Category Archives: FIN 567

FIN 567 Class Project (2 Sets) Updated

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FIN 567 Class Project Updated


Assume that you have $500,000 to invest in equities and want to establish a new portfolio that includes ten (10) stocks to be selected from the Dow Jones Industrial Average of 30 companies.  It is also desired to start with nearly equal dollar values of each issue.  Use current market prices to compute the number of shares required. 


You are bullish on the markets in the long-term; however, you have read analyst predictions that over the next 18 months the market will likely stay flat with some downside potential.  Despite these predictions, you want to make some money in the short-term, and at the same time avoid any downside spikes in the markets.  A hedging strategy using options and/or futures seems appropriate.  Please develop a plan to accomplish your goal and give a detailed explanation, with numerical computations, of the upside opportunities and the downside risks for each chosen position.


In addition to your investment in equities, you also have $1 million dollars to invest conservatively in U.S. Treasury issues and money market securities.  Select four T-bonds and/or T-notes ranging in maturity from two years to five years and purchase equal dollar amounts with a total of approximately $500,000.  Invest the remaining $500,000 in the money market.  You need not select individual money market issues; just assume that the money market investments are secure and return the risk free rate.  Please discuss the how the inclusion of the fixed income securities affects the risk in your total portfolio.


To begin the project you need to select 10 stocks and fixed income issues.  When buying large quantities of stocks, it is most usual and convenient to issue orders in round lots (rounded to 100 shares).  You should do this for your analysis. When you sum the value of the rounded lots, the result will almost certainly not be exactly $500,000.  Ignore that difference and use the sum of the rounded lots as your equity investment.  The same holds true for the fixed income selections.  A spreadsheet is provided in Doc Sharing to help you do the required computations.


General Guidelines


This project is about quality and substance, not about volume.  Your narratives should be concise, comprehensive, and easy to read.  APA format is required.  Your pricing numbers for derivatives must be expressed in a spreadsheet format.  Your presentation should be in the following order:


1.  Executive Summary
2.  Explanation of Hedging Strategy
3.  Spreadsheet
4.  Explanation of the strategy’s risks and rewards
5.  Conclusion


Executive Summary


This narrative should be a brief explanation of the objective, strategy, and conclusion.  There need only be enough information to provide a reader an overview of the issue, your approach, and your perceptions on how you will benefit.




For every derivative security you select as a part of your strategy, there should be a spreadsheet entry identifying the derivative, and all purchasing or selling elements, e.g. strike price, expiration, and costs.  You should also show possible outcomes.  Example, if you recommend selling a call option, then show the net results if the underlying stock moves down, stays flat, and rises above the strike price.  The net results should be expressed in net dollars (actual return or loss), actual percentage gain or loss, and annualized percentage gain or loss.


Risks and Rewards


This is a narrative based on the probabilities shown in your spreadsheet.  You should provide a brief explanation of the outcomes should the market decline, stay flat, or rise.




This is your opportunity to express your professional opinion that your strategy will enhance your portfolio.


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FIN 567 Final Exam 2017, NEW (300/300)

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FIN 567 Final Exam Updated


Question 1. Question : (TCO E) A stock sells for $60 and the risk-free rate of interest is 10%. A call and a put on this stock expire in one year and both options have an exercise price of $55. How would you trade to create a synthetic call option? If the put sells for $2, how much is the call option worth? (Assume annual compounding.)


Question 2. Question : (TCO H) Explain how a put price varies with interest rates. Does the relationship vary for European and American puts? Explain.


Question 3. Question : (TCO D, F, G) Your newest client believes that the Asian currency crisis is going to increase the volatility of earnings for firms involved in exporting, and that this earnings volatility will be translated into large stock price changes for the affected firms. Your client wants to create speculative positions using options to increase his/her exposure to the expected changes in the riskiness of exporting firms. That is, your client wants to prosper from changes in the volatility of the firm’s stock returns. Discuss which Greek your client should focus on when developing his/her options positions.


Question 4. Question : (TCO B) Explain the distinction between a normal and an inverted market.


Question 5. Question : (TCO C) Describe the difference between a stack hedge and a strip hedge. What are the advantages and disadvantages of each?


Question 6. Question : (TCO H) What is the main difference in the calculation of the DJIA and the S&P 500 index? Explain.


Question 7. Question : (TCO B) The spot value of the euro is $1.50, and the 90-day forward rate is $1.45. If the U.S. dollar interest factor to cover this period is 2%, what is the EMU rate for this period?


Question 8. Question : (TCO K) The IMM Index stands as 93.30. What is the discount yield? If you buy a T-bill futures at that index value and the index becomes 92.90, what is your gain or loss?


Question 9. Question : (TCO A) At a party, a man tells you that he is an introducing broker. He goes on to explain that his job is introducing prospective traders such as you to futures brokers. He also relates that he holds margin funds as a service to investors. What do you make of this explanation?


Question 10. Question : (TCO J, L) Consider a firm financed only by common stock and a convertible bond issue. When should the bondholders exercise? Explain. If the common shares pay a dividend, could it make sense for the bondholders to exercise before the bond matures? Explain by relating your answer to our discussion of the exercise of American calls on dividend-paying stocks.


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FIN 567 Midterm 2017, Updated

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 FIN 567 Midterm Updated


Question 1. Question : (TCO A) An order that closes an existing position is called a(n) ______.


Question 2. Question : (TCO A) Which of the following is not a characteristic of a short call position?


Question 3. Question : (TCO E) The owner of a call that expires in the money (ignore cash settlement options) ________.


Question 4. Question : (TCO C) For tax purposes, futures contracts are assumed to be ______.


Question 5. Question : (TCO C) The agency that administers the Commodity Exchange Act is ____.


Question 6. Question : (TCO D) A Jan 50 call option is deep in the money when the ______.


Question 7. Question : (TCO A) How many equity option exchanges exist in the United States?


Question 8. Question : (TCO C) What is the tax consequence when a short call that was written more than a year ago on stock expires worthless?


Question 9. Question : (TCO D) Assume that put and call options with a $50 strike price expire with the stock at $70. Which of the following statements is correct?


Question 10. Question : (TCO E) Assume the following:


Option   Strike price   Call price   Put price
A 90 18 1
B 100 9 3
C 110 3 8
D 120 1 17


What would a short put condor include?


Question 11. Question : (TCO F) What happens to gamma as expiration is approached for options that are near the money?


Question 12. Question : (TCO G) The first rule of the cash-and-carry relationship for futures contracts is that the futures price must be _______.


Question 13. Question : (TCO G) The Dow Jones Industrial Average is ______.


Question 14. Question : (TCO G) A fund manager who wants to buy Japanese equities now, but won’t have the cash for three months can buy a stock index futures contract as a ______.


Question 15. Question : (TCO F) Strangle writers prefer ______.


Question 16. Question : (TCO F) What is the approximate value of delta for a deep-in-the-money call?


Question 17. Question : (TCO F) Vega is least for options that are ______.


Question 18. Question : (TCO A) On which exchanges do options on futures trade?


Question 19. Question : (TCO D) A trader sold a Sep 50 call for $5. At expiration, the stock closed at $53. What was the net result after the trader delivered the stock?


Question 20. Question : (TCO B) In 1979–1980, the Hunt brothers manipulated which market?


Question 21. Question : (TCO B) Which of the following is the most actively traded futures contract?


Question 22. Question : (TCO E) The maximum profit in a bull put spread at expiration occurs when the stock price is _______.


Question 23. Question : (TCO C) What is the limitation on the tax deductibility of net capital losses in one tax year?


Question 24. Question : (TCO D) The maximum profit in a bull call spread at expiration occurs when the stock price is _______.


Question 1. Question : (TCO C) An investor bought 100 shares of stock at $40. The stock now sells for $60 and the investor writes a 65 call for $2. What is the maximum possible gain and loss in this covered call position?


Question 2. Question : (TCO D) An investor bought stock at $50 and sold a covered call with a 55 strike price for $2. The stock now sells for $60.
Part 1: What is the intrinsic value in the option? Assume the call is priced at $7.
Part 2: What is the time value in the option?
Part 3: What would you expect to happen to the value of the call and the 55 put if a shock to the market causes volatility to increase dramatically?


Question 3. Question : (TCO E) Part 1: If you hold two XYZ Dec 60 calls and the stock splits 2 for 1, what will be your resulting position?
Part 2: What is the gain or loss for the following long butterfly spread if the stock is at $302 at expiration?


Buy 1 Jun 300 call at 9
Sell 2 Jun 305 calls at 5
Buy 1 Jun 310 call at 2


Part 3: Construct a bull put spread with the following options:


Apr 40 put at 3
Apr 45 put at 6


Show the P/L result over a range of 38–47.


Question 4. Question : (TCO G) What are the independent variables in the equity options pricing model?
What would you expect deltas to be for an at-the-money call and an at-the-money put?
Why do some portfolio managers attempt to remain delta neutral?
What kind of position do straddle writers plan to maintain?


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