Exam 20: An Introduction to Derivative Markets and Securities

A stock currently sells for $75 per share. A put option on the stock with an exercise price $70 currently sells for $0.50. The put option is

According to put/call parity

A stock currently sells for $150 per share. A call option on the stock with an exercise price $155 currently sells for $2.50. The call option is

Investment costs are generally higher in the derivative markets than in the corresponding cash markets.

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. -Consider a stock that is currently trading at $65. Calculate the intrinsic value for a put option that has an exercise price of $55.

Exhibit 20.4 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Rick Thompson is considering the following alternatives for investing in Davis Industries which is now selling for $44 per share: -Refer to Exhibit 20.4. Assuming no commissions or taxes, what is the annualized percentage gain if the stock is at $30 in four months and the stock was purchased?

The initial value of a future contract is the price agreed upon in the contract.

An equity portfolio manager can neutralize the risk of falling stock prices by entering into a hedge position where the payoffs are

Investors buy call options because they expect the price of the underlying stock to increase before the expiration of the option.

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%. -A stock currently trades for $63. Call options with a strike price of $62 sell for $4.00 and expire in 6 months. If the risk-free rate is 4% what should the price of a put option with an exercise price of $62 be worth?

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. -Assume that you have purchased a call option with a strike price $60 for $5. At the same time you purchase a put option on the same stock with a strike price of $60 for $4. If the stock is currently selling for $75 per share, calculate the dollar return on this option strategy.

Holding a put option and the underlying security at the same time is an example of

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. -Assume that you purchased shares of a stock at a price of $35 per share. At this time you wrote a call option with a $35 strike and received a call price of $2. The stock currently trades at $70. Calculate the dollar return on this option strategy.

Exhibit 20.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) December futures on the S&P 500 stock index trade at 250 times the index value of 1187.70. Your broker requires an initial margin of 10% percent on futures contracts. The current value of the S&P 500 stock index is 1178. -Refer to Exhibit 20.1. Suppose at expiration the futures contract price is 250 times the index value of 1170. Disregarding transaction costs, what is your percentage return?

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. -Assume that you purchased shares of a stock at a price of $35 per share. At this time you purchased a put option with a $35 strike price of $3. The stock currently trades at $40. Calculate the dollar return on this option strategy.

Forward contracts do not require an upfront premium.

A futures contract eliminates uncertainty about the future spot price that an individual can expect to pay for an asset at the time of delivery.

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. What is Sarah's annualized gain/loss?

Derivative instruments exist because

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 $47.00, what is Sarah's dollar gain or loss?