FIN2022 - Futures and Options
In-class Test 15 December 2020
11:00 - 13:30
PART 1: Multiple Choice (50 Points)
Answer all questions. The Quiz is found in Canvas, under “Quizzes” as PART 1 MC.
Deadline: 12:00h (12:15h ISSA)
10 T/F questions, 2 points each, 15 ABCD questions, 2 points each, Total: 50 points
(roughly 50minutes time required)
• one question at a time
• questions are locked after answering
• total points are adjusted for guessing factor
• have your calculator ready
PART 2: Essay Questions (30 Points)
Open Microsoft Word.
Save your word document as “lastname_firstname_studentnumber.docx,” for example:
“klein_tony_12345678.docx.”
Answer all questions in writing. Do not include hand-written solutions. Save your document
from time to time.
When finished, save and upload the correct file in the TurnItIn Plugin found under PART
2 Essay Answers.
Deadline 13:30h (14:00h ISSA)
Answer all sub-questions in full sentences or sensible bullet point form. 150 words maximum
per question.
2.1) Describe the value of a futures contract in t=0. Explain your answer. (6)
2.2) What is Delta for options, how do you calculate it, and why is it important for portfolio
strategies? (8)
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2.3) What is a payoff profile? Explain the term “net payoff profile” with respect to options.
(6)
2.4) Discuss similarities and differences of a long Put and a short forward contract. Give
examples of applications of these instruments and link these examples to the three
investment motives. (7)
2.5) Why was the CRR model introduced after the BSM model? (3)
PART 3 Calculations and Open Answers (40 Points)
Deadline 13:30 (14:00 ISSA)
3.1 (24 Points)
Enter your solutions in the Canvas Quiz PART 3 Calculations 3.1
Round to 4 decimal places for d and N(d) and to 2 decimal places for prices. Use the
provided look up table for N(d) OR use the NORM.DIST(d,0,1,1) function in Micro-
soft Excel.
Answer the following question:
a) What is the intrinsic value and the time value of an option?
3 Points, open text answer, max 75 words
A so-called “Strangle strategy” consists of a long Call with exercise price KCall and long Put
option with exercise price KPut and for this strategy, it holds that KPut < KCall . You apply
this strategy on a stock with the following properties:
• Current market price: S0 = 20
• Volatility: σ = 25%
• Risk free interest rate r = x.y% p.a.
The last two digits of your student number determine the risk free interest rate.
For example, if your student number is 40123456, the last two digits are x = 5 and y = 6,
and the risk-free interest rate would be r = 5.6%.
If your student number ends with “00,” apply r = 1.0%.
You invest in this strategy for T = 12 months.
b) What is your student number? (0 Points)
c) What interest rate are you applying? (0 Points)
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d) Use the BSM to calculate the price of a Call option with KCall = 22.
4 Points, enter the price as numbers
e) Calculate the price of a Put option with KPut = 18.
4 Points, enter the price as numbers
f) Calculate the intrinsic and time value for both options.
3 Points, text/numbers answer
g) Discuss the value of this option strategy at maturity if the price of the underlying
does not change. Make use of the concepts of intrinsic and time value. How can you
measure the change in time value?
5 Points, text answer, max. 100 words
h) When does this strategy produce positive net payoffs? For what situation is this stra-
tegy useful?
5 Points, text answer, max 100 words
3.2 (16 Points)
Enter your solutions in the Canvas Quiz PART 3 Calculations 3.2
Round values of q to 4 decimal places and prices to 2 decimal places.
A three-period binomial tree BT3 is defined by the following parameter vector:
(s0, r, d, u, n) = (17, 0.03, 0.95, 1.08, 3).
Let r be the risk free rate per period.
Answer the following questions:
a) Calculate the risk-neutral probability of a downward movement.
2 Points, MC Answer
b) Calculate the payoff profile of a European Call option with exercise price K = 12.
2 Points, MC Answer
c) Price the European Call option of b).
3 Points, MC Answer
d) What is the value of the Call option, if the stock realised an upward movement from
t = 0 to t = 1?
4 Points, MC Answer
e) Price an American Put option with exercise price K = 17.50.
5 Points, MC Answer
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