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ADMS 1000 Lecture Notes - Lecture 4: Call Option, Pound Sterling, Spot Contract

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blushweasel304
6 Jul 2018
School
York University
Department
Administrative Studies
Course
ADMS 1000
Professor
Alan Shapiro

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ADMS 1000 Full Course Notes
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ADMS 1000 Full Course Notes
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Document Summary

A seller (sometimes called a writer) of a call option is obligated to sell a specified currency at a specified price (the strike price) up to a specified expiration date. At this time, jim exercises the call option and then immediately sells the pounds (to a bank) at the spot rate. In order to determine jim"s profit or loss, first compute his revenues from selling the currency. Then, from this amount subtract not only the purchase price of pounds when exercising the option but also the purchase price of the option. The computations are summarized in the following table. Assume that one option contract specifies 31,250 units. To sell a specified currency at a specified price (the strike price) up to a specified expiration date. Speculators may want to sell their call options on a currency they expect to depreciate in the future.

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Related Questions

1. Options versus Futures Describe the general differences between a call option and a futures contract.

2. Speculating with Call Options How are call options used by speculators? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a call option?

3. Speculating with Put Options How are put options used by speculators? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a put option?

4. Selling Options Under what conditions would speculators sell a call option? What is the risk to speculators who sell put options?

7. Leverage of Options How can financial institutions with stock portfolios use stock options when they expect stock prices to rise substantially but do not yet have sufficient funds to purchase more stock?

8. Hedging with Put Options Why would a finan- cial institution holding the stock of Hinton Co. consider buying a put option on that stock rather than simply selling it?

9. Call Options on Futures Describe a call option on interest rate futures. How does it differ from purchasing a futures contract?

10. Put Options on Futures Describe a put option on interest rate futures. How does it differ from selling a futures contract?

11. Hedging Interest Rate Risk Assume a savings institution has a large amount of fixed-rate mortgages and obtains most of its funds from short-term deposits. How could it use options on financial futures to hedge its exposure to interest rate movements? Would futures or options on futures be more appropriate if the institution is concerned that interest rates will decline, causing a large number of mortgage prepayments?

14. Speculating with Stock Options The price of Garner stock is $40. There is a call option on Garner stock that is at the money with a premium of $2.00. There is a put option on Garner stock that is at the money with a premium of $1.80. Why would investors consider writing this call option and this put option? Why would some investors consider buying this call option and this put option?

1. Options versus Futures Describe the general differences between a call option and a futures contract.

2. Speculating with Call Options How are call options used by speculators? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a call option?

3. Speculating with Put Options How are put options used by speculators? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a put option?

4. Selling Options Under what conditions would speculators sell a call option? What is the risk to speculators who sell put options?

7. Leverage of Options How can financial institutions with stock portfolios use stock options when they expect stock prices to rise substantially but do not yet have sufficient funds to purchase more stock?

8. Hedging with Put Options Why would a finan- cial institution holding the stock of Hinton Co. consider buying a put option on that stock rather than simply selling it?

9. Call Options on Futures Describe a call option on interest rate futures. How does it differ from purchasing a futures contract?

10. Put Options on Futures Describe a put option on interest rate futures. How does it differ from selling a futures contract?

11. Hedging Interest Rate Risk Assume a savings institution has a large amount of fixed-rate mortgages and obtains most of its funds from short-term deposits. How could it use options on financial futures to hedge its exposure to interest rate movements? Would futures or options on futures be more appropriate if the institution is concerned that interest rates will decline, causing a large number of mortgage prepayments?

14. Speculating with Stock Options The price of Garner stock is $40. There is a call option on Garner stock that is at the money with a premium of $2.00. There is a put option on Garner stock that is at the money with a premium of $1.80. Why would investors consider writing this call option and this put option? Why would some investors consider buying this call option and this put option?

I. Fill in the blank using a number of terms listed below (@1 point). Annuity due, Asset Mgmt ratio, Call, Comparisons, Comparative ratio analysis, Corporation, Covered, Current Ratio, DSO, Du Pont Equation , Equal, Future performance, Greater, Higher, In-the-money, Less, Liquidity, Lower, Option, Ordinary Annuity, Out-of-the-money, Percentage, Perpetuity, Put, PV, Quick, Reduced, TIE, TATO, Trend Analysis, Writer 11. The payment or receipt of equal amounts, at the end of a series of equal periods, for a specified amount of time is called a(n) _______________. 12. When a loan is amortized over a five year term, the amount of interest paid is ________________ each year. 13. You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases? It will be worth _________________. 14. The more frequent the compounding the _________________ the effective interest rate. 15. More frequent compounding results in _______________ future values and _______________ present values than less frequent compounding at the same nominal interest rate. 16. A(n) _______________ is a financial instrument that agrees to pay an equal amount of money per period into the indefinite future (i.e. forever). 17. A(n) _________________ is a contract which gives its holder the right to buy(or sell) an asset at some predetermined price within a specified period of time. 18. The seller of an option is called the option __________________. 19. An investor who writes call options against stock held in his or her portfolio is said to be selling _______________ options. 20. When the exercise price exceeds the current stock price, a call option is said to be _____________________; however, when the exercise price is less than the current price of the underlying stock, a call option is _________________. 21. An option which gives you the right to sell a stock at a specified price within some future period is called a(n) ______________ option.