Question

1. State whether the below sentences are True or False and justify your answer in detail.

1. a) According to put-call parity, a long position in a call option combined with a short position in a put option equals a long position in the commodity combined with a short position in a bond with a face value equal to the strike price. (10%)

1. b) If the convenience yield of an underlying commodity increases, then a long put option position will lose money. (10%)

1. c) Assuming that a commodity market is in backwardation, if nothing changes through time, the longer-term contracts will increase in value.

(10%)

1. d) A five-year commodity option trade will have a higher vega exposure today than it will have one month before expiration. (10%)

1. e) In an OTC cleared freight derivative trade, the counterparty risk is almost zero. (5%)

1. f) The most sought after version of crude oil is the heavy sweet. (5%)

Answer 1

1.a. the given statement is FALSE because it does not equal the strike price as there are differences due to premium paid

b. Yes, the given statement is TRUE is the convenience yield of an underline commodity increases then long put will lose money because the position was taken on a bearish view.

C. The given statement is TRUE because backwardation means when the forward contract are trading with discount to the spot price.

D. This given statement is FALSE because vega means volatility in the options and as there would be lesser time to maturity the option will move more and therefore they would be more volatile.