Solutions Manual - Introduction to Derivative Markets 2026
Release Daniel Brown and John C. Miller | 1st Edition
ISBN – 9781265700829 (Complete Chapters – 1 to 15)
Chapter 1 EOC Questions & Problems
1.1 What Is a Derivative: Parts a–c
Using the CME website, identify key contract specifications of the Gold (GC) futures
contract.
Explanation:
The key contract specifications of the Gold (GC) futures contract are:
a) The contract unit is 100 troy ounces.
b) The price quotation is in US dollars and cents per troy ounce.
c) The settlement method is deliverable.
1.1 What Is a Derivative: Parts d–f
Key contract specifications of the Gold (GC) futures contract are
Explanation:
a) One contract represents: 100 × $3,114.30 = $311,430.
b) The value of gold traded on March 28, 2025, was: 100 × 210,491 × $3,114.30 =
$65,553,212,130.
c) The value of gold that the open interest represents is: 100 × 377,252 × $3,114.30 =
$117,487,590,400.
1.2 What Is a Derivative
Using the rulebook on the CME website, identify key characteristics of the gold deliverable
through the Gold (GC) futures contract. Try to answer “what, when, where and how.”
Explanation:
This information can be found in the CME rulebook chapter 113.
a) What: 100 troy ounces of gold with a weight tolerance of 5% that assays to a
minimum of 995 fineness. It can be one 100 troy ounce bar or three one kilo bars
with the weight, fineness, bar number, month and year of production, and brand
mark clearly incised on the bar.
b) Where: Gold must be delivered to an exchange approved depository for gold by an
exchange approved carrier.
©
, c) How: Delivered directly from an exchange approved producer of gold, an exchange
approved assayer for gold, directly from another exchange approved depository of
gold.
d) When: Settled by delivery on any business day during the delivery month. The last
day of trading for the contract is the third to last business day of the contract month.
1.3 What Is a Derivative: Parts a–c
Using the CME website, identify key contract specifications of the Ether (ETH) futures
contract.
Explanation:
The contract specifications are:
a) The Ether futures contract unit is 50 ether and the micro Ether futures contract unit
is 0.1 ether.
b) The price quotation is in US dollars and cents per ether.
c) The contracts are financially settled. No delivery of ether takes place.
1.3 What Is a Derivative: Parts d–f
Two Ether futures contracts are listed on the CME—Ether futures and Micro Ether futures.
Key contract specifications are:
• Contract unit: 50 ether for the ether futures and 0.1 ether for the Micro Ether futures.
• Price quotation units: US dollars and cents per ether.
Explanation:
a) The value of Ether for the Ether futures is: 50 × 8,772 × $1,877.50 = $823,471,500.
The value of Ether for Micro Ether futures is: 0.1 × 47,428 × $1,877.50 = $8,904,607.
b) The Ether futures contract trades more value of Ether than the micro Ether futures.
c) The CME lists both contracts, as the Ether futures is too big for many smaller
investors.
1.4 What Is a Derivative
Ether futures settle against the CME CF Ether Reference Rate. How is this reference rate
designed and published?
Explanation:
The CME CF Ether Dollar Reference Rate is a daily reference rate of the US dollar price of
one Ether as of 4pm London time. It is a volume weighted average of trades across major
Ether spot exchanges and is used to settle the Ether futures contracts. It is published by
the CME.
©
,1.5 Size of the Derivatives Market
Two Ether futures contracts are listed on the CME—Ether futures and Micro Ether futures.
Key contract specifications are:
• Contract unit: 50 ether for the ether futures and 0.1 ether for the Micro Ether futures.
• Price quotation units: US dollars and cents per ether.
Explanation:
The multiplier for the E-mini S&P 500 futures contract is $50 per index point. To calculate
parts a and b, multiply the settlement price by the traded volume or open interest and
multiply by $50. The results for a and b are in Error! Reference source not found.. The
June contract is the most liquid and actively traded.
Contract Month Traded Volume Value Open Interest Value
June 2025 $343,547,059,325.00 $595,350,353,337.50
September 2025 $2,645,920,475.00 $24,316,726,225.00
December 2025 $19,665,750.00 $1,678,849,950.00
Total $346,212,645,550.00 $621,345,929,512.50
1.6 Market Participants
What is the dijerence between a hedger and a speculator?
Explanation:
A hedger typically has a position whose risk they are trying to manage. A speculator is
entering into the market trying to profit from a specific view.
1.7 Market Participants
What is an arbitrage opportunity?
Explanation:
An arbitrage opportunity is the potential to profit from the market without taking any risk.
1.8 Market Participants
What is the dijerence between profit opportunities sought by a speculator and those
sought by an arbitrageur?
Explanation:
©
, A speculator tries to profit by taking a view on how the market might change. If they are
wrong, then they typically lose money. An arbitrageur tries to exploit mispricing in the
market. They are trying to make money without taking any risk.
1.9 Market Participants
Can dealers be arbitrageurs?
Explanation:
Dealers can be arbitrageurs. Their understanding of pricing can help them identify arbitrage
opportunities created by other market participants.
1.10 Risk and Derivatives Pricing
For the option described in Example 1.8, what would be its payoj if Apple shares ended at
$215, $240, or $280 on April 4, 2025? What would be your return on investment for each of
these prices?
Explanation:
The initial investment was $3,950. The investor will make $100 per dollar that Apple shares
end above $217.50 on April 4, 2025. The value of the payoj and returns is given in Table 0.1.
Table 0.1:
Final Apple Dollar Value Return
Share Price
$215 $0 $0 − $3,950
= −100%
$3,950
$240 100 × ($240 − $217.50) $2,250 − $3,950
= $2,250 = −43%
$3,950
$280 100 × ($280 − $217.50) $6,250 − $3,950
= $6,250 = 58%
$3,950
1.11 Risk and Derivatives Pricing
Review the option in Example 1.8. Is the option described there riskier than buying Apple
shares? Given your answer, what would you expect this implies about the expected return
from buying options compared to buying Apple shares?
Explanation:
The option is riskier. If you invest in the shares and the shares end at $210, your return is
$210 × 100 − $217.90 × 100
= −3.60%
$217.90 × 100
©
Release Daniel Brown and John C. Miller | 1st Edition
ISBN – 9781265700829 (Complete Chapters – 1 to 15)
Chapter 1 EOC Questions & Problems
1.1 What Is a Derivative: Parts a–c
Using the CME website, identify key contract specifications of the Gold (GC) futures
contract.
Explanation:
The key contract specifications of the Gold (GC) futures contract are:
a) The contract unit is 100 troy ounces.
b) The price quotation is in US dollars and cents per troy ounce.
c) The settlement method is deliverable.
1.1 What Is a Derivative: Parts d–f
Key contract specifications of the Gold (GC) futures contract are
Explanation:
a) One contract represents: 100 × $3,114.30 = $311,430.
b) The value of gold traded on March 28, 2025, was: 100 × 210,491 × $3,114.30 =
$65,553,212,130.
c) The value of gold that the open interest represents is: 100 × 377,252 × $3,114.30 =
$117,487,590,400.
1.2 What Is a Derivative
Using the rulebook on the CME website, identify key characteristics of the gold deliverable
through the Gold (GC) futures contract. Try to answer “what, when, where and how.”
Explanation:
This information can be found in the CME rulebook chapter 113.
a) What: 100 troy ounces of gold with a weight tolerance of 5% that assays to a
minimum of 995 fineness. It can be one 100 troy ounce bar or three one kilo bars
with the weight, fineness, bar number, month and year of production, and brand
mark clearly incised on the bar.
b) Where: Gold must be delivered to an exchange approved depository for gold by an
exchange approved carrier.
©
, c) How: Delivered directly from an exchange approved producer of gold, an exchange
approved assayer for gold, directly from another exchange approved depository of
gold.
d) When: Settled by delivery on any business day during the delivery month. The last
day of trading for the contract is the third to last business day of the contract month.
1.3 What Is a Derivative: Parts a–c
Using the CME website, identify key contract specifications of the Ether (ETH) futures
contract.
Explanation:
The contract specifications are:
a) The Ether futures contract unit is 50 ether and the micro Ether futures contract unit
is 0.1 ether.
b) The price quotation is in US dollars and cents per ether.
c) The contracts are financially settled. No delivery of ether takes place.
1.3 What Is a Derivative: Parts d–f
Two Ether futures contracts are listed on the CME—Ether futures and Micro Ether futures.
Key contract specifications are:
• Contract unit: 50 ether for the ether futures and 0.1 ether for the Micro Ether futures.
• Price quotation units: US dollars and cents per ether.
Explanation:
a) The value of Ether for the Ether futures is: 50 × 8,772 × $1,877.50 = $823,471,500.
The value of Ether for Micro Ether futures is: 0.1 × 47,428 × $1,877.50 = $8,904,607.
b) The Ether futures contract trades more value of Ether than the micro Ether futures.
c) The CME lists both contracts, as the Ether futures is too big for many smaller
investors.
1.4 What Is a Derivative
Ether futures settle against the CME CF Ether Reference Rate. How is this reference rate
designed and published?
Explanation:
The CME CF Ether Dollar Reference Rate is a daily reference rate of the US dollar price of
one Ether as of 4pm London time. It is a volume weighted average of trades across major
Ether spot exchanges and is used to settle the Ether futures contracts. It is published by
the CME.
©
,1.5 Size of the Derivatives Market
Two Ether futures contracts are listed on the CME—Ether futures and Micro Ether futures.
Key contract specifications are:
• Contract unit: 50 ether for the ether futures and 0.1 ether for the Micro Ether futures.
• Price quotation units: US dollars and cents per ether.
Explanation:
The multiplier for the E-mini S&P 500 futures contract is $50 per index point. To calculate
parts a and b, multiply the settlement price by the traded volume or open interest and
multiply by $50. The results for a and b are in Error! Reference source not found.. The
June contract is the most liquid and actively traded.
Contract Month Traded Volume Value Open Interest Value
June 2025 $343,547,059,325.00 $595,350,353,337.50
September 2025 $2,645,920,475.00 $24,316,726,225.00
December 2025 $19,665,750.00 $1,678,849,950.00
Total $346,212,645,550.00 $621,345,929,512.50
1.6 Market Participants
What is the dijerence between a hedger and a speculator?
Explanation:
A hedger typically has a position whose risk they are trying to manage. A speculator is
entering into the market trying to profit from a specific view.
1.7 Market Participants
What is an arbitrage opportunity?
Explanation:
An arbitrage opportunity is the potential to profit from the market without taking any risk.
1.8 Market Participants
What is the dijerence between profit opportunities sought by a speculator and those
sought by an arbitrageur?
Explanation:
©
, A speculator tries to profit by taking a view on how the market might change. If they are
wrong, then they typically lose money. An arbitrageur tries to exploit mispricing in the
market. They are trying to make money without taking any risk.
1.9 Market Participants
Can dealers be arbitrageurs?
Explanation:
Dealers can be arbitrageurs. Their understanding of pricing can help them identify arbitrage
opportunities created by other market participants.
1.10 Risk and Derivatives Pricing
For the option described in Example 1.8, what would be its payoj if Apple shares ended at
$215, $240, or $280 on April 4, 2025? What would be your return on investment for each of
these prices?
Explanation:
The initial investment was $3,950. The investor will make $100 per dollar that Apple shares
end above $217.50 on April 4, 2025. The value of the payoj and returns is given in Table 0.1.
Table 0.1:
Final Apple Dollar Value Return
Share Price
$215 $0 $0 − $3,950
= −100%
$3,950
$240 100 × ($240 − $217.50) $2,250 − $3,950
= $2,250 = −43%
$3,950
$280 100 × ($280 − $217.50) $6,250 − $3,950
= $6,250 = 58%
$3,950
1.11 Risk and Derivatives Pricing
Review the option in Example 1.8. Is the option described there riskier than buying Apple
shares? Given your answer, what would you expect this implies about the expected return
from buying options compared to buying Apple shares?
Explanation:
The option is riskier. If you invest in the shares and the shares end at $210, your return is
$210 × 100 − $217.90 × 100
= −3.60%
$217.90 × 100
©
