long and short in the stock market. Explain how one shorts a stock.
Explain the differences between long and short in the option market. What is the difference between an option buyer and writer?
Explain the differences between an option’s intrinsic and time values. How do these relate to the option’s price?
Explain the differences between an option’s maturity and exercise date. When does exercise take place for a European option? For an American option?
Explain and carefully describe the following four security positions, drawing payoff diagrams wherever necessary to support your answer: a. Short a forward contract with a delivery price of $100 b. Short-selling a stock at $100 c. Going short on an option with a strike price of $100
Suppose that the current price of platinum is $400 per ounce. Suppose you expect that in three months the price will increase to $425. You are worried, however, that there is a small chance that platinum may fall below $390 or even lower. What securities can you use to speculate on the price of
What is an arbitrage opportunity across space? Give an example.
What is a closed-end fund, and what is the “closed-end fund puzzle”?
Suppose that Boring Unreliable Gadget Inc. has two classes of shares with different voting rights. You find that class A and class B shares are trading at $49 and $37, respectively. However, historically, the spread has been $15, and you expect the price difference to reach that level. a. Explain
What is a stock index? Describe the differences between the Dow Jones Industrial Average and the S&P 500 stock price indexes.
What is algorithmic trading, and how can it be used to make profits? How does this relate to program trading?
Explain the differences between a hedge fund and a mutual fund. Can anyone invest in a hedge fund? If not, who can, and why the difference?

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An Introduction to Derivative Securities Financial Markets and Risk Management 1st edition Robert A. Jarrow, Arkadev Chatterjee - Solutions

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