Re: Questions

[Abhishek]

Q-1 No, They will not come in exam

Q-2 Floor is something from which I will benefit if the interest rates or the floating rates go beyond a pre-defined rate which is called floor. Now If I benefit from the Interest rates going below the reference rate my position is short on Interest rates. Try this question now. If you still have doubts let me know

Q-3 Use call put parity which is C + PV (X) = S + P. Solve this equation with values and you will find that they are not equal. Now the difference between these two sides is the answer. How ? In stable market conditions call put parity holds i.e. both sides should be the same. If this is not the case then either the call or the put is undervalued or overvalued, so then you can make risk less profit or arbitrage by selling the overvalued option or side and buying the undervalued side.

Q-4 I will confirm this.

Rgds,

Abhishek

On Fri, Feb 12, 2010 at 9:09 AM, Geetha Vramani <vramani...@gmail.com> wrote:

Hi Ratan,

Please send equity & derivatives HW answers. Following are my
questions. Please advise -
---------------------------------------------------------------------------------------------------------

Q1) Do we have to practise the derivations of call & put options lower
and upper bounds?

---------------------------------------------------------------------------------------------------------

Q2) An interest rate floor on a floating rate note (from issuers
perspective) is equivalent to a series of : (Please explain the
answer)

a. long interest rate puts
b. short interest rate puts
c. short interest rate calls

---------------------------------------------------------------------------------------------------------

Q3) A stock is selling at $40, a 3-month put at $50 is selling for
$11, a 3-month call at $50 is selling for $1 and RFR is 6%. how much
if anything can be made an arbitrage?

---------------------------------------------------------------------------------------------------------

Q4) In margin call calculation - Please confirm the short position
formula: While solving CFA material problems, I saw that for short the
below formula gives the answer -

Long position we use MC = P (1-Initial Margin) / (1-Maintenance
Margin),
Short position we use MC = P (1-Maintenance Margin) / (1-Initial
Margin)

---------------------------------------------------------------------------------------------------------

Thanks,
Geetha

--
Regards,
Abhishek Dhall
Product Management | Global Marketing
Headstrong, Bangalore
abhishe...@headstrong.com