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SOLUTIONS. C hapter 23. DERIVATIVES: MANAGING FINANCIAL RISK. PROBLEM 23.10. A call option at a strike price of Rs 176 is selling at a premium of Rs 18. At what price will it break even for the buyer of the option?. SOLUTION 23.10.

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Presentation Transcript
slide1

SOLUTIONS

Chapter 23

DERIVATIVES:

MANAGING FINANCIAL RISK

slide2

PROBLEM 23.10

  • A call option at a strike price of Rs 176 is selling at a premium of Rs 18. At what price will it break even for the buyer of the option?

SOLUTION 23.10

  • To recover the option premium of Rs 18, the spot will have to rise to Rs 176+Rs 18 = Rs 194. The option would be break even for the buyer at a price of Rs 194.
slide3

PEOBLEM 23.11

  • Spot value of S&P CNX Nifty is 1200. An investor bought one-month S&P CNX Nifty at 1,220 with a call option for a premium of Rs 10. What type of option is it?

SOLUTION 23.11

  • It is an out-of-money option
slide4

PROBLEM 23.12

  • A stock currently sells for Rs 120. The put option to sell the stock sells at Rs 134 and costs Rs 18. Compute the time value of option.

SOLUTION 23.12

  • The time value of the option is Rs 4
slide5

PROBLEM 23.13

  • If the daily volatility of the Nifty is 1.92, compute the sigma figure used in the Black Scholes formula.

SOLUTION 23.13

  • The Black-Scholes formula uses the annualised sigma. The daily sigma must be expressed in terms of annualised sigma.
  • Sigma annual = sigma daily X Number of trading days per year
  • on an average there are 250 trading days in a year. Therefore, the figure to be used = 1.92 X 250 = 30 per cent.
slide6

PROBLEM 23.14

  • Assuming that the daily volatility of the Nifty is 1.75 and trading happens on 256 days in a year, compute the sigma figure used in the Black Scholes formula.

SOLUTION 23.14

  • The Black-Scholes formula uses the annualised sigma.
  • Sigma annual = sigma daily X Number of trading days per year
  • if there are 256 trading days in a year, the figure to be used
  • = 1.75 X 256 = 28 per cent
slide7

FINANCIAL

END OF THE CHAPTER

MANAGEMENT