Fundamentals of Investments

1. A client has asked you about hedging his production of soybean oil. He expects to sell 360,000 pounds of soybean oil in four months. Soybean oil contracts are available at 60,000 pounds per contract. How could he hedge his position?

A. Buy 6 contracts.
B. Sell 7 contracts.
C. Buy 7contracts.
D. Sell 6 contracts.
E. None of the above.

2. A portfolio manager wants to hedge a stock portfolio with a value of $750 million and a beta of 1.25 with S&P 5000 futures. The quoted price of a six-month futures contract is 1,437.25, and the contract multiplier is $250. How should this manager hedge the portfolio?

A. short 2,431
B. short 2,609
C. long 2,431
D. long 2,609
E. None of the above.

3. In which of the following ways do futures contracts differ from forward contracts?

I. Futures contract are standardized
II. For futures, performance of each party is guaranteed by a clearinghouse
III. Futures contracts require a daily settling of any gains or losses.

A. I only
B. II only
C. I and II only
D. II and III only
E. I, II and III

4. Increasing which of the following will not result in an increase the price of a call option?

A. The stock price.
B. The time to maturity.
C. The risk-free rate of interest.
D. The dividend yield.
E. The volatility of the underlying stock.

5. Which of the following strategies is most suitable for an investor wishing to eliminate "downside" risk from the long position in stock?

A. A long straddle
B. A short straddle
C. A protective put
D. A covered call
E. None of the above

6. A stock is currently selling for $53. It has a standard deviation of 65 percent. There is a call option with a strike price of $50 and 57 days to maturity. If the risk-free rate is 4.1 percent per year, what is the price of the call option?

7. The following prices are observed. Formulate an arbitrage strategy to profit from the situation.
Wheat is $2 per bushel spot and $ 2.30 per bushel for 180-day futures;
U.S. interest rate is 3% compounded daily;
Storage cost is 0.10 per bushel for 180-day period, and you already have an inventory of one million bushels in storage.

8. The following prices are observed. Formulate and explain an arbitrage strategy to profit from the situation. Please use put-call parity to do this problem.

Stock A is selling for $95
Call options on stock A with exercise price of 90 and with April expiration are selling for $10 per share
Put options on stock A with exercise price of 90 and with April expiration are selling for $3 per share
At the current T-bill rate, $88 invested today will grow to 90 at the option's maturity date.