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    Futures & Options Pricing: Calculate call options values; consider time premium

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    Futures Pricing Problem

    Suppose there is a financial asset ABC, which is the underlying asset for a futures contract with settlement six months from now. You know the following about this financial asset and futures contract:

    o In the cash market ABC is selling for $80.
    o ABC pays $8 per year in two semi-annual payments of $4, and the next semi-annual payment is due exactly six months from now.
    o The current six-month interest rate at which funds can be loaned or borrowed is 6%.

    a. What is the theoretical (or equilibrium) futures price?

    b. What action would you take if the futures price is $83? What is the profit?

    c. What action would you take if the futures price is $76? What is the profit?

    Options Pricing Problem

    Calculate the call option value at the end of one period for a European call option with the following terms:
    ? The current price of the underlying asset=$80.
    ? The strike price=$75.
    ? The one period, risk-free rate=10%
    ? The price of the asset can go up or down 10% at the end of one period.

    d. What is the fundamental or intrinsic value?

    e. What is the time premium?

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