Bonus Final for FIRE481, Fall 2015,
Due 11:59pm December 16th
Type your answers or scan your answers and send it to the Dropbox (Bonus Final Dropbox). Each small
question is 1 point, and maximum points are 5 points (If you can get 5 out of the 6 small questions right,
then you get 5 points. If you are so good that you get all the 6 questions right, you still get 5 points). No
partial credit. Students are not allowed to copy the answers from another student, though discussion
among students is allowed.
1. You would like to be holding a protective put position on the stock of XYZ Co to lock in a
guaranteed minimum value of $100 at year-end. XYZ currently sells for $100. Over the next year,
the stock price will either increase by 10% or decrease by 10%. The T-bill rate is 5%.
Unfortunately, no put options are traded on XYZ Co,
a. Suppose the desired put option were traded. How much would it cost to purchase?
b. What would have been the cost of protective put portfolio?
c. What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that
would be provided by a protective put with X=$100? Please show the payoff to this portfolio
and the cost of establishing the portfolio matches that of the desired protective put.
2. In each of the following cases, discuss how you, as a portfolio manager, could use financial
futures to protect a portfolio.
a. You own a large position in a relatively illiquid bond that you want to sell.
b. You have a large gain on one of your long Treasuries and want to sell it, but you would like
to defer the gain until the next accounting period, which begins in 4 weeks.
c. You will receive a large contribution next month that you hope to invest in long-term
corporate bonds on a yield basis as favorable as is now available.

Bonus Final for FIRE481, Fall 2015,
Due 11:59pm December 16th
Type your answers or scan your answers and send it to the Dropbox (Bonus Final Dropbox). Each small
question is 1 point, and maximum points are 5 points (If you can get 5 out of the 6 small questions right,
then you get 5 points. If you are so good that you get all the 6 questions right, you still get 5 points). No
partial credit. Students are not allowed to copy the answers from another student, though discussion
among students is allowed.
1. You would like to be holding a protective put position on the stock of XYZ Co to lock in a
guaranteed minimum value of $100 at year-end. XYZ currently sells for $100. Over the next year,
the stock price will either increase by 10% or decrease by 10%. The T-bill rate is 5%.
Unfortunately, no put options are traded on XYZ Co,
a. Suppose the desired put option were traded. How much would it cost to purchase?
b. What would have been the cost of protective put portfolio?
c. What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that
would be provided by a protective put with X=$100? Please show the payoff to this portfolio
and the cost of establishing the portfolio matches that of the desired protective put.
2. In each of the following cases, discuss how you, as a portfolio manager, could use financial
futures to protect a portfolio.
a. You own a large position in a relatively illiquid bond that you want to sell.
b. You have a large gain on one of your long Treasuries and want to sell it, but you would like
to defer the gain until the next accounting period, which begins in 4 weeks.
c. You will receive a large contribution next month that you hope to invest in long-term
corporate bonds on a yield basis as favorable as is now available.