Futures and forwards a+ rated

 

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1. What is the payoff of a long call option with an exercise price of $15.50, if the underlying share price is $16.50, at the expiry date of the option? The option was purchased for $1.20.(1)

a.

$1.50

b.

$15.00

c.

$1.00

d.

30 cents

e.

$16.5

f.

Zero

1. Given the following data on a European Call calculate the value of a European Put option (correct to two decimal places) with the same exercise price and maturity as the Call: (2)

c = 4.15

Rf = 0.05 continuous pa

T = six months

X = 17

S = 18

1. In Australia the SPI future has a value of $25 per point of the index. If you go short the SPI at 4500 and the price closes for the day at 4510 then your account balance would (0.5)

a.

decrease by $25

b.

increase by $25

c.

increase by $250

d.

not change because marking to market only occurs when you close out

e.

decrease by $250

1. A currency forward contract is a contract that set the exchange rate in advance. It is usually written between a firm and a bank and it fixes the currency exchange rate for a transaction that will occur at a future date.

In Australia most hedging of exchange risk is conducted using these contracts. (0.5)

 True

 False

1. Which of the following enables an arbitrage profit to be made (excluding transaction costs) from a put option if the market price of the underlying share is $5.50, the price of the put is $0.50, and the exercise price is $3.80? (0.5)

a.

Buy the call option, exercise it and sell the underlying share.

b.

An arbitrage profit cannot be made.

c.

Buy a put option, exercise it and buy the underlying share.

d.

Buy a call option and hold onto it until expiry.

e.

Sell a put option now and realise the profit.

1. Identify the profit/loss on this transaction:
   You buy a call option on a share at an exercise price of $34 for a premium of $1.79 per share. The price of the share goes to $38. .(1)

a.

Net profit of $2.21

b.

Net loss of $2.21

c.

zero profit/loss

d.

Net loss of $5.79

e.

Net profit of $5.79

This is the payoff for the taker of a put . (1)

 True

 False

1. Which of the following statements about spot prices (S) and future prices (F) is correct?(0.5)

a.

S is always greater than F.

b.

F and S are never equal

c.

F = f(S plus carrying costs).

d.

F is always equal to S.

e.

There is no relationship between F and S.

1. Identify the profit/loss on this transaction (correct to two decimal places):
   You buy a put on a share at an exercise price of $33 for a premium of $2.2. The price of the share goes to $28 at maturity. (1.5)
2. You are worried about the price of oil decreasing, as you are an oil supplier, and decide to hedge your risk by using futures contracts (you need 10 contracts, each for 1000 barrels). Based on the following information, what is your  gain/loss on futures trading? And what is the effective price of oil per barrel from your hedging strategy?(0.5)

    

·         Now it is May and the current market price is $125 a barrel

·         in May the October futures price is $120 a barrel

·         in September you need to close out from your futures contracts; the current market price for oil is $113 a barrel and the October futures price is $112 a barrel.

a.

Gain on futures of $50,000 and effective price of $113 per barrel.

b.

Loss on futures of $50,000 and effective price of $112 per barrel.

c.

Loss on futures of $80,000 and effective price of $112.20 per barrel.

d.

Gain on futures of $80,000 and effective price of $121 per barrel.

e.

Gain on futures of $80,000 and effective price of $120 per barrel.

1. Identify the profit/loss on this transaction:
   You write two puts on a share at an exercise price of $33 for a premium of $1.63 each. The price of the share goes to $38 at maturity.(1)

a.

Net profit of $1.63

b.

Net loss of $3.37

c.

Net profit of $3.26

d.

Net profit of $10.00

e.

Net loss of $1.63

Which of the following best describes this graph (1)

a.

Long Call Profit

b.

Short Put Profit

c.

Short Call Payoff

d.

Long Call Payoff

e.

Short Put Payoff

f.

Long Put Profit

g.

Short Call Profit

h.

Long Put Payoff

1. It is January. Lan-wool is a manufacturer of woolen jumpers. Mary, the manager of Lan-wool, will need to purchase 7,500kg of wool in September. Mary is worried the market price of wool may increase in the future.(0.5)

   What sort of transactions should Mary undertake in order to hedge her risk using futures?

a.

Take a long position in the futures market in January fixing the price and take delivery of the contract in September.

b.

Take a long position in September wool futures in January, close out by taking a short position in wool futures in September and buy wool in the marketplace in September.

c.

Take a long position in September wool futures in January, close out by taking a long position in wool futures in September and buy wool in the marketplace in September.

d.

Take a short position in September wool futures in  January, close out by taking a long position in wool futures in September and buy wool in the marketplace in September.

e.

Take a short position in the futures market in January and deliver the contract in September.

1. The writer of an option is the (0.5)

a.

 initial seller of the option

b.

taker of a put option

c.

both buyer of the put option and buyer of the call option

d.

owner of the option selling to close

e.

taker of a call option

1. Identify the profit/loss on this transaction:
   You buy two call options on a share at an exercise price of $34 for a premium of $1.79 per share.You write a put on a share at an exercise price of $33 for a premium of $1.63.
   The price of the share goes to $40. All options have the same maturity date and are on the same underlying share. (1)

a.

Net profit of $50.05

b.

Net profit of $6.79

c.

Net Profit of $10.05

d.

Net loss of $1.95

e.

Net loss of $10.05

1. If the share price at the expiry of a call option is less than the exercise price, the call is worth: (0.5)

a.

the market price of the share.

b.

zero.

c.

the difference between the exercise price and the share price.

d.

an undefined amount.

e.

the original price paid for the option.

1. For a long put option (bought) with an exercise price of $9.50, the maximum payoff is: (0.5)

a.

$5.00

b.

infinite.

c.

not enough information given to be able to calculte

d.

Zero

e.

$9.50

1. Which of the following items are correct with respect to Futures? There may be more than one correct answer.(0.5)

I.

Most futures contracts do not go to delivery.

II.

An important difference between a forwards and a futures is that futures are marked to market.

III.

Futures can be used to hedge risk, speculate on price and to perform riskless arbitrage.

IV.

An important function of a futures clearing house is to minimise default

V.

The futures clearing house guarantees all its futures contracts whether they are long or short.