🏷️ LIMITED TIME OFFER: GET 20% OFF GRADE+ YEARLY SUBSCRIPTION →
Log in
HomeStudy Guides420,000CA160,000

ECON 372 Study Guide - Final Guide: Put Option, Call Option, Futures Contract

141 views58 pages
School
Simon Fraser University
Department
Economics
Course
ECON 372
Professor
Usman Hannan

For unlimited access to Study Guides, a Grade+ subscription is required.

Document Summary

Derivative- an instrument whose value depends on the values of other more basic underlying variables; ex. To speculate (take a view on the future direction of the market) To change the nature of a liability. To change the nature of an investment without incurring the costs of selling one portfolio and buying another. Spot contract- an agreement to buy or sell an asset immediately (or within a very short period of time) Spot price- for immediate, or almost immediate, delivery price. Futures contract- (formerly to-arrive contract) an agreement to buy or sell an asset at a certain time in the future for a certain price via the futures exchange. ); entering the contract is free, but contract terms are standardized by the exchange market it is on. Buyer = long futures position committed to buy the asset. Futures price- the price at which you agree to buy or sell a particular futures contract; determined by law of supply and demand.

Get access

Grade+20% off
$8 USD/m$10 USD/m
Billed $96 USD annually
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
40 Verified Answers

Related Documents

ECON372 Chapter Notes - Chapter 1-11: Treasury Stock, Program Trading, S&P 500 Index
magentahedgehog235
ECON372
Final Exam
Study Guide
ECON372 Final: econ 372 final notes
emeraldpanda380
ECON372
Final Exam
Study Guide
ECON372 Final: ECON 372 Notes
ultramarinecoyote540

Related Questions

Explain how each of the following agents might make use of derivatives. 

a) A lender who is worried that the interest rate might rise during the term of a loan it has made. Will this lender buy or sell futures contracts for Treasury bills?

b) Southwest Airlines relies on jet fuel to operate its planes. If it chooses to hedge against future changes in fuel prices, will it buy or sell futures contracts for fuel?

  • Compare who the speculators are with respect to futures contracts and who the hedgers are and the role each plays. If you had to choose, which role would you select? Why?
  • Would you trade in futures contracts? Why or why not?
  • If you had to select a futures contract in which to trade, which would you choose and why? What terms would be associated with the contract in the contract and why?

Throughout this problem, assume that an investor is contractually barred from purchasing asset Y in the current period (period 0). However, the investor is free to short-sell asset Y in period 0. Suppose the price of asset Y in period 0 is $200 and this asset will pay a dividend of $6 one year from now in period 1. Let the interest rate from period 0 to period 1 be 4%.

Assume the price for a futures contract with delivery in period 1 is $210. Can the investor make an arbitrage profit when this is the price? If so, state specifically what financial transactions she would make in period 0 and period 1 to realize a profit. If not, explain why not.

Now, assume the price for a futures contract with delivery in period 1 is $190. Can the investor make an arbitrage profit when this is the price? If so, state specifically what financial transactions she would make in period 0 and period 1 to realize a profit. If not, explain why not.