100 put options to sell one unit of currency B for currency A at a strike price Buy a put and sell a call on the currency with the strike price of the put Options on stock indices 779 when exercised, are settled at cash while futures options are settled with futures.9 Thus, for example, the writer of an index put option, by buying a futures put option with the same strike and maturity, runs the risk of early exercise in the index put. The $\operatorname{S\&P} 100$ is currently standing at $250 .$ Explain how a put option on the S\&P 100 with a strike of 240 can be used to provide portfolio insurance. It is necessary to know the difference between the foreign and domestic It can be used to hedge either a future inflow or a future outflow of a foreign price of 0.8, B) Calculate the value of a 5 -month European put futures option when the futures price is $\$ 19,$the strike price is$\$20,$ the risk-free interest rate is $12 \%$ per annum, and the volatility of the futures price is $20 \%$ per annum. 9) exchange rate are valued using the formula for an option of a stock paying a A) risk-free rate is 5% per annum, and the foreign risk-free rate is 3% per annum. The be changed to provide a put-call parity formula for options on a stock index? The most popular indices underlying options in the U.S. are. Buy a put and sell a call on the currency with the strike price of the put Index options also allow investors to express a directional view without the operational overhead of shorting an ETF or stock basket. Options on Stock Indices, Currencies, and Futures Contracts Educators. Explain your answer. An index is currently standing at 800. The risk-free rates of interest in Canada and the United States are 9 % and 7 % per annum, respectively. The exchange rate volatility is 10%, the domestic risk-free rate is 13) It is not necessary to know either the foreign or domestic interest rate, C) Explain your answer. A portfolio manager in charge of a portfolio worth $10 million is concerned Popular US stock indices The New York Stock Exchange (NYSE) is currently the world's largest stock exchange, with about 3,000 securities being traded. portfolio falling below a certain level. that the market might decline rapidly during the next six months and would like volatility of the index is 16%. C) 5) What is the probability of an up movement? the portfolio has a beta of 0.5? has a beta of 1? 2% and the foreign risk-free rate is 5%. Suppose that the spot price of the Canadian dollar is U.S. 0.75 and that the Canadian dollar-U.S. dollar exchange rate has a volatility of$4 \%$per annum. If the fund makes a profit, the salaries will be proportional to the profit. Would you expect the volatility of a stock index to be greater or less than the volatility of a typical stock? CHAPTER 16 Options on Stock Indices and Currencies Practice Questions Problem 16.1. The number of options required increases. It is not necessary to know the domestic interest rate or the spot exchange There are futures and options markets available for all of the popular stock indexes. A portfolio is currently worth 10 million and has a beta of 1.0 . Futures and options that are based upon a stock index are known as derivatives markets because they are derived from the underlying stock index. What is the size of one option contract on the S&P 500? Which of the following is true when a European currency option is valued using Under what circumstances is the futures option worth more than the corresponding American option on the underlying asset? continuous dividend yield? higher than that of the call, D) The main stock indices are managed by the exchanges of developed countries. Here is a list of the most popular binary option trading indices list.You can start trading binary options over indices by opening a new account from a binary option broker.. United States Indicies Dow Jones (.DJI) The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. 1Complex Options. A) What options should be purchased to provide protection against the value of the portfolio falling below$\$54$ million? What is the put-call parity relationship for European currency options? The current exchange rate is 1.2000. 12) Buy a call and sell a put on the currency with the strike price of the put The futures or options contract's value is based on the movements of the index it tracks. that stock prices might decline rapidly during the next six months and would For instance, the NASDAQ 100 Index – or NDX – is a stock market index that tracks 100 of the largest non-financial companies that are traded on the NASDAQ. A stock option is a contract between two parties in which the stock option buyer (holder) purchases the right (but not the obligation) to buy/sell 100 shares of an underlying stock at a predetermined price from/to the option seller (writer) within a fixed period of time. The risk-free rate of interest is $7 \%$ per annum and the index provides a dividend yield of $4 \%$ per annum. Calculate the implied volatility of soybean futures prices from the following information concerning a European put on soybean futures:Current futures price Exercise price 525Risk-free rate $\quad 6 \%$ per annum Time to maturity 5 months Put price 20, Show that the put-call parity relationship for European index options is $$c+X e^{-r(T-t)}=p+S e^{-q(T-t)}$$ where $q$ is the dividend yield on the index, $c$ is the price of a European call option. interest rate is 3% per annum and the dividend yield is 1% per annum. Index put options are used to provide protection against the value of the 6) A portfolio is currently worth $10 million and has a beta of 1.0. How should the put-call parity formula for options on a non-dividend-paying stock They use indices to track the performance of the stock market. The stock price is replaced by the value of the index multiplied by exp(qT), B) You can trade Indices like the UK 100 and Wall Street with a Spread betting or CFD trading account and our guide to trading stock Indices will help you get started. strike price is 0.9100, the time to maturity is one year, the domestic Others are based on the performance of a particular sector (e.g., computer technology, oil and gas, transportation, or telecoms). For a European call option on a currency, the exchange rate is 1.0000, the Assume that$r>0$and that there is no difference between forward and futures contracts. that the market might decline rapidly during the next six months and would like 100 call options to buy one unit of currency B with currency A at a strike What is the value of the option? volatility of the exchange rate is 12%. In Section 11.4 it is noted that a futures price is analogous to a security paying a continuous dividend yield at rate$r .$By considering a forward contract on the futures price and using results from Chapter 3 , show that the forward price equals the futures price when interest rates are constant. on 100 times the index. The main difficulty for traders pricing index options is the dividend estimate. The stock price is replaced by the value of the index multiplied by exp(-qT), D) Show that if$C$is the price of an American call option on a futures contract when the exercise price is$X$and the maturity is$T,$and$P$is the price of an American put on the same futures contract with the same exercise price and exercise date,\[F e^{-r(T-t)}-X0$. option on a stock index does not have a closed form solution and has to be solved numerically as described by Schwartz (1977). annum. forward contract in order to hedge foreign currency that will be paid? The name of the index usually indicates the number of its constituent companies. The valuation equation Does the cost of portfolio insurance increase or decrease as the beta of the portfolio increases? the portfolio has a beta of 1? interest rates but not the rates themselves, D) Ideally, a change in the price of an index represents an exactly proportional change in the stocks included in the index. of 0.5? lower than that of the call. one on the dollar-deutschemark exchange rate the other on the dollar-yen exchange rate? Buy a call and sell a put on the currency with the strike price of the put to use options on an index to provide protection against the portfolio falling rate, B) A call option on a stock index gives you the right to buy the index, and a put option on a stock index gives you the right to sell the index. Explain this statement. option price be without there being an arbitrage opportunity? What is the same as 100 call options to buy one unit of currency A with What is A portfolio manager in charge of a portfolio worth $10 million is concerned The index is currently standing at 500 and each contract is A) Calculate the value of a European call option with exercise price 0.75 and exercise date in 9 months. Stock market indices are essentially compilations of stocks that are constructed such that they track a particular market or sector. movement? Which of the following describes what a company should do to create a range below$9.5 million. Chapter 17 - Options on Stock Indices and currencies Options on stock indices Several exchanges trade options on stock indices. Help. that the market might decline rapidly during the next six months and would like The Sat, Dec 12th, 2020. (Hint: To obtain the first half of the inequality, consider possible values of: Portfolio A: A European call option plus an amount $X$ invested at the risk-free rate Portfolio $B:$ An American put option plus $e^{-q(T-t)}$ of stock with dividends being reinvested in the stockTo obtain the second half of the inequality consider possible values of:Portfolio $C:$ An American call option plus an amount $X e^{-r(T-t)}$ invested at the risk-free rate. A binary option based on a stock index future is a contract used for speculating on a particular stock index, such as the futures derivative of the S&P 500 or the NASDAQ 100. A European at-the-money call option on a currency has four years until Options, Futures, and Other Derivative Securities 2nd, Options on Stock Indices, Currencies, and Futures Contracts. of 0.8, Orange Technology Solutions is considering expansion of its existing operation …, BUSINESS INTELLIGENCE MANAGEMENT ASSIGNMENT-1 Assessment Marking Criteria: Available Marks …, .blackboard.com/webapps/blackboard/execute/uploadAssignment?content_id=_16324_1&course_id=_513_1&assign_group_id=&mode=view”>Article Review 2 Select an article from Business Source Premier …, .blackboard.com/webapps/blackboard/execute/uploadAssignment?content_id=_16323_1&course_id=_513_1&assign_group_id=&mode=view”>Article review 1 Select an article from Business Source Premier …, Assignment 2: Be Careful What You Sign Sudson Washer and …, chapter-15-options-on-stock-indices-and-currencies, chapter-15-options-on-stock-indices-and-currencies-2, chapter-15-options-on-stock-indices-and-currencies-3, chapter-15-options-on-stock-indices-and-currencies-4, Orange Technology Solutions is considering expansion of its existing operation, Adams State University BUS 304 Article Review 2 (2015), Adams State University BUS 304 Article Review1 (2015). Option trading indicates that the stock could move in a range of ₹1,100-1,200 The outlook on Infosys (₹1,163.20) remains positive. The current exchange rate is 1.2000. How low can the What position is required if the portfolio Can an option on the deutschemark-yen exchange rate be created from two options. forward contract in order to hedge foreign currency that will be received? The exchange rate volatility is 10%, the domestic risk-free rate is 4) currency B at a strike price of 1.25? What position is required if the portfolio has a beta What should the strike price of options on the index be higher than that of the call, B) Which of the following is true as the Suppose that a portfolio is worth 60 million and the S P 500 is at 300 If the value of the portfolio mirrors the value of the index, what options should be purchased to provide protection against the value of the portfolio falling below 54 million in one year's time? Explain how a put option on the index with a strike of 700 can be used to provide portfolio insurance. A binomial tree with one-month time steps is used to value an index option. contract is on 100 times the index. Offered Price: $2.00 Posted By: solutionshere Posted on: 12/16/2014 04:04 AM Due on: 12/16/2014 . 2) Market Indices S&P Indices S&P Sectors Dow Jones Indices Nasdaq Indices Russell Indices Volatility Indices Commodities Indices US Sectors Indices World Indices. A) beta of the portfolio increases? Consider an American futures call option where the futures contract and the option contract expire at the same time. 15) What is the probability of an up below$9.5 million. 10) I.e the inputs of underlying price, strike price, interest rate, volatility, dividend, call or put are fed into the Black and Scholes pricing model to calculate the premium. q. Find an index with which you are comfortable We offer Indices from the UK, US, Asia, Australasia and Europe. A binary option is a financial instrument that enables traders to speculate on markets without owning the underlying asset. Options on stock indexes are similar to exchange-traded funds (ETFs), the difference being that ETF values change throughout the day whereas the value on stock index options change at the end of each trading day. The ASPI is one of the principal stock indices of the CSE and it measures the movement of share prices of all listed companies based on market capitalization. The domestic risk-free rate is 3%. Consider again the situation in Problem $11.20 .$ Suppose that the portfolio has a beta of $2.0,$ that the risk-free interest rate is $5 \%$ per annum, and that the dividend yield on both the portfolio and the index is $3 \%$ per annum. The S&P 100 Index (OEX and XEO) The S&P 500 Index (SPX) The Dow Jones Index times 0.01 (DJX) The Nasdaq 100 Index (NDX) Contracts are on 100 times index; they are settled in cash; OEX is … Portfolio $D:$ A European put option plus one stock with dividends being reinvested in the stock . maturity. 19) Today’s most active Indices options – call options and put options with the highest daily volume. The index is currently standing at 500 and each contract is Explain how you would value (a) futures contracts; and (b) European options on the index. Explain how currency options can be used for hedging. 2% and the foreign risk-free rate is 5%. 15, 16). of 0.8, D) What is the value of the option? What is a stock index binary option? 1) A) ), If the price of currency A expressed in terms of the price of currency B follows the process assumed in Section $11.3,$ what is the process followed by the price of currency $\mathbf{B}$ expressed in terms of currency $\mathbf{A} ?$. Chapter Questions. 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