Download Stock Option Contract - Economics of Financial Markets - Exam and more Exams Financial Accounting in PDF only on Docsity! Ollscoil na hÉireann, Gaillimh GX_____ National University of Ireland, Galway Semester II Examinations 2010 Exam Code(s) 4FM2 Exam(s) 4th B.Sc. in Financial Mathematics and Economics Module Code(s) EC410 Module(s) Economics of Financial Markets Seminar I Paper No. 1 Repeat Paper Special Paper External Examiner(s) Prof. C. Ryan Internal Examiner(s) Prof. J. McHale C. Twomey Instructions: EC410 Students Answer any 3 questions If you attempt MORE THAN the correct number indicate clearly those questions which you wish to be graded. The use of calculators is permitted - programmable calculators may not be used. Duration 2hrs No. of Answer Books 1 Requirements: Statistical Tables - Yes Department(s) Economics Answer 3 Questions – All questions are worth the same marks 1. (a) A stock option contract can be characterised as a zero-sum game between the buyer and the seller about the short-term price moves in the underlying equity. Explain. (9 marks) (b) Holding all else equal, indicate how each of the following unexpected events will increase, decrease, or have no effect on the time value and/or minimum expiration value of a given outstanding call option: (i) decrease in the underlying share’s dividend, (ii) decrease in the underlying share's volatility, (iii) decline in the underlying share's price. (9 marks) (c) Take the following options data from the Financial Times on 11th February, 2011. CALLS PUTS Option Feb Mar Apr Feb Mar Apr Lloyds Bank 64 2.5 4 5 0.75 2.5 3.25 (*65.80) 68 0.75 2 3 2.75 4.25 5.25 Man Group 300 10 16.25 20.25 2.75 8.25 11.5 (*307.40) 310 4.5 10.75 14.75 7.25 13 16.75 M & S 370 6.25 13.25 18 5 11.5 15.75 (*371.60) 380 2.5 9.25 13.25 11 17.25 21.5 i. An investor wishes to use Man Group Mar call options to construct a bear spread. Under what circumstances would an investor wish to use a bear spread? Using a payoff matrix and a diagram, illustrate the net profit or loss to the investor from this strategy at maturity. ii. When would it be appropriate for an investor to use a strangle? Suppose you wish to create a strangle for Lloyds Bank using Apr options. Using a payoff matrix and a diagram, illustrate the net profit or loss to the investor from this strategy at maturity. (15 marks) 2. Over the past 25 years there have been a number of high-profile derivatives related losses. For any two cases with which you are familiar: (i) Compare and contrast the trading strategies or actions primarily responsible for the losses in each case and (ii) Discuss the main lessons that you believe should be learned from the cases in question. (33 marks)
