FinMktHW7 - Financial Markets & Institutions Module 7...

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Module 7 Homework Page 316: 1) A derivative security is a financial security that’s value and characteristics depend on the value or characteristics of an underlying security. 2) A spot contract is a contract available for immediate sale and delivery of a commodity. A forward contract is an agreement between two parties to buy or sell an asset at a predetermined future time at a predetermined price. A futures contract is a standardized contract traded on a futures exchange, to buy or sell an underlying instrument at a certain date in the future at a specific price. 4) The purpose of a margin on these is so that the margin has to be held regardless of the change in the contract’s market value. An initial margin is the amount of funds that you must deposit when the positions are initially put on. A maintenance margin is the minimum balance that needs to be maintained to keep its position. 9) A) Your obligation is a price of $95,000 at a predetermined future date. B) You will lose $1,000, because you will pay $95,000 for a bond with a market value of $94,000. C) You will gain $2,000, because you will pay $95,000 for a bond with a market value of $97,000. 11) An option is a contract to buy or sell a specific financial product. An option differs from a forward or future contract because they limit risk on positions, create a floor and ceiling price protection and are not always required to have a margin on positions. 12) A call option is a contract between parties that allows the option buyer the right to buy the underlying asset, whereas a put option is a contract between parties that allows the option buyer the right to sell the underlying asset. 14) When the price of an underlying stock falls, the put premium will increase and it can be sold for a profit. The writer will make money if the stock rises and can make a profit out of the sale without having to buy the stock from the holder of the put option. 16) A) $2.00 per stock with no premium, $1.50 with a premium.
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B) It would be a net loss of $4.50 per stock. Recent Derivatives Legislation As of late a lot has been going on with derivatives in the news. Some of the biggest reforms in the financial industries have occurred in recent months. Legislation changes of this magnitude have not happened since the time of the Great Depression. The Dodd-Frank Wall Street Reform and Consumer Protection Act was
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This note was uploaded on 07/12/2011 for the course BUS 101 taught by Professor Noname during the Spring '11 term at Albany State University.

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FinMktHW7 - Financial Markets & Institutions Module 7...

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