Unit 4 series 66

An investor buys five put contracts with a strike price of $55 per share. The current price of the underlying stock is $60 and the option premium is $7. The commission schedule is as follows: Trade AmountCommission Rate≤ $2,500$35 + 0.9% of trade amount$2,501-$11,999$35 + 0.7% of trade amount≥ $12,000$35 + 0.5% of trade amount Using the information provided, what is the total commission cost for this trade? A) $199.50 B) $59.50 C) $39.90 D) $297.50 Explanation The cost per contract is $7 × 100 shares, or $700. That makes the total trade amount $700 × 5 contracts, or $3,500, which qualifies for the commission rate of $35 + 0.7% of the trade amount. The math is $35 + (0.7% of $3,500) = $35 + (0.7% × $3,500) = $35 + $24.50 = $59.50 total charge.

$39.90 The cost per contract is $7 × 100 shares, or $700. That makes the total trade amount $700 × 5 contracts, or $3,500, which qualifies for the commission rate of $35 + 0.7% of the trade amount. The math is $35 + (0.7% of $3,500) = $35 + (0.7% × $3,500) = $35 + $24.50 = $59.50 total charge.

Which of the following statements is true? A) A futures contract has standardized terms. B) Unlike forwards, futures are not traded on an exchange. C) A futures contract does not involve obligations to buy or sell an asset. D) A futures contract always requires delivery of an asset.

A futures contract has standardized terms. Futures contracts are traded on exchanges and, therefore, have standardized terms. In forwards, the terms of each contract are separately negotiated.

You have a client who has sold short 100 shares of RIF, a stock listed on the NYSE. If the client wishes to use options to protect against unlimited loss, you would suggest the client A) sell 1 RIF put. B) buy 1 RIF put. C) buy 1 RIF call. D) sell 1 RIF call.

buy 1 RIF call. Buying a call option on a stock you are short will give you a guaranteed covering cost, thus preventing against unlimited loss. This is the best way to hedge a short position.

A farmer who produces soybeans believes that this year's crop will be the biggest ever. The farmer would most likely hedge this risk by A) going long soybean forwards. B) going short soybean futures. C) going long soybean futures. D) going short soybean forwards.

going short soybean forwards. Because this is a producer who will have product to deliver, forwards are likely to be more appropriate than futures.

Buying a put option on a security one currently owns allows an investor to A) participate in additional gains if the security continues to increase in price. B) receive the premium for the purchase of the put. C) increase his profit if the security declines in price. D) buy more stock if he exercises the put.

participate in additional gains if the security continues to increase in price.

News reports indicate that the wheat crop scheduled to be harvested in three months will be much larger than normal. To hedge, a wheat farmer would most likely A) take a long position in wheat futures. B) grow corn instead. C) take a short position in wheat futures. D) sell wheat stock short.

take a short position in wheat futures.