-
Practise Questions (Optional)
(Note:
As
additional
materials,
the
quick
answers
are
given
and
assist
you
to
understand
concepts
and
some
calculations.
You
are
encouraged
to
work
out
procedures
by
yourself.
You should review
that week lecture notes and text chapter/s.)
1. List three types of traders in
futures, forward, and options markets
1.
(i)
.................
2.
(ii) ................
3.
(iii)
...............
1.
hedgers, speculators, arbitrageurs
2. A trader buys 100
European call options with a strike price of $$20
and a time to maturity of
one year. The
cost of each option is $$2. The price of the
underlying asset proves to be $$25 in
one year. What is the trader's gain or
loss? ............
2.
$$300
gain
3. A one-year call option on a
stock with a strike price of $$30 costs $$3; a one-
year put option
on the stock with a
strike price of $$30 costs $$4. Suppose that a
trader buys two call options
and one
put option.
(i) What is the breakeven
stock price, above which the trader makes a
profit? ……….
(ii) What is
the brea
keven stock price below which
the trader makes a profit? ……….
3.
(i) $$35; (ii) $$20.
4. Which of the following is
not
true (circle one)
(a) Futures contracts nearly always
last longer than forward contracts
(b)
Futures contracts are standardized; forward
contracts are not.
(c) Delivery or
final cash settlement usually takes place with
forward contracts; the same is
not true
of futures contracts.
(d) Forward
contract usually have one specified delivery date;
futures contract often have a
range of
delivery dates.
4.
(a)
5. In the corn futures contract a
number of different types of corn can be delivered
(with price
adjustments specified by
the exchange) and there are a number of different
delivery locations.
Which of the
following is true (circle one)
(a) This
flexibility tends increase the futures price.
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(b) This
flexibility tends decrease the futures price.
(c) This flexibility may increase and
may decrease the futures price.
(d)
This has no effect on the futures price
5.
(b);
6. A
company enters into a short futures contract to
sell 50,000 pounds of cotton for 70 cents
per pound. The initial margin is $$4,000
and the maintenance margin is $$3,000. What is the
futures price above which there will be
a margin call? ………..
6.
72 cents;
7. A
company enters into a long futures contract to buy
1,000 units of a commodity for $$20
per
unit. The initial margin is $$6,000 and the
maintenance margin is $$4,000. What futures
price will allow $$2,000 to be withdrawn
from the margin account? …………..
7.
$$22
8. Who
determines when delivery will take place in a corn
futures contract (circle one)
(a) The
party with the long position
(b) The
party with the short position
(c)
Either party can specify a delivery date
(d) The exchange specifies the exact
delivery date.
8.
(b);
9. Which of the following is true
(circle one)
(a) Both forward and
futures contracts are traded on exchanges.
(b) Forward contracts are traded on
exchanges, but futures contracts are not.
(c) Futures contracts are traded on
exchanges, but forward contracts are not.
(d) Neither futures contracts nor
forward contracts are traded on exchanges.
9.
(c)
10. On
March 1 the spot price of a commodity is $$20 and
the July futures price is $$19. On
June
1 the spot price is $$24 and the July futures price
is $$23.50. A company entered into a
futures contracts on March 1 to hedge
the purchase of the commodity on June 1. It closed
out
its position on June 1. What is the
effective price paid by the company for the
commodity? ……….
10.
(a)
2
11. Suppose that the
standard deviation of monthly changes in the price
of commodity A is
$$2. The standard
deviation of monthly changes in a futures price
for a contract on commodity
B (which is
similar to commodity A) is $$3. The correlation
between the futures price and the
commodity price is 0.9. What hedge
ratio should be used when hedging a one month
exposure to the price of commodity A?
…………..
11.
0.6
12. Futures contracts trade with all
delivery months. A company is hedging the purchase
of
the underlying asset on June 15.
Which futures contract should it use (circle one)
(a) The June contract
(b)
The July contract
(c) The May contract
(d) The August contract
12.
(b);
13. A
company has a $$36 million portfolio with a beta of
1.2. The S&P index is currently
standing at 900. Futures contracts on
$$250 times the index can be traded. What trade is
necessary to achieve the following.
(Indicate the number of contracts that should be
traded
and whether the position is long
or short.)
(i) Eliminate all systematic
risk in the portfolio …………
(ii) Reduce the beta
to 0.9
…………..
(iii) Increase beta
to 1.8 …………….
13.
(i) 192 short; 48 short;
96 long
14. The spot price of an
investment asset that provides no income is $$30
and the risk-free rate for all
maturities (with continuous
compounding) is 10%. What is the
three-
year forward price?
………
14.
$$40.50
15. Repeat question 14 on the
assumption that the asset provides an income of $$2
at the end of the
first year and at the
end of the second year………..
15.
$$35.84
16. An
exchange rate is 0.7000 and the six-month domestic
and foreign risk-free interest rates
are 5% and 7% (both expressed with
continuous compounding). What is the six-month
forward rate? …………
16.
0.6930
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