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Derivatives Question and Answers

In: Business and Management

Submitted By tmt86
Words 7033
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Payoff Diagrams (16p)
Draw the gross payoff (not net-payoff/profit) diagram as a function of MLM stock for the following portfolios consisting of: (Strike values are given in parentheses) (a) one long position in the stock and two short positions in the same put option (K). (b) two long positions in the stock, two short call options (2K), and one long position ina put (K). (c) two short positions in the stock, two long call options (2K), and one short put option(3K). (d) one long position in the stock, two short call options (2K), two short call options (3K),and one short put option (2K). For this question, take into account the net profit only for the stock. You can assume that the stock is purchased at a price of K.
Binomial Model (27p)
Chevron Corporation has stakes in various oil development projects in Yemen and is considering to bid on a development of a new oil platform in Yemen in the future. However, due to ongoing civil war in Yemen and the instability of the Yemeni Currency (YER), Chevron wants to be hedged against two possible scenarios: * First scenario: The country becomes stable in the future and Chevron decides to go on with the bid and the bid is accepted, in that case Chevron would need Yemeni Rial (YER). * Second scenario: The country’s situation deteriorates and Chevron is forced to liquidate its current assets, in that case Chevron would want to exchange Yemeni Rial for USD and would want to be hedged against a possible depreciation of the currency.
Chevron approaches J.P Morgan and asks for a derivative on the Yemeni Rial currency exchange rate that would hedge the company’s interests in both scenarios. J.P. Morgan suggests an exotic option on YER/USD. More specifically, the bank suggests a three-year chooser option. The chooser option is a special type of option contract that allows the purchaser to decide during a…...

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