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FINE 342 Lecture Notes - Lecture 5: Spot Contract, Futures Contract, Forward Contract

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erinhorse495
21 Jun 2017
School
McGill University
Department
Finance
Course
FINE 342
Professor
Vadimdi Pietro

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Document Summary

Are losses of short trader and vice versa. Payoff of forward/futures is linear function of spot price. At maturity, futures price always equal spot price. Forward contracts: delivery price (forward price) fixed during contract life. Futures contracts: delivery price (futures price) is changing everyday. Futures can be closed out or settled by delivery. If futures contract not closed out before maturity, settled by delivering underlying assets. When there are alternatives about delivery conditions, party with short position chooses. With cash settlement, contracts are traded until predetermined time; then all are closed out. Futures trading leads to daily activity and flexibility. Delivery price changes during contract life: hedging with forwards and futures. Can use forwards to lock in price early. A major component and cost factor is sugar. To fix sugar costs, cadbury would like to sign a forward contract to purchase sugar at various points in the future for a price negotiated today.

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FINE 342 Lecture Notes - Lecture 6: Put Option, Option Style, Call Option
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Related Questions

Suppose you enter into along 6-month forward position at a forward price of $60. What is the payoff in 6 months for prices of $50, $55, $60, $65, and $70? The payoff to a long forward at expiration is equal to: Payoff to long forward = Spot price at expiration−Forward price Therefore, the payoff in 6 months shown in the following table: Price of position in 6 months Payoff of the forward $50 - $10 55 - 5 60 0 65 5 $70 $10 2. Suppose that instead you buy a 6-month call option with a strike price of $60. What is the payoff in 6 months at the same prices for the underlying asset? Payoff = Price of underlying asset in 6-month - Strike price of 6-month call option = $60 - $60 = $0 or zero 3. Comparing the payoffs of parts (a) and (b), which contract should be more expensive (i.e., the long call or long forward)? Why is this so?

4. If you __________, then you may be forced to buy the underlying stock.

  1. Buy a Call Option
  2. Buy a Put Option
  3. Sell a Call Option
  4. Sell a Put Option

5. Lower risk free rates results in __________ Put Option prices and ______ Call Option Prices.

  1. Higher, Higher
  2. Higher, Lower
  3. Lower, Lower
  4. Lower,Higher

6. Which Statement is correct?

  1. Speculators make money by setting up transactions and are the go betweens in the derivatives market.
  2. A firm should always hedge in order to reduce risk whenever they can
  3. Hedgers do not mind losing money as long as they are reducing their risk
  4. Brokers try to find mispricings in the market where they can buy at a low price and simultaneously sell at a high price without taking on any risk.

7. Which statement regarding executive stock options is correct?

  1. They are short term and usually expire after one year.
  2. They should reduce agency costs by making managers act like shareholders
  3. They are included as compensation expense on the income statement.
  4. Managers can sell the options on an exchange

8. Which of the following statements are correct?

  1. Forward contracts are standardized and trade on an exchange
  2. Profits and Losses on Futures contracts are marked to market on a daily basis.
  3. Delivery of the assets almost never occurs in the forward market
  4. Futures contracts allow you to buy or sell individual stocks for a preset price on the expiration date.

9. You need a barrel of oil next month. You could either buy the oil today and keep it for a month, wait and buy the oil next month when you need it, you could enter into a futures contract to buy oil at the current futures price $81, or you can pay $2 for a call option that gives you the right to buy oil for $80. The current spot price is $79 and the risk free rate is 2%, and carrying costs are $2. If the price ends up being $84 next month, then you should have ______________.

  1. Waited to buy the oil
  2. Entered into a futures contract
  3. Bought a call option
  4. Buy the oil today and store it for a month.

10. Which of these should cause the dollar to appreciate?

  1. A decline in foreign demand for US goods and services
  2. An increase in US demand for foreign goods and services
  3. An increase in foreign demand for US financial assets
  4. An increase in the amount of gold held by the US central bank

FIN36058 EXAM III NAME:
PROBLEMS
I. (15 points) You have purchased a call option contract on Smith & Smith common stock. The option contract is for 100 shares. The option has an exercise price of $43.00 and S & S’s stock currently trades at $40.00. The option premium is quoted at $2.00.
a. If S & S’s stock price rises to $44.00, while you exercise the option? Calculate your net profit/loss on the option contract if (5 points).
b. If S & S’s stock price rises to $48.00, while you exercise the option? Calculate your net profit/loss on the option contract if (5 points).
c. If the stock price rises to $42.00, would you exercise or not exercise the option and what would be your gain or loss (3 points)?
d. You will make a profit on the option if the S & S stock price rises above what amount (2 points)?
To earn a profit, you must recoup the price you paid for the call, plus the exercise price:
II. (13 points) Green Backs Bank wishes to take a position in Treasury bond futures contracts, which
currently have a quote of 96-240. Green Backs thinks interest rates will go down over the period of
investment.
a. Should the bank go long or short on the futures contracts (3 points)?
b. Given your answer to part (a), calculate the net profit to Tree Row Bank if the price of the futures
contracts increases to 99-160 (5 points).
c. Given your answer to part (a), calculate the net profit to Tree Row Bank if the price of the futures
contracts decreases to 94-080 (5 points).
III. (20 points) The financial statements for MHM Bank (MHM) are shown below:
a. Calculate MHM’s total operating income (3 points).
b. Calculate MHM’s asset utilization ratio (3 points).
c. Calculate MHM’s ROA (3 points).
d. Calculate the dollar value of MHM’s earning assets (3 points).
e. Calculate the dollar value of MHM’s interest-bearing liabilities (3 points).
f. Calculate MHM’s spread (3 points).
g. Calculate MHM’s net interest margin (3 points).
h. Calculate MHM’s interest expense ratio (3 points).
Balance Sheet MHM Bank
Assets
Liabilities and Equity Cash and due from banks $ 8,200 Demand deposits $ 35,600
Demand deposits at other FIs
9,100
Small time deposits
32,900 Investments 9,600 Jumbo CDs 12,000
Federal funds sold
9,400
Federal funds purchased
3,300 Loans (less reserve for loan losses of 10,400) 74,800 Other liabilities 16,200
Premises
8,900
Equity
20,000
Total assets
$
120,000
Total liabilities/equity
$
120,000
Income Items for MHM Bank
Interest income
$ 9,380 Interest expense 3,856
Provision for loan losses
7,800 Noninterest income 6,044
Noninterest expense
4,300 Taxes (credit) - 132