Question 2 As a junior analyst, you have been tasked by your line manager to prepare supporting calculations in your rep

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Question 2
As a junior analyst, you have been tasked by your line manager
to prepare supporting calculations in your report for a
presentation to be made before Teachers Pension Fund's management.
These calculations should essentially demonstrate derivative
pricing using the No Arbitrage Principle. To do so, you choose to
demonstrate the pricing of futures and options contract on BT Group
listed on Eurex Exchange. The line manager also wants to understand
more about risk neutral pricing and expects you to provide some
explanation of the underlying concepts.
Required:
A) 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:
B) i). 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:
ii). 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.
C) 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 B above and then the actual prices of calls and puts
available from Eurex Exchange for the same calls and puts. Discuss
the factors that could explain the differences in pricing across
the two put-call parity
calculations.
D) 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.