# Financial DerivativesTerm Paper

Pages: 3 (1482 words)  ·  Bibliography Sources: 0  ·  File: .docx  ·  Level: Master's  ·  Topic: Economics

Financial Derivatives

Financial Derivitives

A trader enters into a one-year short forward contract to sell an asset for \$60 when the spot price is \$58. The spot price in one year proves to be \$63. What is the trader's gain or loss? Show a dollar amount and indicate whether it is a gain or a loss. The trader suffers a \$3.00 loss.

A one-year call option on a stock with a strike price of \$30 costs \$3; a one-year put option on the stock with a strike price of \$30 costs \$4. Suppose that a trader buys two call options and one put option. What is the breakeven stock price, above which the trader makes a profit? What is the breakeven stock price below which the trader makes a profit? The breakeven stock price would be \$30. If the stock goes above \$30. The trader will make a profit, minus the \$3.00; If the stock sells for less than \$30. The trader will lose money plus the cost of \$4.00.

A hedger takes a long position in an oil futures contract on November 1, 2009 to hedge an exposure on March 1, 2010. The initial futures price is \$60. On December 31, 1999 the futures price is \$61. On March 1, 2010 it is \$64. The contract is closed out on March 1, 2010. What gain is recognized in the accounting year January 1 to December 31, 2010? Each contract is on 1000 barrels of oil. It would be a \$4,000 gain. What is your answer to question if the trader is a speculator rather than a hedger? It would still be \$4,000 gain, but it would be a plus if it was a speculator and the hedger would not want a gain, he would want it to stay at \$60/barrel.

for \$19.77
4. An exchange rate is 0.7000 and the six-month domestic and foreign risk-free interest rates are 5% and 7% (both expressed with continuous compounding). What is the six-month forward rate? Give four decimal places 0.0035 at 5% and 0.0049 at 7%.

5. The spot price of an asset is positively correlated with the market. Which of the following would you expect to be true (circle one)

The forward price equals the expected future spot price.

The forward price is greater than the expected future spot price.

## Term Paper on Financial Derivatives Assignment

The forward price is less than the expected future spot price.

The forward price is sometimes greater and sometimes less than the expected future spot price.

6. Is it ever optimal to exercise early an American call option on a) the spot price of gold, b) the spot price of copper, c) the futures price of gold, and d) the average price of gold measured between time zero and the current time? Explain your answers. It would be optimal to exercise an American call option on the spot price of gold if the price of gold goes up and you don't feel it will go up any higher, before the actual call date. It would be optimal to exercise early an American call option on the spot price of copper if the price of copper is at a price that you feel it wouldn't go any higher before the call date. It would probably not be optimal to exercise early an American call option on the future price of gold, but it would be optimal to exercise it early on the average price of gold.

7. Six-month call options with strike prices of \$35 and \$40 cost \$6 and \$4, respectively.

What is the maximum gain when a bull spread is created from the calls?\$10.

What is the maximum loss when a bull spread is created from the calls?\$8. What is the maximum gain when a bear spread is created from the calls?\$2.

What is the maximum loss when a bear spread is created from the calls? \$2.

8. A three-month call with a strike price of \$25 costs \$2. A three-month put with a strike price of \$20 and costs \$3. A trader uses the options to create a strangle. For what two values of the stock price in three months does the trader breakeven with a profit of zero?

_25_ and 25

9. Which two statements are true (circle two)

Delta is a measure of the volatility of an option

Delta is a measure of the position in the underlying stock that should be taken to hedge an option

Delta is estimated… [END OF PREVIEW] . . . READ MORE

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