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Ec 174 SELECTED EXAM QUESTIONS WE DO NOT DISCUSS OLD EXAMS! These questions are provided to you to give you some idea of the level of questions on my midterms and finals. The exams were based on different editions of various textbooks over the years. If having these problems to look at helps you, then good. If not, feel free to ignore them. Many of my exams also include a few multiple choice questions. Problem – Options The table at right shows the current prices for options on Intel Corp. common stock. Each contract is for 100 shares. The spot price of Intel stock is S 0 = $26.80/share. You write one JAN ‘08 CALL option with a $25 exercise price. A. What is the nature of your obligation? You must be prepared to sell (deliver) 100 shares of Intel to the buyer of the call for $25 per share if the buyer exercises the call any time up to January 18, 2008. B. Assume that this was an American-style option. 1. What U.S. exchange was this option most likely traded on? Probably CBOE 2. What is the difference between American-style and European-style options? American can be exercised any time up to expiration date European can only be exercised on the expiration date C. Under what exact circumstances will your gain from writing this option turn out to be $50? If holder (buyer) of your call option exercises when Intel is selling at S t = $27.11/share. You received $2.61 × 100 when you sold the option. Now you buy 100 shares of Intel for $27.11 and sell them to option holder for $25. Your final profit is π = $261 + $2500 − $2711 = $50 Problem – Futures and Hedging A friend of mine named Glen Conrad is a Texas farmer who grows a crop called sorghum. He will harvest 250,000 bushels in February 2008, and wants to hedge the value of this crop. There are no futures contracts in sorghum traded on exchanges, but there are contracts on corn, which he will use for cross hedging. Today’s pertinent information is in the table below (use settlement price for F 0 .) In addition, todays spot prices are: Sorghum = $7.670/bushel Corn = $3.615/bushel Glen wants a short position and the MAR ’08 contract. Conrad’s broker gives him the following OLS regression results, where S = change in sorghum spot prices and F = changes in corn futures prices on a given futures contract, both for about 4- month intervals: S i = −3.06 + 0.88 F i , i = 1…14 R 2 = 0.91 INTEL OPTIONS Expiratio n Strik e Call Put 21 DEC ‘07 $25 $30 $2.2 5 $0.1 9 $0.4 7 $3.2 5 18 JAN ‘08 $25 $30 $2.6 1 $0.4 7 $0.7 4 $3.7 0 Agricultural Futures Wall Street Journal O PEN I NTEREST O PEN H IGH L OW S ETTLE Corn (CBT) – 5,000 bu.; cents per bu. DEC ‘07 MAR ‘08 368.75 385.75 380.7 5 397.5 368.2 5 385.7 5 377.0 0 394.5 0 510,10 4 255,62 3
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Ec 174 SELECTED EXAM QUESTION p. 2 of 29 Glen is going to open a cross hedging position today and close it in February, for a hedge period of τ = 4 months. When he closes the position, he sells his sorghum crop for the spot price at the time.
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