Please complete all parts of the assignment individually and submit in Word document showing all analyses and calculations.
1. Suppose you purchase a Treasury bond futures contract at a price of 95 percent of the face value, $100,000.
a. What is your obligation when you purchase this futures contract?
b. Assume that the Treasury bond futures price falls to 94 percent. What is your loss or gain?
c. Assume that the Treasury bond futures price rises to 97. What is your loss or gain?
2. Tree Row Bank wishes to take a position in Treasury bond futures contracts, which currently have a quote of 95-040. Tree Row thinks interest rates will go up over the period of investment.
a. Should the bank go long or short on the futures contracts?
b. Calculate the net profit to Tree Row Bank if the price of the futures contracts decreases to 94-280.
c. Calculate the net profit to Tree Row Bank if the price of the futures contracts increases to 95-210.
3. Suppose an investor has a $1 million long position in T-bond futures. The investor’s broker requires a maintenance margin of 4 percent, which is the amount currently in the investor’s account.
a. Suppose also that the value of the futures contract drops by $50,000 to $950,000. How much will the investor be required to pay his broker to maintain his margin? What will be the value of the investor’s account balance (assuming no excess) as a result of the price drop?
b. If the futures contract drops in value the next day by another $40,000, to $910,000, how much will the investor be required to pay his broker to maintain his margin? What will be the value of the investor’s account balance (assuming no excess) as a result of the price drop?
c. If, on day 3, the futures contract increases in value by $65,000, to $975,000, how much will the investor be able to withdraw from his account to maintain his margin? What will be the value of the investor’s account balance (assuming no excess) as a result of the price drop?
d. Suppose, instead, an investor has a $1 million short position in T-bond futures and that the value of the futures contract increases by $50,000 to $1,050,000. How much will the investor be required to pay his broker to maintain his margin? What will be the value of the investor’s account balance (assuming no excess) as a result of the price drop?
4. You have taken a long position in a call option on IBM common stock. The option has an exercise price of $176 and IBM’s stock currently trades at $180. The option premium is $5 per contract.
a. How much of the option premium is due to intrinsic value versus time value?
b. What is your net profit on the option if IBM’s stock price increases to $190 at expiration of the option and you exercise the option?
c. What is your net profit if IBM’s stock price decreases to $170?
5. You have written a call option on Walmart common stock. The option has an exercise price of $74, and Walmart’s stock currently trades at $72. The option premium is $1.25 per contract.
a. How much of the option premium is due to intrinsic value versus time value?
b. What is your net profit if Walmart’s stock price decreases to $70 and stays there until the option expires?
c. What is your net profit on the option if Walmart’s stock price increases to $80 at expiration of the option and the option holder exercises the option?
6. Given the stock with the price of £100 and the standard deviation of its returns of 20%, risk-free rate of 5%, and 180 days to maturity, calculate the call and put option prices with the strike price of £110 using the the Black and Scholes option pricing model.
Rubric
Finance Homework
Finance Homework
Criteria Ratings Pts
This criterion is linked to a Learning OutcomeCompleteness of the work
40 pts
Fully complete
Work is fully complete, student follows all guidelines on the format of the assignment, workings, and necessary reference material.
36 pts
Fully Complete but minor omissions
Work is fully complete, but student doesn’t follows some guidelines on the format of the assignment, workings, and necessary reference material.
32 pts
Fully complete but major omissions
Work is fully complete, but student doesn’t follows most of the guidelines on the format of the assignment, workings, and necessary reference material.
28 pts
Mostly complete
Work is mostly complete and/or student doesn’t follows some guidelines on the format of the assignment, workings, and necessary reference material.
24 pts
Somehow complete
Work is somehow complete and/or student doesn’t follows some guidelines on the format of the assignment, workings, and necessary reference material.
20 pts
Work is attempted but not complete
Student attempts all parts of the assignment but does not complete most of the work, and/or student doesn’t follows most of the guidelines on the format of the assignment, workings, and necessary reference material.
16 pts
Some parts not attempted and mostly incomplete
Work is not complete, less than half of the assignment is attempted, student doesn’t follow guidelines on the format of the assignment, workings, and necessary reference material.
12 pts
Most parts not attempted
Work is not complete, less than third of the assignment is attempted, student doesn’t follow guidelines on the format of the assignment, workings, and necessary reference material.
8 pts
Majority not attempted
Work is not complete, less than quarter of the assignment is attempted, student doesn’t follow guidelines on the format of the assignment, workings, and necessary reference material.
0 pts
No Marks
40 pts
This criterion is linked to a Learning OutcomeRelevant Analysis
20 pts
Full Marks
All analysis is relevant and uses correct tools and techniques
18 pts
Very good level
All analysis is relevant and uses correct tools and techniques but minor areas to improve
16 pts
Good level
All analysis is relevant and uses correct tools and techniques but few areas to improve
14 pts
Satisfactory level
Analysis is mostly relevant and mostly uses correct tools and techniques but some areas to improve
12 pts
Passing level
Analysis is somehow relevant and some correct tools and techniques but substantial areas to improve
10 pts
Failing
Analysis is mostly irrelevant and substantial areas to improve
8 pts
Inadequte
Analysis is greatly irrelevant
4 pts
Mostly missing
Analysis is mostly missing/non-existent
0 pts
No Marks
20 pts
This criterion is linked to a Learning OutcomeDepth of Analysis
20 pts
Full Marks
All analysis carried out to the greatest depth, with excellent detail and insights.
18 pts
Very good level
All analysis carried out to the good depth, with very good detail and insights.
16 pts
Good level
All analysis carried out to the good depth, with good detail and insights.
14 pts
Satisfactory level
All analysis carried out to the satisfactory level, with satisfactory detail and insights.
12 pts
Passing level
Showing some level of analysis, with some detail and insights.
10 pts
Failing
Limited level of analysis.
8 pts
Inadequate
Hardly any level of analysis.
4 pts
Mostly missing
No analysis.
0 pts
No Marks
20 pts
This criterion is linked to a Learning OutcomeCalculation part
20 pts
Full Marks
18 pts
Very good
Minor errors
16 pts
Good
Few minor or one major error.
14 pts
Satisfactory
Few minor/major errors.
12 pts
Passing
Several major/minor errors.
10 pts
Failing
Some parts incomplete/mostly incorrect.
8 pts
Inadequate
Mostly incomplete/mostly wrong calculations
0 pts
No Marks
20 pts
Total Points: 100
