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Derivatives Markets

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Each question is worth 1 point. The assignment consists of 10 questions. Please write your name and student number on top of the first page of the assignment. Please provide the relevant calculations. Assignment is individual.

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1. Who from the following list would be considered a speculator by entering into a futures or options contract on commodities?

A) Corn delivery truck driver
B) Food manufacturer
C) Farmer
D) None of the above

2. Assume that you open a 100 share short position in Jiffy, Inc. common stock at the bid-ask price of $32.00 – $32.50. When you close your position the bid-ask prices are $32.50 – $33.00. If you pay a commission rate of 0.5%, calculate your profit or loss on the short investment? 3. If your homeowner’s insurance premium is $1,000 and your deductible is $2000, what could be considered the strike price of the policy if the home has a value of $120,000?

A) $118,000
B) $122,000
C) $117,000
D) $120,000

4. Why are option premiums greater than 0 (in comparison, forward contracts have no premiums)?

5. What are the advantages and disadvantages of using in-the-money put options rather than at-the-money options to hedge downside price risk (e.g. a cotton producer wants to hedge against falling cotton price)?

6. What are the advantages and disadvantages of using out-of-the-money call options rather than at-the-money options to hedge upside price risk (e.g. Qantas wants to hedge against increasing jet fuel price)?

7. What financial derivatives are more liquid: the ones traded on the organized exchanges or the ones traded in over-the-counter market? Why? Why do we care about liquidity?

8. The spot price of the market index is $900. After 3 months the market index is priced at $920. An investor has a long call option on the index at a strike price of $930. After 3 months what is the investor’s
profit or loss, assuming that option premium is 0? a) $10 loss b) $0

c) $10 gain d) $20 gain

9. All of the positions listed will benefit from a price decline, except: a) Short put b) Long put c) Short call
d) Short stock

10. The spot price of the market index is $900. A 3-month forward contract on this index is priced at $930. Draw the payoff graph for the short position in the forward contract. ———————–

Cite this Derivatives Markets

Derivatives Markets. (2016, Oct 28). Retrieved from https://graduateway.com/derivatives-markets/

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