Reference no: EM131388405
1-Concisely define ‘options' and ‘futures', and cite their similarities and differences - in your own words.
2-Assume the existence of a futures market in human blood. The spot price (today's market price) is $200 per pint. (A curious comparison - HP #45 ink cartridges are $355 per pint.) Your hospital is concerned about rising blood prices because competition and regulation prevents it from passing the cost along to patients. Explain how to use futures as a hedge against increases in the price of human blood.
3-You own stock in a NYSE exchange-listed healthcare company and have a hedge in place to lock in capital gains you have made, in case the price falls. Explain the significance of the hedge ratio to your hedging strategy. HINT: Is an option for 100 shares a perfect hedge against a long holding of 100 shares of the underlying stock?
4-Calculate your pre-tax rate of return (profit divided by investment) in each of these scenarios (SHOW YOUR WORK):
a-buy 1,000 shares of ABC common stock at $50 and sell at $60 one year later.
b-buy 1,000 shares of ABC common stock at $50, borrowing 50% of the amount necessary to buy it, at a 2% interest rate, sell the stock at $60 one year later, paying back the loan at the same time.
c-buy listed options at $400 for 1,000 shares of ABC, giving you the right but not the obligation to buy the shares at $50 one year later, you exercise the option one year later when the stock price is $60. Also, use the Long Call chart (from the CBOE material in this PDF) to explain what is going on.
5- Some airlines hedge jet fuel prices and some do not. When oil prices declined, some airlines that had hedged jet fuel prices were worse off than those that did not hedge. Using a numerical example, show your understanding of hedging by explaining why they were worse off. Explain whether or not this situation an argument against hedging?
6- Was Warren Buffett right when he called derivatives "financial weapons of mass destruction"? State your yes or no, followed by a maximum six-line explanation.
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