Capital Markets and Derivatives – Construct a Payoff Diagram – Finance Assignment Help

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Assignment Task :
QUESTION 1
a) Suppose you own 10,000 shares that are worth £50 each. 

Evaluate how put options can be used to provide you with insurance against a decline in the value of your holding over the next four months.

Construct a payoff diagram to illustrate your answer.

b) Suppose that zero interest rates with continuous compounding are as follows:
Maturity
 
Calculate forward interest rates for the second, third, fourth, and fifth years.7/8.
 
QUESTION 2
Consider a long forward contract to purchase a coupon-bearing bond whose current price is £650. We will suppose that the forward contract matures in 9 months, and a coupon payment of £28 is expected after 4 months. We suppose that the 4-month and 9-month risk-free interest rates (continuously compounded) are 3% and 4% per annum.
a) Calculate the forward price.
b) Is there an arbitrage opportunity if the forward price is relatively low at £600? List the possible arbitrage actions for:
i) Now.

In 4 months; and

iii) In 9 months.
c) Critically evaluate why the futures prices of consumption assets are difficult to calculate.
 
 
QUESTION 3
Buffelhead’s stock price is £220 and could halve or double in each six-month period (equivalent to a standard deviation of 98%). A one-year call option on Buffelhead’s has an exercise price of £165. The interest rate is 21% a year.
a) Calculate the value of the Buffelhead’s call.
b) Calculate the option delta for the second six months if:
i) the stock price rises to £440; and
ii) the stock price falls to £110.
c) Critically Evaluate how the call option delta vary with the level of the stock price and explain why.
 
 
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