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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.

Assignments should be lodged at the next lecture (if you intend not to attend the lecture but would like to submit assignment, contact topic coordinator). Emailing assignment is not an option as one needs to get a permission in advance to do so. If you have been granted the permission then the assignment needs to be submitted before the start of the lecture, i.

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I am aware of the University’s policy on Academic Integrity, and, except where appropriately acknowledged, this assignment is my own work, has been expressed in my own words and has not previously been submitted for assessment.

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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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