1. Do you agree with the following statement: "an out of the money option has an intrinsic value of zero and vice versa? Explain your answer.
2. Suppose a two year Treasury note is trading at its par value $1,000. You examine the cash flows, and if you sell them individually in the market, you get $47.85 for the six-month coupon, $45.79 for the one-year coupon, $43.81 for the one-and-a half year coupon, $41.93 for the two-year coupon, and $838.56 for the principal.
a. Are these prices correct?
b. If not, how you can capture arbitrage profit in this case?
3. Suppose you go short one contract of gold at today's closing futures price of $1,300 per oz. Suppose that your brokerage firm requires an initial margin of 5% of position size ($130,000 in this example) and sets the maintenance margin at 80% of the initial margin. Contract size is 100 oz. Keep the margins constant throughout this example. Track the value of our margin account if the closing futures prices are as follows. Clearly identify any margin call received and amount of variation margin that you have to produce.
|
Day
|
Closing Futures Price ($ per ounce)
|
|
0 (today)
|
1,300
|
|
1
|
1,303
|
|
2
|
1,297
|
|
3
|
1,290
|
|
4
|
1,297
|
4. The variance of monthly changes in the spot price of live cattle is (in cents per pound) 1.5 The variance of monthly changes in the future's price of live cattle for the April contract is 2. The correlation between these two price changes is 0.8. Today is March 11. The beef producer is committed to purchasing four hundred thousand pounds of live cattle on April 15th. The producer wants to use the April live cattle futures contract to hedge its risk. What strategy should the beef producer follow? (the contract size of live cattle is forty thousand pounds)
5. Define a forward contract. If a forward contract on gold is negotiated at a forward price of $1,487 per oz., what would the payoff on the maturity date to the buyer if the gold price is $1,518 per oz. and to the seller if the gold price is $1,612 per oz.?
6. What are the costs and benefits to a corn grower trading a forward contract? If she is expecting a harvest in three months, should she buy or sell the derivative?
7. Which contracts has more counterparty risk, a forward contract or a futures contract? Explain your answer.
8. Discuss the benefits of standardization of a futures contract.
9. Ahn, Bae, Chung, and Do are trading futures contracts, Carefully identify the trading volume and open interest for each trader from the following transactions:
a. Ahn buys five October silver futures from Bae. (Monday)
b. Chung sells nine December silver futures to Bae. (Tuesday)
c. Do buys ten October silver futures from Chung. (Wednesday)
d. Bae sells five December silver futures to Ahn. (Thursday)
e. Ahn sells three October silver futures to Chung.(Friday)
10. Explain why a futures contract is a zero sum game between the long and short positions.
11. Is the futures price equal to the value of the futures contracts? If not, then what is the value of a futures contract when it is written? Explain?
12. When holding a futures contract long, if you do not want to take a delivery of the underlying asset, what transaction must you perform? Explain
13. Explain the difference between long and short in the option market. What is the difference between an option buyer and writer?
14. Explain the difference between an option's intrinsic and time values. How do these relate to the option's price?
15. Explain and carefully describe the following three security positions, drawing payoff diagrams wherever necessary to support your answer (assume no premium)
a. Short a forward contract with a delivery price of $100
b. Short selling a stock at $100
c. Going short on an option with a strike price of $100
16. Suppose that the current price of platinum is $400 per oz. Suppose you expect that in three months the price will increase to $425. You are worried, however, that there is a small chance that platinum may fall below $390 or even lower. What securities can you use to speculate on the price of platinum?
17. Why is an American option worth at least as much an otherwise similar European options? Is there an exercise strategy that one can use to turn an American option into a European option? Explain
18. The following option prices are given for Yum Inc, whose stock price equals $50:
|
Strike Price
|
Call Premium
|
Put Premium
|
|
45
|
5.5
|
1.0
|
|
50
|
1.5
|
1.5
|
|
55
|
1.0
|
5.5
|
Compute intrinsic values and time values for each of these options and identify whether they are in the money, at the money, or out of the money.