Rock Investment and Eagle Foundation Eurex Exchange markets

Rock Investment and Eagle Foundation Eurex Exchange markets

This is an assignment that discusses the Rock Investment and Eagle Foundation Eurex Exchange markets. The paper also investigates the various behaviors in the financial markets.

The Rock Investment and Eagle Foundation Eurex Exchange markets

Rock Investments & Eagle Foundation
Firstly, compare exchange-traded and OTC derivatives.            (8 marks)

Then, identify the features of futures and options on BT Group listed on ICE and Eurex Exchange. Compare the differences between ICE and Eurex options on BT Group.                                                                                  (10 marks)

Also, assess futures and options listed on both ICE and Eurex markets and the features of available derivative contracts on BT Group & recommend which market should be used for trading.                                    (7 marks)

Secondly, estimate the fair price of any BT Group futures contract on Eurex using the cost of carry model. You are required to cover the following too:
a.     provide (select and make assumptions) any missing inputs.
b.     explain all the inputs in your pricing model and justify each.
c.     compare the price from your cost of carry model against the actual price at the day close and explain any underlying reasons for the under-pricing or over-pricing.                                            (8 marks)

Eurex Exchange

Thirdly, estimate the prices of both a BT Group call and a BT Group put option trading on Eurex Exchange using two and three period binomial option pricing models as well as the BSM model. You must cover the following:
a.     provide (select and make assumptions) any missing inputs.
b.    explain all the inputs in your pricing model and justify each.
c.     evaluate whether the call and the put options are over or under-valued based on the price estimates from your calculations compared to their actual prices on Eurex Exchange.                  (12 marks)

Fourthly, for the two period binomial model, demonstrate that the estimated price of the call is fair using the hedge portfolio calculations over the two period and adjusting the hedge ratio accordingly.                      (4 marks)

Estimate the value of the risk free bonds from the put-call parity using first the prices of calls and puts from the BSM model in 2 above and then the actual prices of calls and puts available from Eurex Exchange for the same calls and puts. Then, discuss the factors that could explain the differences in pricing across the two put-call parity calculations.                                 (6 marks)

Risk behaviors

Lastly, explain Risk Neutral behaviour and describe how it is different than Risk Averse and Risk Seeking behaviours in financial markets. Give relevant examples of each from financial markets. Why is derivatives pricing considered to be risk neutral? Explain.                                                                 (10 marks)
1.     Explain the mechanics of forwards and swaps as well as their similarities and differences. Also provide detail discussion of the underlying credit risk in both types of contracts.                                           (10 marks)

2.     Illustrate the pricing of a hypothetical forward contract on BT Group’s stock and how it can be used to manage the risk of the proposed investment. However, you will have to consider and choose the required inputs and make reasonable assumptions wherever required. Provide clear descriptions of all the steps in the process and a conclusion.                          (8 marks)

3.     Illustrate the pricing of a hypothetical swap contract involving Eagle receiving GBP Libor[1] and paying the returns on BT Group’s stock; assume an investment of £1,000,000, payments made quarterly for one year. For any missing Libor term rates, assume that the term structure of interest rates is linear and upward sloping. Provide detail descriptions of each step.  (12 marks)

https://www.global-rates.com/interest-rates/libor/libor.aspx