Question: Swaps often contain caps or floors. In this problem, you are to construct an oil contract that has the following characteristics: The initial cost is

Swaps often contain caps or floors. In this problem, you are to construct an oil contract that has the following characteristics: The initial cost is zero. Then in each period, the buyer pays the market price of oil if it is between K1 and K2; otherwise, if S K2, the buyer pays K2 (there is a floor and a cap). Assume that K2 − K1= $2 and that oil volatility is 15%.
a. If there is a single settlement date in 1 year, what are K1 and K2?
b. If the swap settles quarterly for eight quarters, what are K1 and K2?

Step by Step Solution

★★★★★

3.40 Rating (163 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

The contract has the party receiving a K 2 call and writing a K 1 put We will assume K 2 ... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

727-B-B-F-M (4188).docx

120 KBs Word File

Students Have Also Explored These Related Banking Questions!

You have been asked to construct an oil contract that has the following characteristics: The initial cost is zero. Then in each period, the buyer pays S F, with a cap of $21.90 F and a floor of...

In this problem you will compute January 12 2004 bid and ask volatilities (using the Black-Scholes implied volatility function) for 1-year IBM options expiring the following January. Note that IBM...

17. Swaps often contain caps or floors. In this problem, you are to construct an oil contract that has the following characteristics: The initial cost is zero. Then in each period, the buyer pays the...

Swaps often contain caps or floors. In this problem, you are to construct an oil contract that has the following characteristics: The initial cost is zero. Then in each period, the buyer pays the...

Evaluate the potential gains and losses for forwards,future,call options,put options and swaps. Outline and describe the different risks that each type of derivative contract faces. Describe...

Research Paper: Topic: Why did the traditional financial risk approaches, methods, and tools fail in the financial market meltdown of 2008 - 2009? Discuss questions DQ #1: How has fair value...

Companies can intentionally commoditize their products or services as a strategy to make money. Discuss using these two different cases below how companies can intentionally commoditize their...

Hi Katrina, I have another accounting problem I need your help with. It's similar to the one you did on 4/4/2016. The due date for this one will be 4/10/2016, Will you be able to help? See below...

You want to estimate the proportion of your classmates who plan to spend their junior year abroad. You take a simple random sample of 100 classmates from the class population. Twelve students in the...

Write a function that swaps the values of two numbers sent to it by reference. It does not return anything.

Required: Appraisals reveal that the inventory has a fair value $ 1 8 0 , 0 0 0 , and the equipment has a current value of $ 6 1 5 , 0 0 0 . The book value and fair value of liabilities are the same....

Introduce the structure of the accounting system?

8. a. Suppose the March Year 1 forward price were $3.10. Describe two different transactions you could use to undertake arbitrage. b. Suppose the September Year 1 forward price fell to $2.70 and...

9. Consider Example 1. Suppose the February forward price had been $$2.80$. What would the arbitrage be? Suppose it had been $$2.65$. What would the arbitrage be? In each case, specify the...

10. Using Table 6, what is your best guess about the current price of gold per ounce?

You are a manager at North Fare, which is considering expanding its operations in synthetic fibre manufacturing Your boss comes into your office drops a constant report on your desk and complains "We...

I need Correct Answer Don't copy Paste (a) Let F:RR be a function defined as F(x)=2x.F is 11. (b) Let G:NN be a function defined as G(n)=2n2+1. G is not 11

5.1 Q2 A. You need a simple interest bridge loan to cover the costs of buying a new home while waiting to close on your old one. You need to finance $61,000 and bank will charge 3.5%. How much...