tony starkCHAPTER 1
Introduction
Practice Questions
Problem 1.1.
What is the difference between a long forward position and a short forward position?
When a trader enters into a long forward contract, she is agreeing to buy the underlying ast for a certain price at a certain time in the future. When a trader enters into a short forward contract, she is agreeing to ll the underlying ast for a certain price at a certain time in the future.
Problem 1.2.
Explain carefully the difference between hedging, speculation, and arbitrage.
A trader is hedging when she has an exposure to the price of an ast and takes a position in a derivative to offt the exposure. In a speculation the trader has no exposure to offt. She is betting o
n the future movements in the price of the ast. Arbitrage involves taking a position in two or more different markets to lock in a profit.
Problem 1.3.
What is the difference between entering into a long forward contract when the forward price is $50 and taking a long position in a call option with a strike price of $50?
In the first ca the trader is obligated to buy the ast for $50. (The trader does not have a choice.) In the cond ca the trader has an option to buy the ast for $50. (The trader does not have to exerci the option.)
Problem 1.4.
Explain carefully the difference between lling a call option and buying a put option.
Selling a call option involves giving someone el the right to buy an ast from you. It gives you a payoff of
max(0)min(0)T T S K K S --,=-, Buying a put option involves buying an option from someone el. It gives a payoff of max(0)T K S -,
In both cas the potential payoff is T K S -. When you write a call option, the payoff is negative or zero. (This is becau the counterparty choos whether to exerci.) When you buy a put option, the payoff is zero or positive. (This is becau you choo whether to exerci.)
Problem 1.5.
An investor enters into a short forward contract to ll 100,000 British pounds for US dollars at an exchange rate of 1.5000 US dollars per pound. How much does the investor gain or lo if the exchange rate at the end of the contract is (a) 1.4900 and (b) 1.5200?
(a)The investor is obligated to ll pounds for 1.5000 when they are worth 1.4900. The
gain is (1.5000−1.4900) ×100,000 = $1,000.
(b)The investor is obligated to ll pounds for 1.5000 when they are worth 1.5200. The
loss is (1.5200−1.5000)×100,000 = $2,000
Problem 1.6.
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A trader enters into a short cotton futures contract when the futures price is 50 cents per pound. The contract is for the delivery of 50,000 pounds. How much does the trader gain or lo if the cotton price at the end of the contract is (a) 48.20 cents per pound; (b) 51.30 cents per pound?
(a)The trader lls for 50 cents per pound something that is worth 48.20 cents per pound.
Gain ($05000$04820)50000$900
=.-.⨯,=.
(b)The trader lls for 50 cents per pound something that is worth 51.30 cents per pound.
Loss ($05130$05000)50000$650
=.-.⨯,=.
Problem 1.7.
Suppo that you write a put contract with a strike price of $40 and an expiration date in three months. The current stock price is $41 and the contract is on 100 shares. What have you committed yourlf to? How much could you gain or lo?
You have sold a put option. You have agreed to buy 100 shares for $40 per share if the party on the other side of the contract choos to exerci the right to ll for this price. The option will be exercid only when the price of stock is below $40. Suppo, for example, that the option is exercid when the price is $30. You have to buy at $40 shares that are worth $30; you lo $10 per share, or $1,000 in total. If the option is exercid when the price is $20, you lo $20 per share, or $2,000 in total. The worst that can happen is that the price of the stock declines to almost zero during the three-month period. This highly unlikely event would cost you $4,000. In return for the possible future loss, you receive the price of the option from the purchar.
Problem 1.8.
What is the difference between the over-the-counter market and the exchange-traded market? What are the bid and offer quotes of a market maker in the over-the-counter market?
The over-the-counter market is a telephone- and computer-linked network of financial institutions, fund managers, and corporate treasurers where two participants can enter into any mutually acceptable contract. An exchange-traded market is a market organized by an exchange where the contracts that can be traded have been defined by the exchange. When a market maker quotes a bi
d and an offer, the bid is the price at which the market maker is prepared to buy and the offer is the price at which the market maker is prepared to ll.
Problem 1.9.
You would like to speculate on a ri in the price of a certain stock. The current stock price is $29, and a three-month call with a strike of $30 costs $2.90. You have $5,800 to invest.口语话题
Identify two alternative strategies, one involving an investment in the stock and the other involving investment in the option. What are the potential gains and loss from each?
One strategy would be to buy 200 shares. Another would be to buy 2,000 options. If the share price does well the cond strategy will give ri to greater gains. For example, if the share price goes up to $40 you gain [2000($40$30)]$5800$14200
,⨯--,=,from the cond strategy and only 200($40$29)$2200
⨯-=,from the first strategy. However, if the share price does badly, the cond strategy gives greater loss. For example, if the share price goes down to $25, the first strategy leads to a loss of 200($29$25)$800
⨯-=,whereas the cond strategy leads to a loss of the whole $5,800 investment. This example shows that options contain built in leverage.
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Problem 1.10.
Suppo you own 5,000 shares that are worth $25 each. How can put options be ud to provide you with insurance against a decline in the value of your holding over the next four months?
You could buy 50 put option contracts (each on 100 shares) with a strike price of $25 and an expiration date in four months. If at the end of four months the stock price proves to be less than $25, you can exerci the options and ll the shares for $25 each.
Problem 1.11.
When first issued, a stock provides funds for a company. Is the same true of an
exchange-traded stock option? Discuss.
eva cassidyAn exchange-traded stock option provides no funds for the company. It is a curity sold by one investor to another. The company is not involved. By contrast, a stock when it is first issued is sold by the company to investors and does provide funds for the company.
Problem 1.12.
Explain why a futures contract can be ud for either speculation or hedging.
If an investor has an exposure to the price of an ast, he or she can hedge with futures contracts. If the investor will gain when the price decreas and lo when the price increas, a long futures position will hedge the risk. If the investor will lo when the price decreas and gain when the price increas, a short futures position will hedge the risk. Thus either a long or a short futures position can be entered into for hedging purpos.
If the investor has no exposure to the price of the underlying ast, entering into a futures contract is speculation. If the investor takes a long position, he or she gains when the ast’s price increas and los when it decreas. If the investor takes a short position, he or she los when the ast’s price increas and gains when it decreas.means
Problem 1.13.
Suppo that a March call option to buy a share for $50 costs $2.50 and is held until March. Under what circumstances will the holder of the option make a profit? Under what circumstances will the op
tion be exercid? Draw a diagram showing how the profit on a long position in the option depends on the stock price at the maturity of the option.
The holder of the option will gain if the price of the stock is above $52.50 in March. (This ignores the time value of money.) The option will be exercid if the price of the stock is
above $50.00 in March. The profit as a function of the stock price is shown in Figure S1.1.
Figure S1.1:Profit from long position in Problem 1.13
Problem 1.14.
Suppo that a June put option to ll a share for $60 costs $4 and is held until June. Under what circumstances will the ller of the option (i.e., the party with a short position) make a profit? Under what circumstances will the option be exercid? Draw a diagram showing how the profit from a short position in the option depends on the stock price at the maturity of the option.
The ller of the option will lo money if the price of the stock is below $56.00 in June. (This ignores the time value of money.) The option will be exercid if the price of the stock is below $60.00 in June. The profit as a function of the stock price is shown in Figure S1.2.
Figure S1.2:Profit from short position in Problem 1.14
Problem 1.15.
It is May and a trader writes a September call option with a strike price of $20. The stock price is $18, and the option price is $2. Describe the investor’s cash flo ws if the option is held until September and the stock price is $25 at this time.
The trader has an inflow of $2 in May and an outflow of $5 in September. The $2 is the cash received from the sale of the option. The $5 is the result of the option being exercid. The investor has to buy the stock for $25 in September and ll it to the purchar of the option
for $20.
Problem 1.16.
A trader writes a December put option with a strike price of $30. The price of the option is $4. Under what circumstances does the trader make a gain?
The trader makes a gain if the price of the stock is above $26 at the time of exerci. (This ignores the time value of money.)
Problem 1.17.
A company knows that it is due to receive a certain amount of a foreign currency in four months. What type of option contract is appropriate for hedging?
A long position in a four-month put option can provide insurance against the exchange rate falling below the strike price. It ensures that the foreign currency can be sold for at least the strike price.
Problem 1.18.
disabled什么意思A US company expects to have to pay 1 million Canadian dollars in six months. Explain how the exchange rate risk can be hedged using (a) a forward contract and (b) an option.
The company could enter into a long forward contract to buy 1 million Canadian dollars in six months. This would have the effect of locking in an exchange rate equal to the current forward exchange rate. Alternatively the company could buy a call option giving it the right (but not the obligation) to purcha 1 million Canadian dollars at a certain exchange rate in six months. This would provide insurance against a strong Canadian dollar in six months while still allowing the company to benefit from a weak Canadian dollar at that time. Problem 1.19.
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A trader enters into a short forward contract on 100 million yen. The forward exchange rate is $0.0090 per yen. How much does the trader gain or lo if the exchange rate at the end of the contract is (a) $0.0084 per yen; (b) $0.0101 per yen?
四六级考试报名官网入口a)The trader lls 100 million yen for $0.0090 per yen when the exchange rate is $0.0084
⨯.millions of dollars or $60,000.
per yen. The gain is 10000006
b)The trader lls 100 million yen for $0.0090 per yen when the exchange rate is $0.0101
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⨯.millions of dollars or $110,000.
per yen. The loss is 10000011
Problem 1.20.
The CME Group offers a futures contract on long-term Treasury bonds. Characterize the investors likely to u this contract.
