BARUCH COLLEGE (CUNY)

FIN4750 OPTIONS
Professor Christos Giannikos
Instructions
1. This is a closed book, closed notes exam. You are supposed to use only the blue book provided by the proctor and your pen and
calculator. For scrap paper please use the back pages of the blue book. You can ask the proctor for an additional blue book if
necessary.
2. No questions will be answered during the exam. No extra clarifications will be given to any of the students taking the exam. If you
think it is necessary to make assumptions please state them clearly and proceed in answering the question(s) under consideration
the best way you can.
3. Please do all four problems. They are equally weighted.

Problem 1
BBX company agrees today to enter into a contract with BSX that requires BBX to pay to BSX 1,000,000 British
pounds in exactly one year for a certain building. The building is expected to generate a net income for the year of
100,000 British pounds and has no other costs. Naturally its value may vary throughout the year depending on
market conditions. No money changes hands between BBX and BSX today. The current risk free rate in Britain is
12% per annum continuously compounded. If the current market value of the building is 1,000,000 British pounds
is this a fair deal for BBX (please argue your case carefully)? If BSX wanted to pay for the contract upfront (for the
building) how much should it pay now?

Problem 2
Suppose that the Nov 1st price of corn is $2.50/bushel, the effective monthly interest rate is 1%, and storage costs
per bushel are $0.05/month. You know that corn is stored from Nov 1st to Feb 1st. Can you price the Feb 1st forward
contract on one bushel of corn? Please also find the value on Nov 1st of a long position in 7of the contracts on corn
above with a delivery price of $2.75/bushel.

Problem 3
Consider the following option quotations.
Call Call Put Put
Strike Expiry Volume Last Volume Last
45 SEP 686 2 1/4 379 1/16
50 OCT 180 5/8 16 3 1/8
50 DEC 548 1 5/8 10 4 1/4
All options above are written on GM stock taken from WSJ on Sep 16, 1993. On that day the stock closed at 47 1/8.
Answer the following questions: a) What is the cost of 23 GM OCT 50 put option contracts? b) What is the
intrinsic (immediate exercise) value of the GM SEP 45 call? What is its time value? c) Assume that the clearing
corporation is using the following schedule for calculation of margin requirements “The maximum of: 100% of the
proceeds form the sale of options plus 20% of the value of the underlying stock position minus the dollar amount
the options contract is out-of-the-money, or 100% of the proceeds from the sale of the options plus 10% of the
value of the underlying stock position”. Find the margin requirements for the buyer, as well as writer, of 5 GM
DEC 50 call option contracts. Explain how the answer changes if the writer owns 300 shares of GM.

Problem 4
At the LIFFE, BA stock is currently trading at 434p, and the January 420 puts are trading at 39p. If you buy one of
these puts today and hold on to it until expiry a) what will be the price of the stock at expiry that will allow you to
break-even? b) What will be your maximum gain? c) What will be your maximum loss? d) Please answer again
questions a-c for a writer of this put e) if at the January expiry of the option BA stock settles 10% below its current
price, what will be the profit for the put buyer? What about the put writer? f) Draw the profit graph at expiry for a
seller of this put