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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