Writing call options. A call option on Illinois stock specifies an exercise price of $38. Today the stock's price is $40. The premium on the call option is $5. Assume that option will not be exercised until maturity, if at all. Complete the following table. Assumed stock price at the time the call option is about to expire.
1. How are put options used by speculators? can you describe the conditions in which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a put option? 2. Now answer the above for call options instead of put options.
1. If an individual investory buys and sells existing stocks through a broker, these are primary market transactions. a. True b. False 2. A call provision gives bondholders not bond issuers the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rat
A. Suppose you buy 10 contracts of the Feb 110 call option. How much will you pay, ignoring commissions. b. In part (a), suppose that Macrosoft stock is selling for $1.40 per share on the expiration date. How much is your options investment worth? What if the terminal stock price is $125?
Use the options quote information shown here to answer the questions that follow. The stock is currently selling for $114. Calls Puts Option and NY Close - Expiration -Strike Price - Vol. Last - Vol. Last Macrosoft Feb 110
The Dow Jones Industrial Average on January 12, 2009 was 8474 and the price of the March 84 call was $4.50. Assume the risk-free rate is 3.2%, the dividend yield is 2% and the option expires on March 20, 2009 (Note that the options are on the DJI dividend by 100.) Q1: Use Derivagem to calculate the implied v
2. What does the term arbitrage profits mean? 4. What are the differences between a forward contract, a futures contract, and options?
Consider a European call option on a non-dividend-paying stock where the stock price is $60, the strike price is $60, the risk-free rate is 6% per annum, the volatility is 30% per annum, and the time to expiration is six months. Q1: Calculate u, d, and p for a two-step tree. Hint: if the expiration is six months and there ar
As part of a Type A reorganization, a creditor swaps an old bond with a basis of $700 and a principal of $1000 for a new convertible bond with a value of $750 and a principal of $1,200. The low value is due to the lack of security and low coupon rate. What is the bondholder's realized and recognized gain on the reorganization? W
Option strategies-bull spread using European call options, bear spread using European put options, butterfly spread using European call options, butterfly spread using European put options, straddle using options, strangle using options
Suppose that the price of a non-dividend-paying stock is $42, its volatility is 35%, and the risk-free rate for all maturities is 6% per annum. Use Derivagem (Analytic European) to calculate the cost of setting up the following positions. Assume Tree Steps = 100. In each case provide a spreadsheet showing the relationship betwee
A European call option and put option on a stock both have a strike price of $30 and an expiration date in three months. Both sell for $5. The risk-free interest rate is 6% per annum, the current stock price is $28 and a $1 dividend is expected in 2 months. Identify the arbitrage opportunity open to the trader. Q1: To do this,
I need help with the following accounting questions. Chapter 5 1. When accounting for land transactions, a gain is reported by the ______ ______ of the land, even though the transaction occurred between related parties. a. original buyer b. original seller c. escrow attorney d. third party e. parent company 2. The effe
Using Yahoo Finance, take a look at the five year chart for Wal-Mart. Using this chart and other information you can find on this company, write a two-page paper answering the following question: - What do you think the futures price of 100 shares of Wal-Mart to be delivered to you in one year be right now? - Do you exp
You own a position in the Common Stock of XYZ Pharma Corp. Sometime in the next three months XYZ will announce trial results for a highly-publicized blockbuster new drug. There is no good intelligence on the upcoming news. You expect that the stock price reaction to the news could be substantial - but equally large in either dir
On April 30, 2009, the common stock of Minnesota Mining and Manufacturing ("3M") closed at a price of $57.60 per share. On that same date, the July 2009 $55 Calls on 3M common closed at a price of $4.90. a) The premium on this in-the money Call can be understood in terms of two value components. Describe briefly and quantif
Cook Company has net income of $200,000 for 2009 and a weighted average number of shares outstanding of 100,000 shares for 2009. Cook Company also had a 6% convertible bond outstanding with a face value of $100,000. Interest is payable annually. These bonds were issued to yield 6%. The bond is convertible into 20,000 share of
What is the definition of a derivative and give an example. What is one way you would use derivatives?
Question 1: Assume the following information: U.S. deposit rate for 1 year = 11% U.S. borrowing rate for 1 year = 12% New Zealand deposit rate for 1 year = 8% New Zealand borrowing rate for 1 year = 9% New Zealand dollar forward rate for 1 year = $.40 New Zealand dollar spot rate = $.39 Also assume that a U
The current price of a risk free pure discount bond with face value of $1,000,000 and maturity of one month from now is $995,000. The stock of Bluebell Inc. is selling now for $200.00 per share. In one month it will sell for either $225.50 or $185.75. The stock will pay no dividends over the next three months. What must be the p
Conduct an initial country risk analysis for each country (India and Brazil)in your selected scenario. Include the following risk analyses: a. Translation exposure (Brazil and India) b. Socio-economic (Brazil and India) Based on your analyses, describe the appropriate techniques and procedures for mitigating the risks yo
Your firm has a well-respected economic research staff. The staff members have been successful in developing econometric models that can predict macroeconomic variables with a surprisingly degree of accuracy. The economic research staff would like to know which variables to monitor if options are ultimately used by the firm. Wri
Dear Brainmass, I am having some difficulty with this problem. I would really appreciate the assistance when you get the chance. Thank you in advance for taking the time to review my post. The following information is presented for Make Believe Company. 1. In the year 2000, 800,000 shares of $10 par value common stock
The derivatives markets have been attacked as "nothing more than well-dressed casino gambling." Please comment whether you think trading in derivatives is simply gambling or whether they serve a valuable purpose.
At December 31, 2005, Company "A" had 900,000 common shares outstanding. In addition, the company "A" had $10,000,000 of 6% convertible bonds outstanding at December 31, 2005, which are convertible into 600,000 common shares. On Sept. 1, 2006, an additional 300,000 common shares were issued. No bonds were converted in 2006. The
What would be the implications of hedging by (a) selling 8 contracts (b) selling 10 contracts, and (c) selling 12 contracts of September wheat? At what price would you receive a margin call? What is the forward contract worth at that time? If the risk-free interest rate is 10 percent verify that put-call parity holds. Assuming continuous compounding, is the contract correctly priced if the risk-free rate is 5.96 percent and the dividend yield on the index is 2.75 percent?
1. A farmer anticipates having 50,000 bushels of wheat ready for harvest in September. What would be the implications of hedging by (a) selling 8 contracts (b) selling 10 contracts, and (c) selling 12 contracts of September wheat? 2. The crude oil futures contract on the NYMEX covers 1,000 barrels of crude oil and is quoted i
Please choose the correct answer. 1. The concept of flexibility in the law is best illustrated by: a. The use of precedent to decide similar cases in similar ways. b. The ability to overturn precedent when it is no longer valid or when it is erroneous. c.
Create a covered call position using an option contract. What is the payoff to this position if it is closed out at expiration when the stock is selling for $85? Construct a butterfly spread. What is the gain or loss if, at expiration, the underlying security sells for exactly $303? Suppose you buy 100 shares of ABC at $79.25 and simultaneously write a March 80 Straddle at the prices given below. Make a spreadsheet and draw a profit/loss diagram Explain why writing covered calls and writing puts are generally equivalent strategies. Construct a call bull spread using the May contracts.
** See ATTACHED file for all details! ** 1. Suppose you buy 100 shares of ABC at $70. Create a covered call position using an option contract with a strike price of $80 currently selling at $3.00. Make a spreadsheet and draw a profit/loss diagram and label all significant points for this strategy. What is the payoff to this
Please discuss the following question: Why do options sell for more than their exercise value?
Boone Securities buys a $100,000 par value, June Treasury bond contract on Chicago Board of option trading at 106 14/32. A. What is the dollar value of the contract? B. There is an initial margin requirement of $2,565 and a margin maintenance requirement of $1,900. If an interest rate increase causes the bond contract to
Assume an investor writes a call option for 100 shares at a strike price of $40 for a premium of 6.5. This is a naked option. A. What would the gain or loss be if the stock closed at $35? B. What would the break-even point be in terms of the closing price of the stock?
1) Consider a stock currently selling for $80. It can go up or down by 15% per period. The risk-free rate is 6%. Use a one period binomial model. You want to price a European call option with exercise price of $84. a. Determine the two possible stock prices at expiration. b. Construct two portfolios with equivalent payoffs. On