Chat with AIExam 2: An Introduction to Forwards and Options
The spot price of the market index is $900.After 3 months the market index is priced at $920.The annual rate of interest on treasuries is 2.4% (0.2% per month).The premium on the long put,with an exercise price of $930,is $8.00.What is the profit or loss at expiration for the long put?
(32) 
VerifiedC
A put option is purchased and held for 1 year.The Exercise price on the underlying asset is $40.If the current price of the asset is $36.45 and the future value of the original option premium is (-$1.62),what is the put profit,if any,at the end of the year?
(35) VerifiedB
Engage the class in a conversation about auto insurance.Why do people feel their premium is wasted if they do not file a claim? Steer the class towards an understanding of put options and potential gain should a loss occur.It may also be beneficial to ask students to relate insurers' pooling of losses with the concept of risk management.
(29) 
Answered by Examlex AI CopilotAlright class, let's talk about auto insurance. Have you ever wondered why people feel like their premium is wasted if they don't file a claim?
One reason for this feeling is that people often view insurance as a form of protection against financial loss. When they pay their premiums and don't experience a loss, they may feel like they didn't get their money's worth. However, it's important to remember that insurance is about managing risk and providing peace of mind in case of unexpected events.
To help us understand this concept better, let's think about put options in the stock market. A put option gives the holder the right to sell a specific amount of an underlying asset at a set price within a certain time frame. Just like with insurance, the holder of a put option pays a premium for this protection. If the price of the underlying asset falls, the holder can exercise the option and sell at the higher set price, potentially making a gain.
In the context of auto insurance, the premium paid is like the cost of the put option. Even if a loss doesn't occur, the premium provides the peace of mind and financial protection in case of an accident or other covered event. So, just like with put options, the premium paid for insurance is a form of risk management and protection against potential losses.
Another important concept to consider is the pooling of losses by insurers. When individuals pay their premiums, the money is pooled together to cover the losses of those who do experience accidents or other covered events. This pooling of losses is a key aspect of risk management, as it spreads the financial risk across a larger group of people.
So, in conclusion, it's important to recognize that insurance premiums provide valuable protection and peace of mind, even if a claim isn't filed. Just like with put options and pooling of losses, insurance is a tool for managing risk and providing financial security in case of unexpected events.
The spot price of the market index is $900.After 3 months the market index is priced at $920.The annual rate of interest on treasuries is 4.8% (0.4% per month).The premium on the long put,with an exercise price of $930,is $8.00.Draw the payoff graph for the long put position at expiration.Include strike price,breakeven price,and max loss.
(41) The premium on a long term call option on the market index with an exercise price of 950 is $12.00 when originally purchased.After 6 months the position is closed,and the index spot price is 965.If interest rates are 0.5% per month,what is the Call Payoff?
(40) If your homeowner's insurance premium is $1,000 and your deductible is $2000,what could be considered the strike price of the policy if the home has a value of $120,000?
(36) The spot price of the market index is $900.A 3-month forward contract on this index is priced at $930.The annual rate of interest on treasuries is 2.4% (0.2% per month).What annualized rate of interest makes the net payoff zero? (Assume monthly compounding.)
(26) The spot price of the market index is $900.A 3-month forward contract on this index is priced at $930.What is the profit or loss to a short position if the spot price of the market index rises to $920 by the expiration date?
(32) The premium on a call option on the market index with an exercise price of 1050 is $9.30 when originally purchased.After 2 months the position is closed,and the index spot price is 1072.If interest rates are 0.5% per month,what is the Call Profit?
(38) The spot price of the market index is $900.After 3 months the market index is priced at $915.The annual rate of interest on treasuries is 2.4% (0.2% per month).The premium on the long put,with an exercise price of $930,is $8.00.Calculate the profit or loss to the short put position if the final index price is $915.
(36) The spot price of the market index is $900.A 3-month forward contract on this index is priced at $930.Draw the payoff graph for the short position in the forward contract.
(28) The spot price of the market index is $900.After 3 months the market index is priced at $920.The annual rate of interest on treasuries is 2.4% (0.2% per month).The premium on the long put,with an exercise price of $930,is $8.00.At what index price does a long put investor have the same payoff as a short index investor? Assume the short position has a breakeven price of $930.
(34) As with Chrysler Corp.many years ago,the government occasionally guarantees loans.What option is the government granting and to whom in a loan guarantee?
(32) The spot price of the market index is $900.The annual rate of interest on treasuries is 2.4% (0.2% per month).After 3 months the market index is priced at $920.An investor has a long call option on the index at a strike price of $930.What profit or loss will the writer of the call option earn if the option premium is $2.00?
(34) All of the positions listed will benefit from a price decline,except:
(36) Develop the payoff table for the previous question,using at least five different possible index prices,in addition to the strike price and breakeven price.
(29) An investor has a long call option on the market index at a strike price of $930.At expiration the index price is $920.Explain the profit and loss.
(30) The spot price of the market index is $900.After 3 months,the market index is priced at $920.An investor has a long call option on the index at a strike price of $930.After 3 months,what is the investor's profit or loss?
(37) The spot price of the market index is $900.A 3-month forward contract on this index is priced at $930.The market index rises to $920 by the expiration date.The annual rate of interest on treasuries is 2.4% (0.2% per month).What is the difference in the payoffs between a long index investment and a long forward contract investment? (Assume monthly compounding.)
(34) 
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