<p> Financial Derivatives Handout</p><p>Name:______Date:______</p><p>1) Its Super Bowl XLII between the Patriots and the Giants. The Patriots are favored 4-1 to win the game and your friend places a $1,000 bet on the Giants to win the game. Answer the following questions. </p><p> a. How much would you pay to your friend for the option to purchase his bet? (Hint: There is no single right answer) </p><p> b. Would you pay him more than $1,000 for this option at the start of the game?</p><p> c. The Giants are winning 3-0 at the end of the first quarter, how would the price of the option change? (increase, decrease, remain the same)</p><p> d. The Patriots are now winning 14-10 with 2:42 left in the game, how would the price of the option change? (increase, decrease, remain the same)</p><p> e. The Giants scored a late touchdown to take a 17-14 lead with 0:35 left in the game, would you pay him more than $1,000 for this option? 2) You are a Patriots fan and bet $4,000 on them to win the game (remember the odds are 1- 4 so the payout is only $1,000). It’s the end of the 3rd Quarter and the Patriots are only up by 4 points. You want to hedge your risk and find someone to sell you a $500 option on a $1,000 bet that the Giants win. Answer the following questions.</p><p> a. How much would you win / lose if the Patriots win/ lose</p><p> a.i. Patriots win:</p><p> a.ii. Patriots lose:</p><p> b. How much would you have had to wager without options if you wanted to win $500?</p><p>3) Identifying Options: Google’s stock price is $570 and Bill has bought 3 option contracts for $15 ($5 per contract) with a strike price of $580. Answer the following questions.</p><p> a. If the stock price goes above $600 Bill will exercise the option, what has he bought?</p><p> b. How much money will he make?</p><p>4) Identifying Options: Google’s stock price is $570 and Bill has written 3 option contracts for $9,000 ($3,000 per contract) with a strike price of $600. Answer the following questions.</p><p> a. If the stock price goes down to $560 Bill is forced to exercise the option, what has he written?</p><p> b. How much will he lose? 5) Calculate the Value of the CALL option using the simplified binomial options pricing model.</p><p>S = $100 Strike = $100 σ = 25% t = .25</p><p>Rf = 5%</p><p>(a) Find the values of Su and Sd and write them in the tree below:</p><p>σ√t .25√ (.25) -σ√t 1 u = e = e = d = e = /u = </p><p>Su = S * u = Sd = S * d = </p><p>(b) Calculate the value of the call option at the end nodes and write them in the tree</p><p>Vud = MAX [0, Sud - Strike -] = MAX [0, 100 - 100] = 0</p><p>Vdd = </p><p>Vuu = (c) Calculate the value of the option today assuming p =.5 (remember r = 5%, and t=.25)</p><p>(- r × t) Formula to be used is: Max [(S – Strike), p × Vu+ (1-p) × Vd] × e</p><p>V = </p>