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Solution manual- Options, Futures, and
Other Derivatives 11th Edition -John Hull
(Author)
, Stuvia.com - The Marketplace to Buy and Sell your Study Material
Table Of Contents
1 (9)
Introduction
Mechanics of Futures Markets 10 (5)
Hedging Strategies Using Futures 15 (5)
Interest Rates 20 (7)
Determination of Forward and Futures Prices 27 (7)
Interest Rate Futures 34 (6)
Swaps 40 (8)
Mechanics of Options Markets 48 (8)
Properties of Stock Options 56 (6)
Trading Strategies Involving Options 62 (6)
Binomial Trees 68 (9)
Wiener Processes and Ito's Lemma 77 (5)
The Black--Scholes--Merton Model 82 (12)
Options on Stock Indices, Currencies, and Futures Contracts 94 (15)
The Greek Letters 109(11)
Volatility Smiles 120(7)
Basic Numerical Procedures 127(16)
Value at Risk 143(5)
Estimating Volatilities and Correlations 148(5)
Credit Risk 153(7)
Credit Derivatives 160(7)
Exotic Options 167(7)
Weather, Energy, and Insurance Derivatives 174(3)
More on Models and Numerical Procedures 177(10)
Martingales and Measures 187(6)
Interest Rate Derivatives: The Standard Market Models 193(6)
Convexity, Timing, and Quanto Adjustments 199(5)
Interest Rate Derivatives: Models of the Short Rate 204(8)
Interest Rate Derivatives: HJM and LMM 212(5)
Swaps Revisited 217(2)
Real Options 219
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Chapter; 1
Introduction
Practice Questions
Problem: 1.1.
What Is The Difference Between A Long Forward Position And A Short Forward Position?
When A Trader Enters Into A Long Forward Contract, She Is Agreeing To Buy The
Underlying Asset For A Certain Price At A Certain Time In The Future. When A Trader
Enters Into A Short Forward Contract, She Is Agreeing To Sell The Underlying Asset For A
Certain Price At A Certain Time In
The Future.
Problem: 1.2.
Explain Carefully The Difference Between Hedging, Speculation, And Arbitrage.
A Trader Is Hedging When She Has An Exposure To The Price Of An Asset And Takes A
Position In A Derivative To Offset The Exposure. In A Speculation The Trader Has No
Exposure To Offset. She Is Betting On The Future Movements In The Price Of The Asset.
Arbitrage Involves Taking A Position In Two Or More Different Markets To Lock In A
Profit.
Problem: 1.3.
What Is The Difference Between Entering Into A Long Forward Contract When The Forward
Price Is $50 And Taking A Long Position In A Call Option With A Strike Price Of $50?
In The First Case The Trader Is Obligated To Buy The Asset For $50. (The Trader Does Not
Have A Choice.) In The Second Case The Trader Has An Option To Buy The Asset For $50.
(The Trader Does Not Have To Exercise The Option.)
Problem: 1.4.
Explain Carefully The Difference Between Selling A Call Option And Buying A Put Option.
Selling A Call Option Involves Giving Someone Else The Right To Buy An Asset From You. It
Gives You A Payoff Of
−Max(St − K 0) = Min(K − St 0)
Buying A Put Option Involves Buying An Option From Someone Else. It Gives A Payoff Of
Max(K − St 0)
In Both Cases The Potential Payoff Is K − St . When You Write A Call Option, The Payoff Is
Negative Or Zero. (This Is Because The Counterparty Chooses Whether To Exercise.) When
You Buy A Put Option, The Payoff Is Zero Or Positive. (This Is Because You Choose
Whether To Exercise.)
Problem: 1.5.
An Investor Enters Into A Short Forward Contract To Sell 100,000 British Pounds For Us
Dollars At An Exchange Rate Of 1.5000 Us Dollars Per Pound. How Much Does The
Investor Gain Or Lose IDf oTwhn el o aEd xe dc bhya: nbegsets R atti oensA1 t| Tbehs etsoEluntiodnsO64f Is (A) 1.49W00antAtonedarn
o lu $1.236
, Stuvia.com - The Marketplace to Buy and Sell your Study Material
(B) 1.5200?
(a) The Investor Is Obligated To Sell Pounds For 1.5000 When They Are Worth
1.4900. The Gain Is (1.5000−1.4900) ×100,000 = $1,000.
(b) The Investor Is Obligated To Sell Pounds For 1.5000 When They Are Worth
1.5200. The Loss Is (1.5200−1.5000)×100,000 = $2,000
Problem: 1.6.
A Trader Enters Into A Short Cotton Futures Contract When The Futures Price Is 50 Cents
Per Pound. The Contract Is For The Delivery Of 50,000 Pounds. How Much Does The
Trader Gain Or Lose If The Cotton Price At The End Of The Contract Is (A) 48.20 Cents Per
Pound; (B) 51.30 Cents Per Pound?
(a) The Trader Sells For 50 Cents Per Pound Something That Is Worth 48.20 Cents Per
Pound.
Gain = ($05000 −$04820)50 000 = $900 .
(b) The Trader Sells For 50 Cents Per Pound Something That Is Worth 51.30 Cents Per
Pound. Loss = ($05130 −$0500 0)50 000 = $650 .
Problem: 1.7.
Suppose That You Write A Put Contract With A Strike Price Of $40 And An Expiration Date
In Three Months. The Current Stock Price Is $41 And The Contract Is On 100 Shares. What
Have You Committed Yourself To? How Much Could You Gain Or Lose?
You Have Sold A Put Option. You Have Agreed To Buy 100 Shares For $40 Per Share If
The Party On The Other Side Of The Contract Chooses To Exercise The Right To Sell For
This Price. The Option Will Be Exercised Only When The Price Of Stock Is Below $40.
Suppose, For Example, That The Option Is Exercised When The Price Is $30. You Have To
Buy At $40 Shares That Are Worth $30; You Lose $10 Per Share, Or $1,000 In Total. If The
Option Is Exercised When The Price Is $20, You Lose $20 Per Share, Or $2,000 In Total.
The Worst That Can Happen Is That The Price Of The Stock Declines To Almost Zero
During The Three-Month Period. This Highly Unlikely Event Would Cost You $4,000. In
Return For The Possible Future Losses, You Receive The Price Of The Option From The
Purchaser.
Problem: 1.8.
What Is The Difference Between The Over-The-Counter Market And The Exchange-Traded
Market? What Are The Bid And Offer Quotes Of A Market Maker In The Over-The-Counter
Market?
The Over-The-Counter Market Is A Telephone- And Computer-Linked Network Of
Financial Institutions, Fund Managers, And Corporate Treasurers Where Two Participants
Can Enter Into Any Mutually Acceptable Contract. An Exchange-Traded Market Is A
Market Organized By An Exchange Where The Contracts That Can Be Traded Have Been
Defined By The Exchange. When A Market Maker Quotes A Bid And An Offer, The Bid Is
The Price At Which The Market Maker Is Prepared To Buy And The Offer Is The Price At
Which The Market Maker Is Prepared To Sell.
Problem: 1.9.
You Would Like To Speculate On A Rise In The Price Of A Certain Stock. The Current Stock
Price Is
$29, And A Three-MonthDoCwnalolladW
editbhy: A
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s1f |$b3
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9g0m. aYilo.cuo mHave $5,800 ToWaInntvtoeseta.rn $1.236
Solution manual- Options, Futures, and
Other Derivatives 11th Edition -John Hull
(Author)
, Stuvia.com - The Marketplace to Buy and Sell your Study Material
Table Of Contents
1 (9)
Introduction
Mechanics of Futures Markets 10 (5)
Hedging Strategies Using Futures 15 (5)
Interest Rates 20 (7)
Determination of Forward and Futures Prices 27 (7)
Interest Rate Futures 34 (6)
Swaps 40 (8)
Mechanics of Options Markets 48 (8)
Properties of Stock Options 56 (6)
Trading Strategies Involving Options 62 (6)
Binomial Trees 68 (9)
Wiener Processes and Ito's Lemma 77 (5)
The Black--Scholes--Merton Model 82 (12)
Options on Stock Indices, Currencies, and Futures Contracts 94 (15)
The Greek Letters 109(11)
Volatility Smiles 120(7)
Basic Numerical Procedures 127(16)
Value at Risk 143(5)
Estimating Volatilities and Correlations 148(5)
Credit Risk 153(7)
Credit Derivatives 160(7)
Exotic Options 167(7)
Weather, Energy, and Insurance Derivatives 174(3)
More on Models and Numerical Procedures 177(10)
Martingales and Measures 187(6)
Interest Rate Derivatives: The Standard Market Models 193(6)
Convexity, Timing, and Quanto Adjustments 199(5)
Interest Rate Derivatives: Models of the Short Rate 204(8)
Interest Rate Derivatives: HJM and LMM 212(5)
Swaps Revisited 217(2)
Real Options 219
, Stuvia.com - The Marketplace to Buy and Sell your Study Material
Chapter; 1
Introduction
Practice Questions
Problem: 1.1.
What Is The Difference Between A Long Forward Position And A Short Forward Position?
When A Trader Enters Into A Long Forward Contract, She Is Agreeing To Buy The
Underlying Asset For A Certain Price At A Certain Time In The Future. When A Trader
Enters Into A Short Forward Contract, She Is Agreeing To Sell The Underlying Asset For A
Certain Price At A Certain Time In
The Future.
Problem: 1.2.
Explain Carefully The Difference Between Hedging, Speculation, And Arbitrage.
A Trader Is Hedging When She Has An Exposure To The Price Of An Asset And Takes A
Position In A Derivative To Offset The Exposure. In A Speculation The Trader Has No
Exposure To Offset. She Is Betting On The Future Movements In The Price Of The Asset.
Arbitrage Involves Taking A Position In Two Or More Different Markets To Lock In A
Profit.
Problem: 1.3.
What Is The Difference Between Entering Into A Long Forward Contract When The Forward
Price Is $50 And Taking A Long Position In A Call Option With A Strike Price Of $50?
In The First Case The Trader Is Obligated To Buy The Asset For $50. (The Trader Does Not
Have A Choice.) In The Second Case The Trader Has An Option To Buy The Asset For $50.
(The Trader Does Not Have To Exercise The Option.)
Problem: 1.4.
Explain Carefully The Difference Between Selling A Call Option And Buying A Put Option.
Selling A Call Option Involves Giving Someone Else The Right To Buy An Asset From You. It
Gives You A Payoff Of
−Max(St − K 0) = Min(K − St 0)
Buying A Put Option Involves Buying An Option From Someone Else. It Gives A Payoff Of
Max(K − St 0)
In Both Cases The Potential Payoff Is K − St . When You Write A Call Option, The Payoff Is
Negative Or Zero. (This Is Because The Counterparty Chooses Whether To Exercise.) When
You Buy A Put Option, The Payoff Is Zero Or Positive. (This Is Because You Choose
Whether To Exercise.)
Problem: 1.5.
An Investor Enters Into A Short Forward Contract To Sell 100,000 British Pounds For Us
Dollars At An Exchange Rate Of 1.5000 Us Dollars Per Pound. How Much Does The
Investor Gain Or Lose IDf oTwhn el o aEd xe dc bhya: nbegsets R atti oensA1 t| Tbehs etsoEluntiodnsO64f Is (A) 1.49W00antAtonedarn
o lu $1.236
, Stuvia.com - The Marketplace to Buy and Sell your Study Material
(B) 1.5200?
(a) The Investor Is Obligated To Sell Pounds For 1.5000 When They Are Worth
1.4900. The Gain Is (1.5000−1.4900) ×100,000 = $1,000.
(b) The Investor Is Obligated To Sell Pounds For 1.5000 When They Are Worth
1.5200. The Loss Is (1.5200−1.5000)×100,000 = $2,000
Problem: 1.6.
A Trader Enters Into A Short Cotton Futures Contract When The Futures Price Is 50 Cents
Per Pound. The Contract Is For The Delivery Of 50,000 Pounds. How Much Does The
Trader Gain Or Lose If The Cotton Price At The End Of The Contract Is (A) 48.20 Cents Per
Pound; (B) 51.30 Cents Per Pound?
(a) The Trader Sells For 50 Cents Per Pound Something That Is Worth 48.20 Cents Per
Pound.
Gain = ($05000 −$04820)50 000 = $900 .
(b) The Trader Sells For 50 Cents Per Pound Something That Is Worth 51.30 Cents Per
Pound. Loss = ($05130 −$0500 0)50 000 = $650 .
Problem: 1.7.
Suppose That You Write A Put Contract With A Strike Price Of $40 And An Expiration Date
In Three Months. The Current Stock Price Is $41 And The Contract Is On 100 Shares. What
Have You Committed Yourself To? How Much Could You Gain Or Lose?
You Have Sold A Put Option. You Have Agreed To Buy 100 Shares For $40 Per Share If
The Party On The Other Side Of The Contract Chooses To Exercise The Right To Sell For
This Price. The Option Will Be Exercised Only When The Price Of Stock Is Below $40.
Suppose, For Example, That The Option Is Exercised When The Price Is $30. You Have To
Buy At $40 Shares That Are Worth $30; You Lose $10 Per Share, Or $1,000 In Total. If The
Option Is Exercised When The Price Is $20, You Lose $20 Per Share, Or $2,000 In Total.
The Worst That Can Happen Is That The Price Of The Stock Declines To Almost Zero
During The Three-Month Period. This Highly Unlikely Event Would Cost You $4,000. In
Return For The Possible Future Losses, You Receive The Price Of The Option From The
Purchaser.
Problem: 1.8.
What Is The Difference Between The Over-The-Counter Market And The Exchange-Traded
Market? What Are The Bid And Offer Quotes Of A Market Maker In The Over-The-Counter
Market?
The Over-The-Counter Market Is A Telephone- And Computer-Linked Network Of
Financial Institutions, Fund Managers, And Corporate Treasurers Where Two Participants
Can Enter Into Any Mutually Acceptable Contract. An Exchange-Traded Market Is A
Market Organized By An Exchange Where The Contracts That Can Be Traded Have Been
Defined By The Exchange. When A Market Maker Quotes A Bid And An Offer, The Bid Is
The Price At Which The Market Maker Is Prepared To Buy And The Offer Is The Price At
Which The Market Maker Is Prepared To Sell.
Problem: 1.9.
You Would Like To Speculate On A Rise In The Price Of A Certain Stock. The Current Stock
Price Is
$29, And A Three-MonthDoCwnalolladW
editbhy: A
beS
s ttsroil ukte
i onO
s1f |$b3
es0tsC
o l uotisotnss 6$425.@
9g0m. aYilo.cuo mHave $5,800 ToWaInntvtoeseta.rn $1.236
