ACF 103 Revision Qns Solns 20141

Use of
Financial
Derivatives,
option
pricing
models, etc.
DE LUNA
15.5 THE USE OF
FINANCIAL
DERIVATIVES,
INCLUDING THE BLACK-
SCHOLES OPTION-
PRICING MODEL
PART 1
USE OF FINANCIAL
DERIVATIVES
-a financial contract
that derives its value 1) To Hedge Risk 2) For Speculation, motivated by
from an underlying profit
asset
Four Types of
Derivative
1) Forwards
2) Futures
3) Options
4) Swaps
1) Find The Range Of Values At Expiration --------------
--------------------------------------------------------------------- OPTION
Ending stock price Strike Price Value Ending Option Value© PRICING
--------------------------------------------------------------------- MODELS
S1 Exercise price If lower than 0, zero
---------------------------------------------------------------------
S2 Exercise price Two Popular Approaches:
---------------------------------------------------------------------
Range -difference1- -difference2-
1) Binomial OPM
------------------------------------------------------------
2) Black-Scholes OPM
2) Equalize The Range Of Payoffs For The Stock And For
The Option ------------------------------------------------------- ☞ An OPM based on a
Ending stock Ending Value Ending Option
--------------------------------------------------------------------- riskless hedge with two
price X of stock Value(V)
scenarios for the value of
---------------------------------------------------------------------
(diff2/diff2)
the underlying asset.
---------------------------------------------------------------------
S1 P1 If lower than 0,
zero ☞ Accurate, iterative,
------------------------------------------
S2 P2 lengthy, time consuming
Rang -difference- -difference-
e
3) Create A Riskless Hedge Investment-------------------------
Ending X Ending Ending Value Ending Total Value
--------------------------------------------------------------------------
stock price (diff2/diff1) Value of of option in of the Portfolio
OPTION
--------------------------------------------------------------------------
stock in portfolio(V) PRICING
portfolio MODELS
--------------------------------------------------------------------------
S1 P1 (1) Two Popular Approaches:
--------------------------------------------------------------------------
S2 P2 (1)
----------------- 1) Binomial OPM
4) Pricing The Option 2) Black-scholes OPM
1) Value Of Portfolio
2) PV Of Riskless Portfolio ☞ An OPM based on a
riskless hedge with two
3) Cost Of The Stock In The Portfolio (Current Stock Price Per
scenarios for the value of
Share X Share In Portfolio) the underlying asset.
4) Price Of Option
☞ Accurate, iterative,
Price Of Option=cost Of Stock-pv Of Portfolio lengthy, time consuming
Stewart Enterprises’ Current Stock Price Is $60 Per Share. Call OPTION
Options For This Stock Exist That Permit The Holder To PRICING
MODELS
Purchase One Share At An Exercise Price Of $50. These Options
Two Popular Approaches:
Will Expire At The End Of 1 Year, At Which Time Stewart’s
Stock Will Be Selling At One Of Two Prices, $45 Or $70. The 1) Binomial OPM
Risk-free Rate Is 7%. As An Assistant To The Firm’s 2) Black-Scholes OPM
Treasurer, You Have Been Asked To Perform The Following
☞ An OPM based on a
Tasks To Arrive At The Value Of The Firm’s Call Options.
riskless hedge with two
scenarios for the value
of the underlying asset.
☞ Accurate, iterative,
lengthy, time consuming
OPTION PRICING
MODELS
Two Popular Approaches:
1) Binomial OPM
2) Black-scholes OPM
☞ An OPM that calculates

as the difference bet. The
expected PV of the
terminal stock price and
the PV of the exercise price
Assume That You Have Been Given The Following
Information On Purcell Industries:
Current Stock Price=$15
OPTION PRICING
Exercise Price Of Option=$15 MODELS
Time To Maturity Of Option=6 Mos. Two Popular Approaches:
Risk-free Rate=10% 1) Binomial OPM
Variance Of Stock Price=0.12
2) Black-scholes OPM
D1=0.32660
☞ An OPM that calculates
D2=0.08165
as the difference bet. The
N(d1)=0.62795 expected PV of the
N(d2)= 0.53252 terminal stock price and
Using The Black-scholes Model. What Is The Value Of The the PV of the exercise price
Option
DERIVATIVE
REGULATIONS
AND
ACCOUNTING
STANDARDS
PART 2
OVERVIEW OF PART 2
The OTC Derivatives Regulators' Forum (ODRF) Was Launched In
September 2009 To Provide Authorities Interested In OTC Derivatives
Markets And Their Supporting Infrastructures With A Means To
Cooperate, Exchange Views, And Share Information On OTC
Derivatives Central Counterparties (Ccps) And Trade Repositories
(Trs).
One Of The Authorities Currently Involved In The Otc
Derivatives Regulators' Forum Are Japan, Korea, Greece And Us
Accounting Standards For Derivatives Are IAS 39, IFRS 9,
FAS133 And Others

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☞ An OPM that calculates

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