Options+Futures+and+Other+Derivatives++5th+Edition+End+of+Chapter+1234+Problems+

Options+Futures+and+Other+Derivatives++5th+Edition+End+of+Chapter+1234+Problems+

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CHAPTER 1 QUESTIONS AND PROBLEMS 1.1. What is the difference between a long forward position and a short forward position? 1.2. Explain carefully the difference between hedging, speculation, and arbitrage. 1.3. What is the difference between entering into a long forward contract when the forward price is $50 and taking a long position in a call option with a strike price of $50? 1.4. Explain carefully the difference between writing a call option and buying a put option. 1.5. A trader enters into a short forward contract on 100 million yen. The forward exchange rate is $0.0080 per yen. How much does the trader gain or lose if the exchange rate at the end of the contract is (a) $0.0074 per yen; (b) $0^00? 1 per yen? 1.6. A trader enters into* a "snort cotton futures contract when the futures price is 50 cents per pound. The contract is for the delivery of 50,000 pounds. How much does the trader gain or lose if the cotton price at the end of the contract is (a) 48.20 cents per pound; (b) 51.30 cents per pound? 1.7. Suppose that you write a put contract on AOL Time Warner with a strike price of $40 and an expiration date in three months. The current stock price of AOL Time Warner is $41 and the contract is on 100 shares. What have you committed yourself to? How much could you gain or lose? 1.8. You would like to speculate on a rise in the price of a certain stock. The current stock price is $29, and a three-month call with a strike of $30 costs $2.90. You have $5,800 to invest. Identify two alternative strategies, one involving an investment in the stock and the other involving investment in the option. What are the potential gains and losses from each? 1.9. Suppose that you own 5,000 shares worth $25 each. How can put options be used to provide you with insurance against a decline in the value of your holding over the next four months? 1.10. A trader buys a European put on a share for $3. The stock price is $42 and the strike price is $40. Under what circumstances does the trader make a profit? Under what circumstances will the option be exercised? Draw a diagram showing the variation of the trader's profit with the stock price at the maturity of the option. 1.11. A trader sells a European call on a share for $4. The stock price is $47 and the strike price is $50. Under what circumstances does the trader make a profit? Under what circumstances will the option be exercised? Draw a diagram showing the variation of the trader's profit with the stock price at the maturity of the option. 1.12. A trader buys a call option with a strike price of $45 and a put option with a strike price of $40. Both options have the same maturity. The call costs $3 and the put costs $4.
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Options+Futures+and+Other+Derivatives++5th+Edition+End+of+Chapter+1234+Problems+

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