-Foe-T + Eo[ST]e-ar

A risk manager uses a futures contract, which has a correlation of 0.88 with the spot asset, to hedge her exposure. She calculates a hedge ratio of 0.9429. What part of the cash flow remains unhedged? None of these O 5.71% O 77.44% 22.56%

Assume a security follows a geometric Brownian motion with volatility parameter = 0.2. Assume the initial price of the security is 21 and the interest rate is 0. It is known that the price of a down-and-in barrier option and a down-and-out barrier option with strike price 19 and expiration 30 days have equal risk-neutral prices. Compute this common risk-neutral price.

At the expiration of a futures contract, futures prices converge to __.     a. Option prices b. forward prices c. market prices d. spot prices

Explain in your own words what dynamic hedging is, and how a trader could profit by dynamically hedging an option if they have a forecast of volatility that is different to implied volatility.

If the forward rate is expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then: a. the international Fisher effect (IFE) is refuted. b. the international Fisher effect (IFE) is supported. c. covered interest arbitrage is feasible. d. the average absolute error from forecasting would equal zero.

4. Valuation of a Derivative Consider a derivative on a stock with the time to expiration T and the following payoff: 0 K₁ 0 if ST K₁. What is the present value of the derivative? Provide an analytic expression of the price using N(), the cumulative probability distribution function of a standard normal random variable.

Assume that the CAPM assumptions hold. Consider the following statements:i. A stock with a beta below zero will tend to move in the same direction as the market but will tend to move less aggressively in that direction than the market does.ii. Alpha measures the additional risk we take on top of the risk of the market portfolio.

The basis is defined as the spot price minus the futures price. A trader is hedging the sale of an asset with a short futures position.  The basis increases unexpectedly. Which of the following is TRUE?  a. The hedger’s position stays the same. b. The hedger’s position improves. c. The hedger’s position sometimes worsens and sometimes improves. d. The hedger’s position worsens.

Suppose that the standard deviation of quarterly changes in the prices of a commodity is $0.65, the standard deviation of quarterly changes in a futures price on the commodity is $0.81, and the coefficient of correlation between the two changes is 0.8. What is the optimal hedge ratio for a three-month contract? What does it mean? Explain what is meant by basis risk when futures contracts are used for hedging.