Finance assignment

  1. A “derivative” is a _______________________ between two parties.  Its value

 

_________________ from the value of ________________________.(2 points)

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  1. What is the meaning of the “notional value” of a derivative? (2 points)

 

 

 

  1. Is the following a forward contract or a futures contract? (2 points)

A contract by which I will sell $100,000 of bonds at a percentage-of-par price of 97.500          for delivery in June 2021.  The contract is listed on an exchange and the rules of the         exchange       specify when in June the delivery takes place, and the method of payment. The           contract is     settled through the exchange clearing house.

 

Forward or futures? _________

 

Why?

 

 

  1. Suppose you enter the following contract: you buy the right to sell 5,000 troy ounces of        silver by February 20 at a price of $24/troy ounce; you pay $1.25/troy ounce for this right.

Which type of contract is this? (Highlight the correct answer)  (2 points)

 

forward     futures      call option      put option

 

  1. Describe the role of the clearing house in futures markets. (2 points)

 

 

 

  1. SPECULATION WITH DERIVATIVES (5 points)

Suppose you have the opinion that the price of crude oil will increase.

 

  1. If you want to speculate on that opinion you can ____________________ the                       March 2021 Crude Oil futures contract.  The current futures price is $47.41/barrel.                            Its notional amount is 1,000 barrels of crude oil.

 

  1. The next day the futures price rises to $47.75/barrel.  Do you received variation                    margin from the clearing house, or pay variation margin to the clearing house?

 

 

  1. How much to you receive or pay?

 

  1. HEDGING WITH DERIVATIVES (10 points)

You are a grain merchant with an inventory of 2,000,000 bushels of soybeans to sell in           the coming months. The price of corn is high now at $11.70/bushel but there is a risk       that the price may decline as we move into harvest season.

 

The derivatives market you decide to use to hedge is the May 2021 Soybean Futures    market; its price now is $11.75/bushel. The notional amount of one futures contract is   5,000 bushels.

 

  1. Do you buy the futures contract or sell the futures contract as a hedge?

 

 

  1. How many futures contracts do you buy or sell?

 

 

  1. Two months later you sell all the soybeans to a feed manufacturer and offset your                          futures hedge.

 

The price at which you sell the soybeans is $12.50/bushel. How much money in total                do you receive for the sale?

 

 

The price of the May 2021 soybean futures at that time is 12.60/bushel.  Has                       your hedge made a profit or a loss?  How much?

 

 

 

  1. When you combine the amount you received for the soybeans and the profit or loss                       on the futures market hedge, what is the net amount of you have received (i.e.                           your “effective value”)?

 

 

 

  1. Convert that effective value into the “effective price” per bushel of soybeans.

 

 

 

  1. OPTIONS (Be careful completing this – it’s not difficult but it is tricky.)   (10 points)

You sell a March 19 $3.60/pound put option on 25,000 pounds of copper at a premium of        $0.20/pound.  The current price of copper is $3.58/pound.

 

  1. Describe this option

 

Is it a right to buy copper or to sell copper?

 

When does the option expire?

What is the underlying market for this option?

 

What is the exercise price/strike price of the option?

 

Did you pay or receive a premium?  How much/pound? How much total?

 

 

  1. What is the intrinsic value of the option?

 

 

  1. What is the time value of the option?

 

 

  1. Is the option “in the money” or “out of the money”?

 

  1. When the option expires, who decides whether to exercise the option: you or the                  counterparty who sold the option?

 

  1. If the price of copper is $3.55/pound when the option expires, will the option be                   exercised?  Why/why not?

 

 

  1. Which of the following profit/loss profiles applies to your position in this option?

 

A                                                                  B

 

C                                                                  D

 

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