Reference no: EM13669409
1. We said that options can be used either to scale up or reduce overall portfolio risk. What are some examples of risk-increasing and risk-reducing options strategies? Explain each.
2. Turn back to Figure which lists prices of various IBM options. Use the data in the figure to Calculate the payoff and the profits for investments in each of the following February expiration options. assuming that the stock price on the expiration date is $195.
a. Call option, X = $190.
b. Put Option. X = $190.
c. Call option. X = $195.
d. Put option, X = $195.
e. Call option, X = $200.
f. Put option, X = $200.
3. diagram at expiration tor your position.
Assume a stock has a value of $100. The stock is expected to pay a dividend of $2 per share at year-end. An at-the-money European-style put option with one-year maturity sells for $7. if the annual interest rate is 5%, what must be the price of a 1-year at-the-money European call option on the stock?
4. You buy a share of stock, write a -year call option with X = $10, and buy a 1-year put option with X = $10. Your net outlay to establish the entire portfolio is $9.50. What is the risk-ftee A interest rate? The stock pays no dividends.
5. Why is there no futures market in cement?
6.
a). Turn to the S&P 500 contract in Figure 22.1.1f the margin requirement is 10% of the futures price times the multiplier of $250. how much must you deposit with your broker to trade the March maturity contract?
b). If the March futures price were to increase to 1,498, what percentage return would you earn on your net investment if you entered the long side of the contract at the price shown in the figure?
c.) If the March futures price falls by 1%, what is your percentage return?
7. Maria VanHusen. CFA. suggests that using forward contracts on fixed-income securiti be used to protect the value of the Star Hospital Pension Plan's bond portfolio against 1110 sibility of rising interest rates.
VanHusen prepares the following example to illustrate how protection would work:
• A 10-year bond with a face value of $1,000 is issued today at par value. The bond PS. an annual coupon.
• An investor intends to buy this bond today and sell it in 6 months.
A stock's beta is a key input to hedging in the equity market. A bond's duration is key in fixed, income hedging. How are they used similarly?
Are there any differences' in the calculations necessary to formulate a hedge position in each market?
8. A corporation plans to issue $10 million of 10-year bonds in 3 months. At current yields the bonds would have modified duration of 8 years. The T-note futures contract is selling at F0 = 100 and has modified duration of 6 years. How can the firm use this futures contract to hedge the risk surrounding the yield at which it will be able to sell its bonds? Both the bond and the contract arc at par value.
9. After studying Iris Hamson's credit analysis, George Davies is considering whether he can increase the holdingeriod return on Yucatan Resort's excess cash holdings (which are held 1:1A pesos) by investing those cash holdings in the Mexican bond market. Although Davies would be investing in a peso-denominated bond, the investment goal is to achieve the highest holding period return. measured in U.S. dollars. on the investment.