OPTIONS, FUTURES AND OTHER

DERIVATIVES

TRACK : Financial Economics

PROGRAMME : MASTER 2
ACADEMIC YEAR: 2017/2018
PROFESSOR: ABRAHAM LIOUI

FINAL EXAM
Total duration: 3 hours
Open Book
Edhec calculator allowed
Exercise 1 (3 points):

Hereafter you will find data from the futures market on the CAC 40 dated November 6, 2017:

Treat the futures as if it was a forward contract. Use settlement prices only. Assume the
December 2017 contract matures in two months, the January 2018 matures in three months,
and so on. The term structure of interest rates is flat at 1%.

Questions:

1) Using the information in the December 2017 and January 2018 contracts, please price
the March 2018 contract.
2) Compare the cost of carry in the December 2017 contract to that in the June 2018
contract. Is the term structure of the cost of carry upward or downward slopping?

Whenever necessary, add any assumption you may need.

Exercise 2 (3 points):

Hereafter you will find data from the options market on the CAC 40 dated November 6, 2017
for options maturing in November 2017 (1/2 a month time to maturity):

Questions:

1) Build a bear spread with the Calls 5475 and 5525. Use the book prices.
2) Build a bear spread with the Puts 5475 and 5525. Use the book prices. Compare to 1).
3) What strategy replicates a long position is a Futures maturing in November 2017 ?
Exercise 3 (4 points):

Consider the following two-period financial market:

t=0 t=1 t=2

6,25
1,21
5
1,1
3,75
1,21
A 4
B 1
3,75
1,21
3
1,1
2,25
1,21

There are two assets available for trade, one risky asset (Asset A) and one riskless asset (Asset
B).

Questions:

1) What should be the fair price of a Futures on A maturing at time t = 2 ?

2) What should be the fair price of a Forward on A maturing at time t = 2 ?
3) What should be the fair price of an European Call with exercise price equal to 3
maturing at time t = 2 ? Show that the replicating strategy is self-financing.
4) What should be the fair price of an European Call with exercise price equal to 3
maturing at time t = 2 ? Use the pricing function approach with the riskless asset as
the numéraire.
Exercise 4 (5 points):

Hereafter you will find data from the options market on the CAC 40 dated November 6, 2017
for options maturing in December 2018 (1 year time to maturity):

Assume you plan to collect 1,000,000,000 Euros for a Capital Guaranteed product. What can
you offer based on the data above (use just the settlement prices) ?
Exercise 5 (5 points):

Consider the following two-period financial market:

t=0 t=1 t=2

6,25
1,21
4,75 and 0,25 div.
1,1
3,75
1,21
A 4
B 1
3,75
1,21
2,75 and 0,25 div.
1,1
2,25
1,21

There are two assets available for trade, one risky asset (Asset A) and one riskless asset (Asset
B). Asset A pays a 0.25 dividend at time t = 1. When the market went up at time t = 1, the
dividend is 0.25 and the price ex dividend is 4.75.

Questions:

1) What should be the fair price of an European Call with exercise price equal to 3
maturing at time t = 2 ?
2) What should be the fair price of an American Put with an exercise price equal to 5
maturing at time t = 2 ?