Exam 20: An Introduction to Derivative Markets and Securities

Exhibit 21.12 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Suppose you are a loan officer for a commercial bank and one of your clients has just approached you about a one-year loan for $4,000,000. Interest on the new loan will be paid at the end of each quarter based on the prevailing level of LIBOR at the beginning of each quarter. The LIBOR yield curve in the cash market is as follows: -A primary function of futures markets is to allow investors to transfer risk.

A stock currently sells for $15 per share. A put option on the stock with an exercise price $15 currently sells for $1.50. The put option is

A one year call option has a strike price of 50, expires in 6 months, and has a price of $4.74. If the risk free rate is 3%, and the current stock price is $45, what should the corresponding put be worth?

A stock currently sells for $75 per share. A call option on the stock with an exercise price $70 currently sells for $5.50. The call option is

A one year call option has a strike price of 50, expires in 6 months, and has a price of $5.04. If the risk free rate is 5%, and the current stock price is $50, what should the corresponding put be worth?

Futures contracts are similar to forward contracts in that they both

A one year call option has a strike price of 70, expires in 3 months, and has a price of $7.34. If the risk free rate is 6%, and the current stock price is $62, what should the corresponding put be worth?

Consider a stock that is currently trading at $45. Calculate the intrinsic value for a call option that has an exercise price of $35.

Forward contracts are much easier to unwind than futures contracts due to the standardization of the contracts.

Exhibit 21.12 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Suppose you are a loan officer for a commercial bank and one of your clients has just approached you about a one-year loan for $4,000,000. Interest on the new loan will be paid at the end of each quarter based on the prevailing level of LIBOR at the beginning of each quarter. The LIBOR yield curve in the cash market is as follows: -All features of a forward contract are standardized, except for price and number of contracts.

Which of the following statements is a true definition of an out-of-the-money option?

In the valuation of an option contract, the following statements apply except

Which of the following statements is false?

The option premium is the price the call buyer will pay to the option seller if the option is exercised.

Exhibit 20.5 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Sarah Kling bought a 6-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share. -Refer to Exhibit 20.5. If at expiration Peppy is selling for $42.00, what is Sarah's dollar gain or loss?

In the two state option pricing model, which of the following does not influence the option price?

Futures differ from forward contracts because

An advantage of a forward contract over a futures contract is that

Exhibit 20.2 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) A futures contract on Treasury bond futures with a December expiration date currently trade at 103:06. The face value of a Treasury bond futures contract is $100,000. Your broker requires an initial margin of 10%. -Refer to Exhibit 20.2. Calculate the current value of one contract.

Exhibit 20.6 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The current stock price of ABC Corporation is $53.50. ABC Corporation has the following put and call option prices that expire 6 months from today. The risk-free rate of return is 5% and the expected return on the market is 11%. -Refer to Exhibit 20.6. What is the value of a synthetic stock created with put and call options that expire in 6 months with an expiration price of $50?