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ADMS 1000 Lecture Notes - Lecture 24: Speculation, Straddle, Call Option

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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

In addition to the basic call and put options just discussed, a variety of currency option combinations are available to the currency speculator and hedger. For each of these combinations, the topics will be discussed. The two main types of currency option combinations are discussed. To construct a long straddle in a foreign currency, an mnc or individual would buy (take a long position in) both a call option and a put option for that currency. The basic call and put options just discussed, a variety of currency option combinations are available to the currency speculator and hedger. A currency option combination uses simultaneous call and put option positions to construct a unique position to suit the hedger"s or speculator"s needs. A currency option combination may include both long and short positions and will it be either long or short. Typically, a currency option combination will result in a unique contingency graph.

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Related Questions

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