School of Mathematics and Statistics Autumn 2014-2015 Financial Mathematics Hours and Minutes

MAS362
SCHOOL OF MATHEMATICS AND STATISTICS
Autumn 2014-2015
2 hours and 30 minutes
Financial Mathematics
Attempt all the questions. The allo ation of marks is shown in bra kets.
Please leave this exam paper on your desk

Do not remove it from the hall
Registration number from U-Card (9 digits)

to be ompleted by student
MAS362
Turn Over
MAS362
Blank
MAS362
Continued
MAS362
1
Consider the following three bonds with fa e value of 100:

Time to maturity
Annual interest
(in years)
(paid every 6 months)
0.5
4%
1.
8%
1.5
6%
Bond pri e
(in )
101.49
105.92
105.13
(i)
Find the 0.5-year spot interest rate.
(ii)
Use the bootstrap method to nd the 1 and 1.5-year spot interest rates.
(iii)
Consider a forward ontra t to deliver the 1.5-year bond listed in the table
above, with delivery date in 1 year. (Assume that the bond is delivered
immediately after the payment of its se ond oupon.) What is the orre t
forward pri e for this ontra t?
(3 marks)
(iv)
Suppose you are oered a short position in the forward ontra t des ribed
in (iii) with a forward pri e of 104. Exhibit in detail an arbitrage strategy
available to you.
(13 marks)
MAS362
(1 mark)
(8 marks)
Turn Over
MAS362
2
(i)
(a)
Consider a portfolio onsisting of European put options on the same

underlying asset and same expiration date, whi h is short two options
with strike 30, short one option with strike 50 and long one option
with strike 70. Sket h a graph of the payo fun tion of this portfolio.
(4 marks)
(b)
(ii)
The pri e of a sto k whi h pays no dividends is urrently 15 and at the

end of one year its pri e will be either 20 or 10. Suppose that all interest
rates are onstant and equal to 3%. Consider an Ameri an put option on
this sto k expiring in one year and with an unspe ied strike pri e of X ,
where 10 X 20. This put option an be exer ised either at expiration
or immediately.
(a) Des ribe a portfolio onsisting of some number of units of the sto k
des ribed above together with one of the Ameri an put options
des ribed above with the property that, if the put option is held
until expiration, the value of this portfolio in one year is the same
regardless of the sto k pri e. (Your answer will involve the unknown
value of X .)
(7 marks)
(b)
MAS362
Let p30 , p50 and p70 be the spot pri es of the put options in part (a)
with strike pri es 30, 50 and 70, respe tively. Let c10 be the spot
pri e of a European all option on the same underlying asset and
with the same expiration date as the options above and with strike
pri e 10. Des ribe an inequality involving c10 , p30 , p50 and p70 and
explain in detail why it holds.
(7 marks)
Find all values of 10 X 20 for whi h the portfolio in part (a)

should be exer ised immediately.
(7 marks)
Continued
MAS362
3
(i)
(ii)
(a)
State the mathemati al denition of Brownian motion. (5 marks)
(b)
State Ito's Lemma.
(3 marks)
Assume that a sto k pri e S is given as the Ito pro ess

dS = S dt + S dB
where and are onstants. Let f = f (S, t) be the value at time t of a

derivative ontingent on the value of S at some time T . Assume further that
f (s, t) is twi e ontinuously dierentiable with respe t to s and ontinuously
dierentiable with respe t to t. Assume also that all interest rates are nonsto hasti and equal to r.
(a) Show that the pro ess followed by f (S, t) is
df =
(b)

f
f
1 2f 2 2
f
dt
+
S +
+
S
SdB.
S
t
2 S 2
S
(3 marks)
(S, t) of
Consider a portfolio onsisting of a variable quantity
S
shares and 1 derivatives; let be the value of this portfolio, i.e.,
=
f
(S, t)S f. Show that after a short period of time t the
S
value of the portfolio hanges by

1 2 f 2 2 f
S
2 S 2
t
t
(5 marks)
( )
Dedu e that rt.
(d)
Dedu e that
f
f
1
2f
+ rS
+ 2 S 2 2 = rf.
t
S 2
S
(e)
MAS362
(4 marks)
(2 marks)
How does the risk-aversion of investors ae t the pri e of this derivative? Justify your answer in detail.
(3 marks)
Turn Over
MAS362
4
(i)
Dene the following on epts in the ontext of Portfolio Theory.

(a) The market portfolio.
(2 marks)
(b)
( )
(ii)
line.
The beta- oe ient of an investment.
(2 marks)
(2 marks)
Sket h the following:

(a) an example of a feasible set and e ient frontier in the absen e of a
risk-free investment,
(2 marks)
(b)
(iii)
The apital market
an example of a feasible set, market portfolio and e ient frontier

in a market ontaining a risk-free investment.
(3 marks)
You are given the following data on three sto ks and the market portfolio:
Expe ted Correlation with Standard deviation
return
market portfolio
of return
Sto k 1
?
0.7
80%
Sto k 2
5%
?
63%
Sto k 3
3.8%
0.9
?
Market portfolio
4.5%
1
37%
The risk-free interest rate for the period is 3%. Give the equation of
the apital market line, nd the beta- oe ients of Sto ks 1, 2 and 3, and
ll in all missing data in the table above.
(14 marks)
End of Question Paper
MAS362

School of Mathematics and Statistics Autumn 2014-2015 Financial Mathematics Hours and Minutes

Uploaded by

Copyright:

Available Formats

School of Mathematics and Statistics Autumn 2014-2015 Financial Mathematics Hours and Minutes

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

School of Mathematics and Statistics Autumn 2014-2015 Financial Mathematics Hours and Minutes

Uploaded by

Copyright:

Available Formats

MAS362

SCHOOL OF MATHEMATICS AND STATISTICS

Please leave this exam paper on your desk

Registration number from U-Card (9 digits)

Consider the following three bonds with fa e value of 100:

Find the 0.5-year spot interest rate.

Consider a portfolio onsisting of European put options on the same

The pri e of a sto k whi h pays no dividends is urrently 15 and at the

Find all values of 10 X 20 for whi h the portfolio in part (a)

State the mathemati al denition of Brownian motion. (5 marks)

State Ito's Lemma.

Assume that a sto k pri e S is given as the Ito pro ess

where and are onstants. Let f = f (S, t) be the value at time t of a

value of the portfolio hanges by

Dedu e that rt.

Dene the following on epts in the ontext of Portfolio Theory.

The beta- oe ient of an investment.

Sket h the following:

The apital market

an example of a feasible set, market portfolio and e ient frontier

End of Question Paper

You might also like

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

State the mathemati al denition of Brownian motion. (5 marks)

Dene the following on epts in the ontext of Portfolio Theory.

The beta- oe ient of an investment.

an example of a feasible set, market portfolio and e ient frontier