Example critical thinking 1 define a futures contract

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Unformatted text preview: rice of the AT&T stock is $100. Ginny decides to buy a call option for $10. This call option gives her the right to buy AT&T at a price of $100. Five months pass and the price of AT&T shares has risen to $150. If Ginny wants to, she can exercise her call option to buy AT&T stock at $100. In other words, she can spend $100 to buy a share of stock, which she can turn around and immediately sell for $150, making a profit of $50 per share. EXAMPLE: Critical Thinking 1. Define: a. futures contract b. option 4. “The currency speculator who sells futures contracts assumes the risk that someone else doesn’t want to assume.” Do you agree or disagree? Explain your answer. 2. Why might a person buy a futures contract? 3. Why might a person buy a call option? Rank than it currently brings on the market will be willing to buy your put option from you for some price higher than the price you paid. Defining Terms Review Facts and Concepts Largest Percentage Gains Applying Economic Concepts 5. If you thought the share price of a stock was going to fall, would you buy a call option or a put option? Section 3 Futures and Options 455 16 (428-459) EMC Chap 16 5/8/06 5:07 PM Page 456 Economics Vocabulary Chapter Summary Be sure you know and remember the following key points from the chapter sections. Section 1 Financial markets serve the purpose of channeling money from some people to other people. A stock is a claim on the assets of a corporation that gives the purchaser a share (ownership) in the corporation. Stocks are bought and sold on exchanges and markets such as the New York Stock Exchange. Some people buy stocks for the dividends, which are payments made to stockholders based on a company’s profits, or to make money by buying shares at a lower price and selling at a higher price. Section 2 A bond is simply an IOU, or a promise to pay, typically issued by companies, governments, or government agencies. The three major components of a bond are face or par value, maturity date, and coupon rate. The price that a person pays for a bond depends on market conditions: the greater the demand for the bond relative to the supply, the...
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