Investment 2

Forward Contract

Agreement between a buyer and a seller, who both commit to a transaction at a future date at a price set at negotiation today

Company is to buy electronic boards from Japan and has to pay upon delivery in four months. The price per board was fixed in the contract. Should they buy or sell Japanese Yen Contracts.

Buy yen futures. If the value of the dollar depreciates relative to the yen in the intervening four months, then the dollar/yen exchange rate will rise, and the payment required by the importer in dollars will rise. A long yen futures position would profit from the dollar's depreciation and offset the importer's higher invoice cost.

Futures Contract

Contract between a buyer and a seller specifying a commodity or financial instrument to be delivered and price paid at contract maturity, managed through an organized futures exchange

In which of the following ways to futures contracts differ from forward contracts

Future contracts are standardized, for futures performance of each party is guaranteed by a clearing house, and futures contracts require a daily settling of any gains or losses

If you buy a call option, what stock price is needed to break even? what about a put option?

In general, the breakeven stock price for a call purchase is the exercise price plus the premium paid. For stock prices higher than this, the purchaser realizes a profit. For a put purchase, it's the strike price less the premium. For stock prices lower than this, the purchaser realizes a profit.

Corn prices are expected to rise Short or long?

Long

strike price

Price specified in an option contract that the holder pays to buy shares or receives to see shares of the option is exercised

South Park is planning a bond issue in six months but Kenny is worried that the interest rates may rise. Should he buy or sell treasury bond futures contracts

Sell

Should Jed Clampett buy or sell oil futures contracts if the market has been skyrocketing lately

Sell crude oil futures. Price declines in the oil market would be offset by a gain on the short position.

Long term treasury bonds are being liquidated in three months. The fund manger is afraid interest rates are gonna rise from current levels and wants to hedge the price risk of the portfolio. Should she buy or sell the treasury bond futures contracts

Sell the futures. If interest rates rise, causing the value of the bonds to be less at the time of sale, the corresponding futures hedge will show a profit.

Which of the following is not specified by a stock option contract

The underlying stock' price

What are the similarities and differences in taking the short side of futures contracts and short selling a stock? How do the cash flows differ?

There are two similarities. 1) You are selling an asset today that you do not currently own (you may expect to own the asset in the future, say a wheat harvest). 2) Both contracts have an initial margin and a maintenance margin. There are several major differences between a futures contract and short selling a stock. 1) With a futures contract you are agreeing to a price at a specific date in the future. The price at settlement may be above or below the agreed upon price. In short selling the stock, you are selling at the current price and the price in the future is not set. 2) In a futures contract, the maturity date is determined when the contract is sold. A short stock sale can theoretically extend to infinity. 3) The cash flows from the short sale are different. In a futures contract, cash for the sale of a futures contract is not exchanged until the settlement of the contract. At the settlement date, you will receive the cash for the sale. In a short stock sale, you receive the cash for the sale of the stock today (although your broker may not allow you access to the cash). When you close the short stock position, you must pay cash to purchase the stock.

Option chain

a list of available option contracts and their prices for a particular security arrayed by strike price and maturity

Which of the following statement is false about futures account margin

a margin call results when the account margin falls below the initial margin

short position

a market position where the holder benefits from price decreases and loses from prices increases

Long position

a market position where the holder benefits from price increases and loses from price decreases

speculator

a person or firm that takes the risk of loss for the chance for profit

long hedge

adding a long futures position to a short position in the underlying asset

short hedge

adding a short futures position to a long position in the underlying asset

initial margin

amount required when a futures contract is first bought or sold \ and varies with the type and size of a contract, but it is the same for long and short positions

American option

an option that can be exercised any time before expiration

European Option

an option that can be exercised only at expiration

On the maturity date, stock index futures contracts require delivery of

cash

The open interest on a futures contract at any given time is the total number of outstanding

contracts

futures margin

deposit of funds in a futures trading account dedicated to covering potential losses from an outstanding futures position

Which of the following statements is true regarding the distinction between futures contracts and forward contracts

future contracts are exchange traded where as forward contracts are OTC traded

Which of the following contract terms changes daily during the life of a futures contract

futures price

call option

grants the holder the right but not the obligation to buy the underlying asset at a given strike price

put option

grants the holder the right, but not the obligation to sell the underlying asset at a given strike price

market to market

in futures trading accounts, the process where by gains and losses issued on outstanding futures positions are recognized on a daily basis

In futures trading, the minimum level to which an entity position may fall before requiring additional margin is most accurately termed

maintenance margin

margin call

notification to increase the margin level in a trading account

Put writer

one who has the obligation to buy stock at the options strike price if the option is exercised

Call writer

one who has the obligation to sell stock at the options strike price if the option is exercised

the buyer of a call option

pays money for the right to buy

the buyer of a put option

pays money for the right to sell

futures price

price negotiated by the buyer and seller at which the underlying commodity or financial instrument will be delivered and paid for to fulfill the obligations of a future contract

Options Clearing Agency

private agency that guarantees that the terms of an option contract be fulfilled if the option is exercised, issues, and clears all option contracts trading on U.S. exchanges

the seller of a put option

receives money for the obligation to buy

the seller of a call option

receives money for the obligation to sell

Derivative security

security whose value is derived from the value of another security Ex: options

Option Writing

taking the sellers side of an option contract

underlying asset

the commodity or financial instrument on which the futures contract is based

maintenance margin

the minimum margin level required in a futures trading account at all times

Initial margin for a futures contract is usually

the range between 5 percent and 15 percent of contract value

hedger

trader who seeks to transfer price risk by taking a futures position opposite to an existing position in the underlying asset

All of the following statements about the value of a call option at expiration are true except that the

value of the long position at equals zero or the exercise price minus the stock price, whichever is higher