FN 316 homework ch 10

You have agreed to deliver the underlying commodity on a futures contract in 90 days. Today the underlying commodity price rises and you get a margin call. You must have

a short position in a futures contract.

You have taken a stock option position and, if the stock's price increases, you could lose a fixed small amount of money, but if the stock's price decreases, your gain increases. You must have ________________________________.

bought a put option

The higher the exercise price, the ________________ the value of a put and the _______________ the value of a call.

higher; lower

Refer to the Listed Stock Option Price Quote from February and assume it is now January: IRQ Underlying stock price $45.23 Expiration STRIKE Call Put LAST VOLUME OPEN INTEREST LAST VOLUME OPEN INTEREST Mar 50 ? 102 12,578 6.55 80 11,175 Jun 50 2.25 35 1,062 ? 48 909 Based on the option quote, the March call should cost

less than $225

By convention, a swap buyer on an interest rate swap agrees to

periodically pay a fixed rate of interest and receive a floating rate of interest

An agreement between two parties to exchange a series of specified periodic cash flows in the future based on some underlying instrument or price is a(n)

swap contract.

A speculator may write a put option on stock with an exercise price of $15 and earn a $3 premium only if he thought

the stock price would stay above $12.

A credit forward is a forward agreement that hedges against an increase in default risk on a loan after the loan has been created by a lender.

true

Futures or option exchange members who take positions on contracts for only a few moments are called scalpers.

true

If you think that interest rates are likely to rise substantially over the next several years, you might sell a T-bond futures contract or buy an interest rate cap to take advantage of your expectations.

true

Marking to market of futures contracts is the process of realizing gains and losses each day as the futures contract changes in price.

true

The buyer of a call option on stock benefits if the underlying stock price rises or if the volatility of the stock's price increases.

true

Writing a put option results in a potentially limited gain and a potentially unlimited loss.

true

You have taken a stock option position and, if the stock's price drops, you will get a level gain no matter how far prices fall, but you could go bankrupt if the stock's price rises. You have________________________________.

written a call option.

Your firm enters into a swap agreement with a notional principal of $40 million wherein the firm pays a fixed rate of interest of 5.50 percent and receives a variable rate of interest equal to LIBOR plus 150 basis points. If LIBOR is currently 3.75 percent, the NET amount your firm will receive (+) or pay (−) on the next transaction date is

− $100,000.

An investor has unrealized gains in 100 shares of Amazin stock for which he does not wish to pay taxes. However, he is now bearish upon the stock for the short term. The stock is at $76 and he buys a put with a strike of $75 for $300. At expiration the stock is at $68. What is the net gain or loss on the entire stock/option portfolio?

−$400

An investor is committed to purchasing 100 shares of World Port Management stock in six months. She is worried the stock price will rise significantly over the next six months. The stock is at $45 and she buys a six-month call with a strike of $50 for $250. At expiration the stock is at $54. What is the net economic gain or loss on the entire stock/option portfolio?

−$750

A stock has a spot price of $55. Its May options are about to expire. One of its puts is worth $5 and one of its calls is worth $10. The exercise price of the put must be ______________ and the exercise price of the call must be ________________.

$60; $45

Two competing fully electronic derivatives markets in the United States are

CME Globex and Eurex.

Which of the following is true?

Futures contracts require an initial margin requirement be paid.

An interest rate floor is designed to protect an institution from I. falling interest rates. II. falling bond prices. III. increased credit risk on loans. IV. swap counterparty credit risk.

I only

An increase in which of the following would increase the price of a call option on common stock, ceteris paribus? I. Stock price II. Stock price volatility III. Interest rates IV. Exercise price

I, II, and III only

In a bear market, which option positions make money? I. Buying a call. II. Writing a call. III. Buying a put. IV. Writing a put.

II and III

My bank has a larger number of adjustable-rate mortgage loans outstanding. To protect our interest rate income on these loans, the bank could I. enter into a swap to pay fixed and receive variable. II. enter into a swap to pay variable and receive fixed. III. buy an interest rate floor. IV. buy an interest rate cap.

II and III only