Financial Derivatives
Assignment 2
1、It is July 30, 2000. The cheapest-to-deliver bond in a September 2000 Treasury
bond futures contract is a 13% coupon bond, and the delivery is expected to be
made on September 30, 2000. Coupon payments on the bonds are made on
February 4 and August 4 each year. The term structure is flat and the rate of
interest with semiannual compounding is 12%. The conversion factor for the bond
is 1.5. The current quoted bond price is $110. Calculate the quoted futures price
for the contract. (Omitted)
2、It is June 25, 1999. The futures price for the June 1999 CBOT bond futures
contract is 118-23.
a. Calculate the conversion factor for a bond maturing on January 1, 2015,
paying a coupon of 10%.
b. Calculate the conversion factor for a bond maturing on October 1, 2020,
paying a coupon of 7%.
c. Suppose that the quoted prices of the bonds in a and b at 144.00 and
112.00 respectively. What bond is cheaper to deliver?
d. Assuming that the cheapest-to-deliver bond is actually delivered, what is
the cash price received for the bond?
3、The Treasurer of a corporation is trying to choose between the use of options and
forward contracts to hedge the corporation’s foreign exchange risk. Discuss the
advantages and disadvantages of each.
4、Consider an exchange-traded call option contract to buy 500 shares with an
exercise price of $40 and maturity in 4 months. Explain how the terms of option
contract changes when there is
a. A 10% stock dividend.
b. A 10% cash dividend.
c. A 4 for 1 stock split.
5、What is the lower bound for the price of a two-month European put option on a
non-dividend paying stocks when the stock price is $58, the strike price is $65,
and risk free rate is 5% per annum?
6、Call options on a stock are available with strike prices of $15, $17.5, and $20 and
expiration dates in three months. Their prices are $4, $2, and $0.5 respectively.
Explain how the options can be used to create a butterfly spread. Construct a table
showing how profit varies with stock price for the butterfly spread. (omitted)
7、Three put options on a stock have the same expiration date and strike prices of
$55, $60, and $65. The market prices are $3, $5, and $8 respectively. Explain how
a butterfly spread can be created. Construct a table showing the profit from the
strategy. For what range of stock prices would the butterfly spread lean to a loss?
(omitted)