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Fin 672 Oxford University Financial Instruments and Derivatives Questions


1.  What position in naked options would a firm adopt if they believe that  the price of the stock is going to drop and the volatility of the stock  is going to decrease?

2. Microsoft is  currently trading at $26. A firm expect that prices will increase but  not rise above $28 per share. Options on Microsoft with strikes of  $22.50, $25.00, $27.50, and $30 are available. What options portfolio  would they construct from these options to incorporate their views?

3.  Assume the current volatility of oil is high. What options portfolio  offers a firm a gain from the high volatility if they do not have a view  on direction?

4. A firm is planning to trade on  the fortunes of a biotech firm that has a drug patent pending FDA  approval. If the patent is approved, the stock price is expected to go  up sharply. If it is not approved, the stock will drop sharply. In the  firm’s view, it is unlikely to move more than 20% in either direction.  Describe a portfolio combining straddles and strangles that takes  advantage of that view. Suppose (for example) that the stock price of  the firm is currently at 100.

5. A. A firm is long futures and long a straddle, what is their view on direction? On volatility?

B. (8.26) If a firm is short futures and long a straddle, what is their view on direction? On volatility?

6. How does the payment of an unexpected dividend affect (a) call prices and (b) put prices?


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