Kenneth R. Szulczyk
- A call options give the right to the contract holder to buy an asset at the stated price, while
the put option gives the holder the right to sell at the price in the contract. - An option's premium is affected by the volatility of an asset's price on the spot market, the
magnitude of the strike price, the maturity of the option, and interest rates. - Your premium equals: $0.5 1 , 000 10 =$ 5 , 000. You could exercise the option and pay $75
for petroleum or buy the petroleum from the spot market at $50. Consequently, you would
buy the oil from the spot market. - Premium equals: $0.01 100 100 =$ 100. Farmer could sell his corn for $6 per bushel on the
spot market, or exercise the put option and sell his corn for $5 per bushel. Thus, farmer
would sell his corn to the spot market. - Problem with the derivatives based on the stock market index or the volatility index is no
commodity, or financial instrument is traded. Instead, the investor gambles on future index
numbers. Unfortunately, the company issuing the index derivative could have a massive
exposure if the stock market rapidly drops during a financial crisis. - Credit Default Swaps are a form of insurance. Issuer guarantees payment if a mortgage fund
or company bankrupts, causing their bonds to plummet in value. Thus, risk-averse investors
commit to speculative grade investments if they can buy this insurance. - We could not avoid this crisis. However, the impact could have been less severe.
Government could tighten laws that forced mortgage companies to verify homeowners'
income. Government could pass laws that prevented the layering of CDS contracts. - Coupon payments are $1.5 million and 2.2 million euros respectively. Implicit exchange rate
is $1.5 million ÷ 2.2 million euros, which equals $0.682 per euro. Present values of the cash
flows are:
ܸܲ=
ଶ.ଶ €
ଵା.ଷ +
ଵଵ €ାଶ.ଶ €
(ଵା.ଷ)మ =^107.^9 ݈݈݊݅݅݉^ €^
ܸܲௗ௦௧=
.ହ
ଵା.ଶହ +
ା .ହ
(ଵା.ଶହ)మ =$98.^1 ݈݈݊݅݅݉^
We calculate the Swap's present value as:ܽݓܵ ݁ݑ݈ܸܽ=ܸܲ∙ܵ−ܸܲௗ௦௧
ܽݓܵ ݁ݑ݈ܸܽ= 107. 9 ݈݈݊݅݅݉ €∙