7SSMM704 Financial Derivatives - Mock Mid Term Test
SECTION A - Answer All Questions
Question 1
What is a Call Option?[10 marks]
Question 2
What is the definition of Delta when talking about option prices?[10 marks]
Question 3
Define Vega in the context of option pricing.[10 marks]
Question 4
Using Put Call Parity, a protective call is equivalent to what simple options position?[10 marks]
SECTION B - Answer All Questions
Question 5
The spot price of an underlying is $100 and its volatility is 20%. The interest rate is 5% with continuous compounding. What is the fair price for a three- month call option with a strike price of $105? Explain in details the procedure you use.[20 marks]
Question 6
Discuss how you would use a two-step binomial tree to evaluate a European call option.[20 marks]
Question 7
A trader buys a call option with a strike price Kc = $50 and a put option with a strike price Kp = $45. The call and the put options have the same maturity. The price of the call option is c = $5 and the price of the put option is p = $6. Draw a diagram of the trader’s profit as a function of the price of the underlying ST. What is the maximum loss the trader can incur? What is the maximum profit the trader can make?[20 marks]