Complete post-module assignment for the course Derivatives Markets including futures and options....

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Complete post-module assignment for the course Derivatives Markets including futures and options. The attachments are NOT the assignment. It is the in-class exercises/cases and the assignment will be based on the excel summary. The assignment solution should include all of the data in the sample solution. The assignment questions will not be provided until I log in to Canvas and share the questions. As soon as I log in the timer starts and I have four hours to complete the entire assignment. I must have the same expert as 76124 - Shakeel. DO NOT assign me a different expert. The assignment is very complicated and I was assigned the wrong expert on the last two assignments. Shakeel will contact me when he is ready and we will log in together. We can select any time to do this. There will be at least 40 multiple choice questions and computations. I must show all of my work, provide the data, answers, and excel work. I will need the answers to be highlighted so I can transfer to text boxes in Canvas. I must also submit one excel file with all of the answers with one tab for each question. Please let me know when you contact Shakeel - the same expert as 76124, and he is available. The deadline cannot be extended.Microsoft Word - March 2021 In-Class Problem Set F&O.doc   IN-CLASS PROBLEM SET    Module 2A: Derivatives Markets    Prof Menachem Brenner    March 07-09, 2021 (Sun - Tue)          Please work in group to solve the following questions.  Your group work will be graded and will be part of the in-class Participation grade.  This problem set is based on the material covered in class          FUTURES:      Q1.  Fill out the blank spaces (class notes) for the REVERSE CASH & CARRY case on slide  number 23 (Derivatives Markets)           Q2.  Fill out the blank spaces (Class Notes, slides 29, 30) for the June 2021 futures contract on  the S&P500 Index (SPX). Answer the following questions:  a. Did the June 2021 futures contracts settle above or below Fair Value?   b. Use the transaction costs (TC) for index arbitrage to compute the values of the TC band.  c.         Was there an arbitrage opportunity?  d. What is the implied interest rate using the settlement price? Compare to the market rate  e.          What is the Mar-June implied forward rate compared to the market forward rate?   Is there an arbitrage opportunity? You can use the slides as your template.                    MS in Global Finance; Module 2A: Derivatives Markets (Prof Menachem Brenner)    Problem Set 2 of 3  OPTIONS:      Q1.   OPTION PRICING; THE VALUE OF INSURANCE     Assume spot gold is selling for $2,000 per ounce.  Over the next period it will either rise by  10% or fall by 10%.  The interest rate over the period is 5%.     A. What is the value of a European call on gold with a strike price of $2,000?  What is  the hedge ratio?    B. Redo a.  When the price of gold can either rise by 20% or fall by 10%, other things  being equal, how do you account for any change, or lack of it, in the value of the  call option?  What is the hedge ratio?      C. Redo a.  When the price of gold can either rise by 20% or fall by 20%, other things  being equal, how do you account for any change, or lack of it, in the value of the  call option?  What is the hedge ratio?    D. What will the prices of puts be in A. B. C.?    Q2.        RISK MANAGEMENT (The Greeks) – POST MODULE     In this problem set you will compute and examine the behavior of options sensitivities (the       Greeks).  The relevant parameters are: The underlying commodity is Gold. The volatility of the       ROR on gold is 30%, time to maturity is 90 days, 90 - day risk free rate is 3% per annum.            Using the B-S-M model compute the following:     a. Compute Price, Delta, Gamma, Vega and Theta, for calls and puts for the  following gold prices:               1960, 1980, 2000, 2020 and 2040. Assume the same strike price (K=2000).   b. Compute Price, Delta, Gamma, Vega and Theta, for calls and puts, for the  following times to expiration:  30, 60, 90, 120, 150     (K = 2000, S = 2000)    What have you learned from this exercise?  MS in Global Finance; Module 2A: Derivatives Markets (Prof Menachem Brenner)    Problem Set 3 of 3 Q3.  Option Strategies (combinations) – Post Module (Optional)    Assume that the interest rate is 3%, the volatility of the gold prices is 30%, the available options  strikes are: 1960, 1980, 2000, 2020 and 2040.     a) You formed a spread position where you bought the 90 days 1960 call and sold  the 90 days 2000 call.    (1) What is the value of your spread at the following prices of gold: 1960,  1980, 2000, 2020 and 2040?     What is the value of the hedge ratio at these prices?    (2) How does the value of your spread change with an increase in volatility  from 30% to 40%?  How does the hedge ratio change?    (3) How does the spread value change when maturity declines from 90 days  to 10 days?  How does the hedge ratio change?     b) You formed a put spread where you bought the 90 days 2040 put and sold the  2000 put.  Repeat (1), (2), and (3) for the put spread.  How does the put spread  relate to the call spread?     c) You bought a 90 day 1960-2000 call spread (bull spread) and a 90 days   2040-2000 put spread (bear spread).    (1) Assuming the price of gold is 2000, what is the value of the position and  the hedge ratio?    (2) How would the value of the position change with time?    (3) How would the value of the position change with a decrease in volatility  from 30% to 20%?                 Year     IN-CLASS PROBLEM SET SOLUTION    Module 2A: Derivatives Markets    Prof Menachem Brenner    March 07 - 09, 2021 (Sun - Tue)      Futures:      Q1.   REVERSE CASH AND CARRY F.5 = 1.25  F* - TC = 3897.21 - 1.16  = 3896.05 and the settlement price stays within the TC band.    MS in Global Finance | Module 2A: Derivatives Markets (Prof Menachem Brenner)  In-Class Problem Set Solution

Shakeel · Accepted Answer

Answer 1
Marking to Market risk in futures and options contracts
(b) is mainly due to interest rate risk 
Reason: because as per change in interest rate, the value of future and option changes due to discounting the expected cash flows associated with it.
Answer 2
Assume that the 3-month Hang Seng Index futures contract settled exactly at the index level, the 3-month risk-free rate is 1.50% (annually) and the annual dividend yield on the index is 2.00%. The round trip transactions costs, for arbitrage, are 0.1% of the index. These values imply the following arbitrage strategy
(d) borrow funds, buy the index and sell futures
Reason: Since, the dividend yield is higher than the risk free rate, the fair value of future will be less than index value and hence, to make an arbitrage profit, the strategy would be borrow funds, buy index and sell future.
Answer 3
Mexico and Peugeot (the car company) have been facing market price risk which affected their revenues.  To deal with this risk
Not clear
Answer 4
Basis risk
(c) is zero if the optimal hedge ratio (h*) is 1.0
Reason: Basis risk arises due to imperfect hedging or mismatch in hedging position. So, if hedge ratio is 1.0 there would be perfect hedging and the basis risk will be eliminated.
Answer 5
(b) subject to “rollover” risk and MTM risk
Reason: Stack hedging is a strategy which involves buying various futures contracts that are concentrated in nearby delivery months to increase the liquidity position. Here the most nearby and liquid contract is used, and it is rolled over to the next-to-nearest contract as time passes. Therefore, it is subject to “rollover” risk and MTM risk
Answer 6
Assume that the March 2021 futures contract on SPX settled at 3695, r = 0.24%, q = 1.67%, arbitrage transactions costs (TC) are 1.16 index points. The TC band is [3689.59, 3691.91]. Thus, the Fair Value of the Futures contract is
(e)
First find F*, compute 3,689.59 + 1.16 =  3,690.75 
Thus, S = F*/e((.0024-.0167)/(365/127)) = 3,690.75*0.9950 = 3672.30
Answer 7
An increase in domestic interest rates (ceteris paribus)
(b) should raise the price of an FX forward contract
Reason: cost of carry as the interest cost of a similar position in cash market and carried to maturity of the futures contract, less any dividend expected till the expiry of the contract.
Futures price = Spot price + cost of carry
Therefore, on increasing the domestic interest rate, the price of forward contract will also rise.
Answer 8
Assume that the risk minimizing cross-hedge ratio (h*) is 1.0 and the correlation coefficient, ρρ(DS, DF), is 1.0. The cash-flow risk per unit, σσh*(π) = 0. σσ(DF) must be equal to (assume it is a forward contract, no marking to market risk)
(a) Zero
Reason: 
 (DS)/  (DF) = 1/1 = 1
It means,  (DF) =  (DS)
 h*(π) = 0 =  (DS) (1 – (1)2)1/2,   (DS) = 0
Therefore,  (DF) = 0
Answer 9
The cost-of-carry for the S&P500 index (SPX) futures
(b) equals all costs and benefits associated with carrying the futures contract to expiration
Reason: Cost-of-carry refers to the cost of holding the asset till the futures contract matures. This could include storage cost, interest paid to acquire and hold the asset, financing costs etc.

Complete post-module assignment for the course Derivatives Markets including futures and options. The attachments are NOT the assignment. It is the in-class exercises/cases and the assignment will be...

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