Suppose the current stock price for A.B.C Corp is £100, the volatility is 0.25, the time to maturity is 1 year and the strike prices are K1=£80, K2= £100, calculate the premium for both put and call options using both strike prices, assume risk free rate as 0.0077 or 0.77% (10%). Suppose you have a long position in the

 

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Suppose the current stock price for A.B.C Corp is £100, the volatility is 0.25, the time to maturity is 1 year and the strike prices are K1=£80, K2= £100, calculate the premium for both put and call options using both strike prices, assume risk free rate as 0.0077 or 0.77% (10%). Suppose you have a long position in the stock now. How would you hedge against price declines for a one-year period, using puts, calls, and combinations of options? Devise two different option strategies using puts, calls and combinations of options (30%) Question 2 Suppose in Month 1 the yield on ten-year bonds issued by the government in a country was 1.8% (also the coupon rate). In the following Month 2, the yield was 2.3%. Predict the effect of these changes in yield on the price of the ten-year government bonds, assume a face value, 1000. You will need to calculate the duration, modified duration, convexity and clearly explain your results. (30% of total marks) Question 3 In no more than 400 words answer the following two questions: a) Clearly explain why a short hedger position improves when the basis strengthens unexpectedly and deteriorates when the basis weakens unexpectedly. b) The executive of a biscuit factory has told their treasurer "there is no point in our using wheat futures". There is as much chance that the price of wheat in future will be less than the futures price, as there is that it will be greater than this price. Discuss the executive's viewpoint, if you were the treasurer what would you tell the executive

Expert Answer

Answer 1 The premium for the call option with a strike price of K1 = £80 is calculated as follows: Premium = S × N (d1) − K × N (d2) Where, S = Current stock price = £100 K = Strike price = £80… View the full answer