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Homework Solutions (Options and Futures)
$10.001.Consider a trader who opens a short futures position. The contract size is £62,500, the maturity is six months, and the initial price is $1.50 = £1. The next day, the settlement price is $1.60 = £1. What is the amount of the trader’s gain or loss?
A) Gain of $6,250.
B) Loss of $6,250. (1.6 USD – 1.5 USD = 0.1 USD per 1 EUR loss; 0.1 * 62,500)
C) Gain of $2,604.
D) No gain or loss, since maturity has not arrived.
2. Suppose you wish to speculate on a rise in the value of the euro. If you are correct and the value of the euro does indeed rise in the future, you would profit with
A) a short position in a futures contract on the euro.
B) a long position in a futures contract on the euro.
C) a short position in a forward contract on the euro.
D) None of the above.
3. Explain the basic differences between the operation of a currency forward market and a futures market.
4. A call option:
A) is a contract to buy a certain quantity of a specific underlying asset at a specific price at a specified date in the future.
B) gives the holder the right, but not the obligation, to sell the underlying asset for a stated price over a stated time period.
C) is an exchange-traded contract to buy a certain quantity of a specific underlying asset at a specific price at a specified date in the future.
D) gives the holder the right, but not the obligation, to buy the underlying asset for a stated price over a stated time period.
5. Consider a put option written on €100,000. The strike price is $1.50 = €1.00 and the option premium is $0.02 per euro. What is the theoretical maximum gain on this position?
A) There is unlimited upside potential.
B) $80,000
C) $148,000 (1.50 USD – 0.02 USD = 1.48 USD; 1.48 USD per 1 EUR * 100,000 EUR)
D) $2,000
6. Consider a trader who buys a European call option on euro. The contract size is €62,500, the maturity is six months, and the strike price is $1.50 = €1. At maturity, the settlement price is $1.60 = €1. What is the amount of the trader’s gain or loss?
A) Gain of $6,250. (1.6 USD – 1.5 USD = 0.1 USD per 1 EUR gain; 0.1 * 62,500)
B) Loss of $6,250.
C) Gain of $2,604.
D) No gain or loss, since expiry has not arrived.
7. Consider a put option written on €100,000. The strike price is $1.50 = €1.00 and the option premium is $0.02. At what exchange rate will the buyer of this put option break even?
A) $1.00 = €.667
B) $1.52 = €1.00
C) $1.48 = €1.00 (1.50 USD – 0.02 USD = 1.48 USD per 1 EUR)
D) $1.50 = €1.00
8. What is meant by the terminology that an option is in-, at-, or out-of-the-money?
9. Assume that the Japanese yen is trading at a spot price of 92.04 cents per 100 yen. Further assume that the premium of an American call (put) option with a striking price of 93 is 2.10 (2.20) cents. Calculate the intrinsic value and the time value of the call and put options.
SECTION A Questions and Solutions
$15.00Answer one question from this section. Answer all questions in a separate answer book.
(a) Assume you are a UK-based buyer of New Zealand frozen lamb meat. You have just concluded a deal to buy NZD 5,000,000 worth of lamb meat from New Zealand and you will have to pay in one year’s time. You strictly prefer hedging against fluctuations in the foreign exchange market of NZD against GBP. The GBP interest rate is 2.5% per annum. The NZD interest rate is 5% per annum.
Information on the spot and forward exchange rates quoted against the U.S. Dollar (USD) on 20/03/2014 (retrieved on 21/03/2014 from The Financial Times web page http://markets.ft.com/research/Markets/Currencies) is summarised in the following table:
Currency Spot Rate 12-Month Forward
Rate
New Zealand Dollar
(NZD)
Great Britain Pound
(GBP)
1.1713 NZD/USD 1.2114 NZD/USD
1.6510 USD/GBP 1.6456 USD/GBP
- i. Calculate the spot and one-year forward cross rates of GBP against NZD. Is the New Zealand Dollar selling at a premium or at a discount versus the Great Britain Pound?
- ii. Describe two financial instruments to hedge against exchange rate risk. What is the pound cost of New Zealand lamb for each instrument?
iii. Which of the two hedging mechanisms is preferred? Why?
- iv. What happens if the UK buyer decides not to hedge? Why?
(b) Explain whether and, if so, how covered interest arbitrage opportunities can be exploited. Use the information provided in part (a). Assume that the arbitrageur can borrow up to NZD 5,000,000 or an equivalent amount in GBP.
(a) Suppose an investor is considering setting up a new e-business that consists of selling smartphone applications. Expected cash flows from her new business are for the amount of GBP 20,000 per annum over the period of 10 years, and the yield to maturity is 5%.
- i. As a financial manager, you are expected to tell to the investor how much she could invest in her business to break even. Please provide your valuable customer with a qualified advice.
- ii. Would the present value of the business be higher or lower relative the value calculated in part i if the yield to maturity increases to 10%? Explain your answer.
iii. Assume that in one year’s time, the investor encounters liquidity issues and thus is forced to sell her business. The price that she is offered is GBP 150,000. Calculate the rate of return from year 1 to year 2
(b) Calculate the market value of a perpetuity that pays a coupon of GBP 100. Assume the yield to maturity is 4%. Can the nominal price of a perpetuity be negative? Why?
(c) Explain the role of deflation for project evaluation. Why real rather than nominal cost of borrowing matters for project evaluation?
(d) If the interest rate is 4%, how much would you be willing to pay for a security that pays you GBP 1,000 next year, GBP 2,000 in two years, GBP 3,000 in three years and GBP 4,000 in four years from now? If the market price of a security is GBP 8,000, would you buy or sell it? Why?
Maximize Z = 3×1 + 2×2
$20.00Problem 4. (25 Points)
Solve the following problem graphically (Please be neat). Draw the polytope on the x-y coordinate system (can be done either by hand or computer). Show all intersection of the polytope and identify the point (x,y coordinate) where the objective function is maximized and provide that value.Maximize Z = 3×1 + 2×2
Subject to:
1×1 + 1×2 ≤ 10
8×1 + 1×2 ≤ 24
and
x1, x2 ≥ 0Problem 5. (30 Points)
Work through the simplex method (in algebraic form) step by step to solve the following problem. Show all work and provide the solutions for each variable at every iteration of the simplex.Maximize z = 4×1 + 3×2 + 4×3
Subject to:
2×1 + 2×2 + 1×3 ≤ 20
2×1 + 1×2 + 2×3 ≤ 14
1×1 + 1×2 + 3×3 ≤ 15
and
x1, x2, x3 ≥ 0What is the allowed range of mass flow rates for the water
$1.00Oil Enters a counterflow heat exchanger at 450k with a mass flow rate of 10 kg/s and exits at 350k. A seperate stream of liquid water enters at 20 C, 5 bar. Each stream experiences no significant change in pressure. stray heat transfer with the surroundings of the heat exchanger and kinetic and potential energy effects can be ignored. the specific heat of the oil is constant, c=2 kJ/kg k. if the designer wants to ensure no water vapor is present in the exiting water stream, what is the allowed range of mass flow rates for the water, in Kg/s
Jimmy and Dave: Enemies That Started as Friends (Comparing and Contrasting Mystic River)
$37.50Essay 2: Comparing and Contrasting Mystic River
Purpose: Comparing and contrasting is an important academic skill. It allows writers to draw rich connections between disparate ideas and to hone broad ideas to a sharp focus. But comparing and contrasting also poses a unique set of organizational challenges. In this assignment, you will practice thinking in terms of differences and similarities and presenting these differences and similarities in a balanced and organized way.
Assignment: Write a thesis-driven argument of 5-7 pages in which you compare and/or contrast the novel Mystic River with the film version directed by Clint Eastwood. You should acknowledge and respond to a minimum of two critical (secondary) sources.
Comments: As you shape your comparison / contrast, you should deepen your argument with research. What relevant background can you give about the novel and film? Who else has written about them? Do you agree with them? Disagree? Both?
You should move gradually from a working thesis that aspects of the the novel or film are superior to a more specific thesis that explicitly states your major reasons. We’ll have a thesis workshop in class.
You are charged with evaluating the literature, so do not hesitate to make claims about the quality of the texts you examine, backing up these claims with clear reasons and convincing evidence.
Make sure to be fair and objective when stating an opposing claim. Feel free to concede any points you cannot disprove. Use a “devil’s advocate” position (summarize an imaginary opposing argument as in “A reader might argue that . . . ”) only if you cannot find a real source with an opposing argument. You could present the opposing argument before your refutation (as in a “classical argument”) or after you state and argue for your own position.
Use the library’s indexes and databases rather than Google, Yahoo, or Wikipedia (see the class library page on our Blackboard site for links).
7 pages
MLA 5 References
Calculate the percentage efficiency at rated load
$1.00The following data applies to a 100kW, 250V, 6 pole, 900 RPM,long-shunt, compound DC generator: No-load rotational loss = 3,480WattsArmature resistance = 0.012 ohmsSeries field resistance = 0.008 ohmsShunt field current = 2.6 AAssume a stray-loss equal to 1% of the output. Calculate the %efficiency at rated load.The answer becomes 92.2% but please show the steps arriving to the answer.Determine the net power developed
$1.00
Figure P6.165 shows a simple vapor power plant operating at steady state with water as the working fluid. Data at key locations are given on the figure. The mass flow rate of the water circulating through the components is 109 kg/s. Stray heat transfer and kinetic and potential energy effects can be ignored. Determine the net power developed, in MW. the thermal efficiency. the isentropic turbine efficiency. the isentropic pump efficiency. the mass flow rate of the cooling water, in kg/s. the rates of entropy production, each in kW/K, for the turbine, condenser, and pump. Fig. P6.165
Determine mechanical power developed
$1.00A 40hp, 50Hz, 2300V, 8-pole induction motor is operating at 80% rated load and 6% reduced voltage. The efficiency and power factor for these conditions are 85 and 90% respectively. The combined windage, friction, and stray power losses are 1011W, the rotor conduction losses are 969W, and the stator conductor losses are 1559W. Sketch the power flow diagram, enter values, and determine
(a) mechanical power developed;
(b) shaft speed;
(c) shaft torque;
(d) slip speed;
(e) line current;
(f) core loss
Determine the mass flow rate of the helium, in kg/s
$1.00
Text: Steady-state operating data are provided for a compressor and heat exchanger in Fig. P4.103. The power input to the compressor is 50 kW. As shown in the figure, nitrogen (N2) flows through the compressor and heat exchanger with a mass flow rate of 0.25 kg/s. The nitrogen is modeled as an ideal gas. A separate cooling stream of helium, modeled as an ideal gas with k = 1.67, also flows through the heat exchanger. Stray heat transfer and kinetic and potential energy effects are negligible. Determine the mass flow rate of the helium, in kg/s.
