Question 1
It is January the dollar/pound ($/£) exchange rate is currently $1.72/£1 and the following options and futures prices exist for June

June Futures (contract size £100,000)
$1.70/£1

June Options
The underlying contract is to buy/sell £100,000 at $1.70/£1

Strike price call option premium put option premium
$1.70/£1 $0.05 $0.03

You are a speculator and expect the spot rate on expiry in June to be $1.85/£1. Discuss the relative merits of using the futures or options contracts to speculate on your predicted currency movement. In your answer consider a range of possible future spot rates for sterling and the resulting profit/losses.

Question 2
Briefly explain with a simple numerical example a ‘’long straddle’’ position in the options market.

Question 3
You are given the following data on call and put premium in pence per share for Company ABC shares which are currently priced in the market at 311 pence. Each contract refer to 1000 shares.

Call premiums in pence Put premiums in pence
Strike prices September September
300 pence 61 44
330 pence 48 60

i. You expect the share price to rise to 400 pence discuss a speculative strategy and the profits/losses at a range of different prices for the underlying share in September
ii. You own 1000 shares in Company ABC and fear that the share price might fall to 200 pence. Discuss a hedging strategy using the above contracts and the approximate value of your net hedged position at a range of different prices for the underlying share in September.

Question 4
XYZ shares are currently priced in June at 250 pence a share. You believe that they are currently considerably overvalued and are worth only 150 pence a share. September put options on a strike price of 230 pence a share are currently valued at 25 pence. Each call option contract is based on 1000 shares.

(a) What is the beak even XYZ share price in September which will yield the option holder zero profits from the put option contract?
(b) What is the net profit (+)/net loss (-) in pounds to the put holder if the shares are priced at 150 pence in September?
(c) What is the net profit (+)/net loss (-) in pounds to the put holder if the shares are priced at 300 pence in September?

Question 5
You are given the following information about the stock in Company A. Share price $60 risk free rate of interest is 8%, time to expiration is 3 months, annualized standard deviation is 0.4 and exercise price is $65.
(i) Calculate the appropriate call value of the stock according to the Black-Scholes option pricing formula. Show your workings in full.
(ii) Calculate an appropriate put premium. Show your workings in full.

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