Reference no: EM13560470

Problem 1.11: A cattle farmer expects to have 120,000 pounds of live cattle to sell in three months. The live-cattle futures contract on the Chicago Mercantile Exchange is for the delivery of 40,000 pounds of cattle. How can the farmer use the contract for hedging? From the farmer's viewpoint, what are the pros and cons of hedging?

 

Problem 1.12:- It is July 2013. A mining company has just discovered a small deposit of gold. It will take six months to construct the mine. The gold will then be extracted on a more or less continuous basis for one year. Futures contracts on gold are available on the New York Mercantile Exchange. There are delivery months every two months from August 2013 to December 2014. Each contract is for the delivery of 100 ounces. Discuss how the mining company might use futures markets for hedging.

 

Problem 1.14:- Suppose that a June put option on a stock with a strike price of $60 costs $4 and is held until June. 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 short position in the option depends on the stock price at the maturity of the option.

 

Problem 1.15: It is May and a trader writes a September call option with a strike price of $20. The stock price is $18, and the option price is $2. Describe the investor's cash flows if the option is held until September and the stock price is $25 at this time.

 

Problem 1.27 :Trader A enters into a forward contract to buy an asset for $1000 an ounce in one year. Trader B buys a call option to buy the asset for $1000 in one year. The cost of the option is $100. What is the difference between the positions of the traders? Show the profit as a function of the price of the asset in one year for the two traders.

 

Problem 1.32 : A stock price is $29. An investor buys one call option contract on the stock with a strike price of $30 and sells a call option contract on the stock with a strike price of $32.50. The market prices of the options are $2.75 and $1.50, respectively. The options have the same maturity date. Describe the investor's position.

 

Problem 1.35: The current price of a stock is $94, and three-month call options with a strike price of $95 currently sell for $4.70. An investor who feels that the price of the stock will increase is trying to decide between buying 100 shares and buying 2,000 call options (20 contracts). Both strategies involve an investment of $9,400. What advice would you give? How high does the stock price have to rise for the option strategy to be more profitable?  

 

Problem 1.37: A trader buys a European call option and sells a European put option. The options have the same underlying asset, strike price and maturity. Describe the trader's position. Under what circumstances does the price of the call equal the price of the put?