While solving past year papers, I had few questions. Cab someone please help in clearing my doubts?
1. For option payoff, we were asked to draw a graph in past year papers. Given online exam, is this still a possibility?
2. Sept 2018- Q7, sector selection profit for Fund A should be -0.25%.
calculated as (total outperformance-stock selection profit) = (0.72%-0.98%) = -0.25%. Even when I calculated sector selection profit as (actual sector allocation- benchmark sector allocation)*(notional sector return- overall benchmark return) for each sector and sum it, the answer is -0.25%. Is this a mistake in examiner's report? Please help.
3. Q3-for butterfly spread and bear spread- I have few doubts.
Bear spread-
a) I did not understand the diagram completely.
Referring to the solution in examiner's report now.
A. For call option-We are considering 3 cases here, St>K2, St<K1 and K1<St<K2.
I presume that the second part of the graph (downward sloping part) is for case K1<St<K2 and the flat curve after that is for St>K2. If this is correct, shouldn't the curve be on the negative axis for St>K2?
Also, why is St>K2 assumed as a loss? Wouldn't this depend on the value of O1-O2 as payoff = (O1-O2)-(K2-K1)
B. For put option- again, we are considering 3 cases.
a) When St<K1, the payoff should be (O1-O2)+(K2-K1) and not (K2-K1) only, right?
Butterfly spread (part ii)
I couldn't follow the solution in examiner's report. Is there a more straightforward solution or relatable bookwork which I can apply to understand?
Thank you in advance!
1. For option payoff, we were asked to draw a graph in past year papers. Given online exam, is this still a possibility?
2. Sept 2018- Q7, sector selection profit for Fund A should be -0.25%.
calculated as (total outperformance-stock selection profit) = (0.72%-0.98%) = -0.25%. Even when I calculated sector selection profit as (actual sector allocation- benchmark sector allocation)*(notional sector return- overall benchmark return) for each sector and sum it, the answer is -0.25%. Is this a mistake in examiner's report? Please help.
3. Q3-for butterfly spread and bear spread- I have few doubts.
Bear spread-
a) I did not understand the diagram completely.
Referring to the solution in examiner's report now.
A. For call option-We are considering 3 cases here, St>K2, St<K1 and K1<St<K2.
I presume that the second part of the graph (downward sloping part) is for case K1<St<K2 and the flat curve after that is for St>K2. If this is correct, shouldn't the curve be on the negative axis for St>K2?
Also, why is St>K2 assumed as a loss? Wouldn't this depend on the value of O1-O2 as payoff = (O1-O2)-(K2-K1)
B. For put option- again, we are considering 3 cases.
a) When St<K1, the payoff should be (O1-O2)+(K2-K1) and not (K2-K1) only, right?
Butterfly spread (part ii)
I couldn't follow the solution in examiner's report. Is there a more straightforward solution or relatable bookwork which I can apply to understand?
Thank you in advance!