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Ch01_HW_Questions (1)

# Ch01_HW_Questions (1) - per yen The loss is 100 0 0011 ×...

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CHAPTER 1 Introduction Problem 1.13. Suppose that a March call option on a stock with a strike price of \$50 costs \$2.50 and is held until March. Under what circumstances will the holder of the option make a gain? Under what circumstances will the option be exercised? Draw a diagram showing how the profit on a long position in the option depends on the stock price at the maturity of the option. Problem 1.20. 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) \$0.0091 per yen? a) The trader sells 100 million yen for \$0.0080 per yen when the exchange rate is \$0.0074 per yen. The gain is 100 0 0006 × . millions of dollars or \$60,000. b) The trader sells 100 million yen for \$0.0080 per yen when the exchange rate is \$0.0091
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Unformatted text preview: per yen. The loss is 100 0 0011 × . millions of dollars or \$110,000. Problem 1.29. Discuss how foreign currency options can be used for hedging in the situation described in Example 1.1 so that (a) ImportCo is guaranteed that its exchange rate will be less than 1.6600, and (b) ExportCo is guaranteed that its exchange rate will be at least 1.6200. Problem 1.31. On July 17, 2009, an investor owns 100 Google shares. As indicated in Table 1.2, the share price is \$430.25 and a December put option with a strike price \$400 costs \$21.15. The investor is comparing two alternatives to limit downside risk. The first involves buying one December put option contract with a strike price of \$400. The second involves instructing a broker to sell the 100 shares as soon as Google’s price reaches \$400. Discuss the advantages and disadvantages of the two strategies....
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