Question #17

Reading: Reading 31 Valuation of Contingent Claims

PDF File: Reading 31 Valuation of Contingent Claims.pdf

Page: 9

Status: Unattempted

Part of Context Group: Q17-19 First in Group
Shared Context
- Williamson would like to consider neutralizing his Reston equity position from changes in Reston's stock price. Using the information in Tables 3 and 4 how many standard Reston European options would have to be bought/sold in order to create a delta neutral portfolio? A) Sell 370,300 call options. B) Sell 497,141 put options. C) Buy 497,141 put options.
Question
Williamson is very interested in the total return swap. He asks Potter how much it would cost to enter into this transaction. Which of the following is the most likely cost of the swap at inception?
Answer Choices:
A. $45,007
B. $0
C. $340,885
Explanation
Swaps are priced so that their value at inception is zero.
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