hw1-1 - 1 Introduction Problems 1. What is the difference...

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Unformatted text preview: 1 Introduction Problems 1. What is the difference between taking a long position in a forward contract and in a call option? Solution : Taking a long position in a forward contract is an obligation to buy an underlying asset at a fixed price. Taking a long position in a call option is a right but not an obligation to buy a certain instrument at a fixed price. The holder of a call option does not have to exercise the right. 2. Suppose the futures price of gold is currently $324 per ounce. An investor takes a short position in a futures contract for the delivery of 1,000 ounces. How much does the investor gain or lose if the price of gold at the end of the contract is (a) $310 per ounce; (b) $340 per ounce? Solution : The investor takes a short position, so his payoff is E- S . Therefore a) if gold price goes down at $310, he will gain (324- 310) 1 , 000 = $14 , 000; b) if gold price goes up to $340, he will loss (340- 324) 1 , 000 = $16 , 000....
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This note was uploaded on 02/11/2010 for the course MATH 6203 taught by Professor Zhu during the Spring '10 term at University of North Carolina Wilmington.

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hw1-1 - 1 Introduction Problems 1. What is the difference...

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