Assignment
Multiple Choice
1. Which of the following statement(s) on Option Hedging is TRUE?
a. Hedgers typically buy options to achieve price protection
b. If the market moves in favorable direction, the hedgers can abandon the option and take advantage of current market prices
c. The option premium needs to be taken into account for the final sale or purchase price
d. All of the above
2. Assume you pay a premium of 13 cents per bushel for a JAN soybean call with a $12.40 strike price, and the basis is 20 cents over in December. What is the net purchase price for soybeans if the JAN soybean futures price in December is $12.20 per bushel?
a. $12.20 c. $12.40
b. $12.33 d. $12.53
3. (Continued from Q2)
If in December the futures price is $12.70, what is the net purchase price?
a. $12.40 c. $12.60
b. $12.53 d. $12.73
4. If you sell an OCT soybean put with a strike price of $12.40 for 10 cent per bushel. Assume the basis is 5 cents under October and the futures price is $12.10, what will be the net purchase price?
a. $12.05 c. $12.25
b. $12.10 d. $12.30
5. (Continued from Q4)
If in October the futures price is $12.50, what will be the net purchase price?
a. $12.55 c. $12.40
b. $12.45 d. $12.35
6. Which of the following statement(s) on comparison between alternative option hedging strategies for commodity buyers is NOT ture?
a. "Doing nothing" gives the best purchase price as the market declines but provides zero risk management against a rising market
b. "Long hedge" provides protection against the risk of rising price, but doesn't alllow hedger to take advantage of falling price
c. "Long call hedge" provides protection again rising prices and also allows the buyer to improve on the purchase price if the market declines
d. "Short put hedge" provides the best protection against rising and falling prices
7. Assume that you pay a premium of 30 cents a bushel for a NOV soybean put option with a $12.50 strike price, and the basis is expected to be 25 cents under NOV futures when you sell you crop in October. What will be net selling price be if the NOV soybean futures price in October is $12.20 per bushel?
a. $12.20 c. $11.95
b. $12.00 d. $11.85
8. (Continued from Q7)
If in October the futures price is $12.70, what is the net selling price?
a. $12.15 c. $12.70
b. $12.55 d. $12.85
9. To enhance your effective selling price, you sell the $11.80 NOV soybean call option for a premium of 21 cent per bushel. Assume the harvest basis is 15 cents under the NOV futures and the futures price is $11.10, what will be the net selling price?
a. $11.16 c. $10.95
b. $11.10 d. $10.74
10. (Continued from Q9)
If in October the futures price is $12.20, what is the net selling price?
a. $12.20 c. $11.86
b. $12.05 d. $11.50
Short Answer
11. Assume it is now November, that the JUL corn futures price is $6.70, and that call/put options with various strike prices are currently being traded at the following premiums:
|
Otion strike price
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Call option premium
|
Put option premium
|
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$6.50
|
$0.23
|
$0.10
|
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$6.60
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$0.19
|
$0.12
|
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$6.70
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$0.15
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$0.17
|
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$6.80
|
$0.09
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$0.21
|
(1) Based on the futrues price at expiration and the Call you have purchased, determine the net profit or loss.
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Futures price at expiration
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$6.50 call
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$6.60 call
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$6.70 call
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$6.80 call
|
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$6.50
|
|
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|
|
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$6.80
|
|
|
|
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$7.10
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(2) Assume at harvest as a feed producer you purchase your corn at $6.60 per bushel in the cash market and purchased a $6.80 JUL call option for 9 cents. What will be the net purchase price if:
|
Futures price
|
Net purchase price
|
|
$6.50
|
|
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$6.80
|
|
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$7.10
|
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(3) Based on the futrues price at expiration and the Put you have purchased, determine the net profit or loss.
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Futures price at expiration
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$6.50 put
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$6.60 put
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$6.70 put
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$6.80 put
|
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$6.30
|
|
|
|
|
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$6.50
|
|
|
|
|
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$6.80
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(4) Assume at harvest as a corn producer you sell your corn at $6.60 per bushel in the cash market and purchased a $6.50 JUL put option for 10 cents. What will be the net selling price if:
|
Futures price is
|
Net selling price
|
|
$6.30
|
|
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$6.50
|
|
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$6.80
|
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12. The price of a futures contract is currently $50 and will move either up or down by 10% at the end of one month. The risk free interest rate is 10%.
(1) What is the price of a European call option on the futures contract with a strike price of $52 that expires in one month?
(2) What is the price of a European put option on the futures contract with a strike price of $52 that expires in one month?
Attachment:- Option-Hedging-Strategies.rar