FUTURES OPTIONS AND SWAPS KOLB PDF
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Futures, Options, and Swaps by Robert W. Kolb, , available at Book Depository with free delivery worldwide. Robert W. Futures Options And Swaps Solutions Manual By Kolb Robert W - [ PDF] [EPUB] Futures. Options And Swaps Solutions Manual By Kolb Robert W -. Solution Manual for Futures Options and Swaps 5th Edition by Kolb - Free download as PDF File .pdf), Text File .txt) or read online for free. Download full file at.
Answers to Questions and Problems 1. If an arbitrage opportunity did exist in a market, how would traders react? Would the arbitrage opportunity persist? If not, what factors would cause the arbitrage opportunity to disappear? Traders are motivated by profit opportunities, and an arbitrage opportunity represents the chance for risk- less profit without investment. Therefore, traders would react to an arbitrage opportunity by trading to exploit the opportunity. They would buy the relatively underpriced asset and sell the relatively overpriced asset.
In other words, construct a synthetic share of security C. Assume that there are no restrictions associated with short selling any of the securities. To create a synthetic share of security C, we must construct a portfolio of securities A and B that has the same payoffs as security C in both the up and down states of the market. That is, we must construct a portfolio with the following characteristics:.
The two equations in the table constitute two equations in two unknowns.
What are the commitments to securities A and B? How much does it cost to construct a synthetic share of security C? Compare this cost with the market price of security C. Which security is cheaper? The cost of constructing the synthetic security is:. Explain the transactions necessary to engage in riskless arbitrage. Explain why these transactions constitute a riskless arbitrage opportunity. How much profit can an investor make in this riskless arbitrage?
These prices present an opportunity for the investor to engage in riskless arbitrage. The synthetic security constructed to produce the same payoffs as security C in all states of nature is cheaper than security C itself. To take advantage of this situation, we must simultaneously sell the overpriced, expensive security and buy the underpriced, cheap security.
That is, we must simultaneously sell security C and buy the synthetic secu- rity. Arbitrage is transacting to secure a riskless profit without investment. That is, we must buy and sell the same number of units of the securities.
Solution Manual for Futures Options and Swaps 5th Edition by Kolb
Note that the math of the problem requires one to sell fractions of a unit of a security. However, institutional con- straints do not permit the sale or purchase of fractional units of a security.
We can easily solve this problem by scaling up our purchase and sale transactions by That is, we will sell 10 units of security C and buy 10 units of the synthetic security. Since we are assuming that the investor does not own security C, the investor will be engaging in short selling. Transactions Cash Flows.
The profit could be increased to infinity by scaling up the size of all of these transactions. Explain why we do not have to worry about future obligations in a properly constructed riskless arbitrage transaction. Consider the following:. In addition, the synthetic security was constructed such that the payoffs on the synthetic security were equal to the payoffs from investing in security C in both states of nature. Explain why we would not expect such a structure of prices to exist in the marketplace.
If these prices were observed in the market, the investor could earn a certain profit with no commitment of her own resources. Persistence of such mispricing would permit all investors to become infinitely wealthy through riskless arbitrage.
Explain the purpose of short selling in riskless arbitrage. In arbitrage we sell high to finance the transaction. Construct a portfolio consisting of securities B and C that replicates the payoffs on security A in both the up and down states subject to the constraint that the sum of the commitments to the two securities B and C is one.
In other words, construct a synthetic share of security A. To create a synthetic share of security A, we must construct a portfolio of securities B and C that has the same payoffs as security A in both the up and down states of the market.
Solution Manual for Futures Options and Swaps 5th Edition by Kolb | Futures Contract | Arbitrage
That is, to construct synthetic security A, we must short sell security B and invest the proceeds from the short sale of security B in security C. What are the commitments to securities B and C? Construction of the synthetic security required the short sale of security B to finance the purchase of addi- tional units of security C. Thus, the investor commits more than percent of his wealth to security C.
How much does it cost to construct a synthetic share of security A? Compare this cost with the market price of security A. Security A is cheaper than the synthetic security. Explain the transactions necessary to engage in a riskless arbitrage. Assume that one trades 10 shares of security A in constructing the arbitrage transactions. The synthetic security constructed to produce the same payoffs as security A in all states of nature is more expensive than security A itself.
Therefore, we must sell the overpriced synthetic security and buy security A itself. Riskless arbitrage transactions:. Short selling the synthetic security requires the investor to purchase security B, and sell security C.
Discuss the differences between the transactions necessary to capture the arbitrage profit when creating a synthetic share of security A and the arbitrage transactions undertaken to capture the arbitrage profit when creating a synthetic share of security C.
In the first problem, the construction of the synthetic security required positive commitments by the investor to each security, that is, the portfolio weights were positive. In addition, to capture the profit avail- able from the mispricing of the securities, we sold the actual security short and bought the synthetic secu- rity. In the second problem, construction of the synthetic security required the investor to sell security B short to finance purchases of security C. We then short sold the synthetic security and bought the actual security to reap the arbitrage profits.
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Futures, Options, and Swaps
Search inside document. That is, we must construct a portfolio with the following characteristics: The cost of constructing the synthetic security is: The synthetic security is cheaper. Riskless arbitrage transactions: Consider the following: Akhilesh Dixit. Shreyans Jain.
Aman Tyagi. Ajay Gupta. Patrick Jenny. Karan Oberoi.
Niladri Kumar. Nitin Jain. Mukul Kr Singh Chauhan. CA Vinay K Singh. Sandeep Rao.
Table of contents Preface. Futures Markets. Futures Prices. Using Futures Markets. Interest Rate Futures: An Introduction. Security Futures Products: Foreign Exchange Futures. The Options Market. Option Payoffs and Option Strategies. Bounds on Option Prices. European Option Pricing.
Option Sensitivities and Option Hedging. American Option Pricing. The Options Approach to Corporate Securities. Exotic Options. Interest Rate Options. The Swaps Market: Economic Analysis and Pricing. Appendix A: Appendix B: Index show more. Review Text "This is a revision of an already excellent textbook that has a very clear way of explaining the often difficult concepts that the student needs to understand in this very technical subject area.
What I particularly like is the careful way the text builds up the material in a simple style without skipping any steps. This incremental approach makes it a very useful teaching resource. The book clearly knows what it is trying to do and makes no assumption about the knowledge level of the reader. I also like the way material is presented through the use of concrete examples.
Review quote "This is a revision of an already excellent textbook that has a very clear way of explaining the often difficult concepts that the student needs to understand in this very technical subject area. About Robert W. Kolb Robert W.
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