7SSMM704 Financial Derivatives – Mock Mid Term Test

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7SSMM704  Financial Derivatives - Mock Mid Term Test

SECTION A - Answer All Questions

Question 1

What is a Call Option?

[10 marks]

Question 2

What is the definition of Delta when talking about option prices?

[10 marks]

Question 3

Define Vega in the context of option pricing.

[10 marks]

Question 4

Using Put Call Parity, a protective call is equivalent to what simple options position?

[10 marks]

SECTION B - Answer All Questions

Question 5

The spot price of an underlying is $100 and its volatility is 20%. The interest rate is 5% with continuous compounding. What is the fair price for a three- month call option with a strike price of $105? Explain in details the procedure you use.

[20 marks]

Question 6

Discuss how you would use a two-step binomial tree to evaluate a European call option.

[20 marks]

Question 7

A trader buys a call option with a strike price Kc  = $50 and a put option with a strike price Kp  = $45. The call and the put options have the same maturity. The price of the call option is c = $5 and the price of the put option is p = $6. Draw a diagram of the trader’s profit as a function of the price of the underlying ST. What is the maximum loss the trader can incur? What is the maximum profit the trader can make?

[20 marks]




2024-03-07