8006 Exam Dumps : Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition

Explanation:

If the spot rate is 1.1010 and the forward is 1.1040, the swap rate is 30 "points" (= 1.1040 - 1.1010). The annualized swap premium is the swap premium divided by the spot rate, and therefore =0.0030/1.1010 =0.27%, or 27 basis points.

To solve this question, we need to revisit how delta is calculated in a single step binomial model:

Consider a portfolio with just two positions: 1 Long Call option, and Δ Short Stock. We do not know what Δ (Delta) is.

Now if the current price of the stock is P, which can take the value P2 (higher value) and P1 (lower value) in the future at time T, then Δ needs to be such that the value of the portfolio is equal in both the cases. If the price goes up, the value of the option will be $1 (given) and the value of the short stock will be -Δ P2. If the price goes down, the value of the option will be $0, and the value of the stock will be -Δ P1.

Therefore, $1 - Δ P2 = $0 - Δ P1.

Solving for Δ, we get Δ = $1 /(P2 - P1) = $1 / ($102-$98) = 1/4.

The put-call parity can be expressed as:

Call – Put = Spot – PV of exercise price

Note that a negative sign above means a short position. The 'term PV of exercise price' is the same as a bank deposit placed today equivalent to the PV of the exercise price so that we will have the cash flow on the exercise date to exercise the option.

Therefore only Choice 'd' is the correct answer as rearranging the above gives us Buying a call + Bank Deposit = Buying the stock + Buying a put.

Choice 'd' is therefore the correct answer.