PractiseQuestions..doc

Practise Questions (Optional) (Note: As additional materials, the quick answers are given and assist you to understand concepts and some calculations. You are encouraged to work out procedures by yourself. You should review that week lecture notes and text chapter/s.) 1. List three types of traders in futures, forward, and options markets (i) ................. (ii) ................ (iii) ............... hedgers, speculators, arbitrageurs 2. A trader buys 100 European call options with a strike price of $20 and a time to maturity of one year. The cost of each option is $2. The price of the underlying asset proves to be $25 in one year. What is the traders gain or loss? ............ 2. $300 gain 3. A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. (i) What is the breakeven stock price, above which the trader makes a profit? ………. (ii) What is the breakeven stock price below which the trader makes a profit? ………. 3. (i) $35; (ii) $20. 4. Which of the following is not true (circle one) (a) Futures contracts nearly always last longer than forward contracts (b) Futures contracts are standardized; forward contracts are not. (c) Delivery or final cash settlement usually takes place with forward contracts; the same is not true of futures contracts. (d) Forward contract usually have one specified delivery date; futures contract often have a range of delivery dates. 4. (a) 5. In the corn futures contract a number of different types of corn can be delivered (with price adjustments specified by the exchange) and there are a number of different delivery locations. Which of the following is true (circle one) (a) This flexibility tends increase the futures price. (b) This flexibility tends decrease the futures price. (c) This flexibility may increase and may decrease the futures price. (d) This has no effect on the future