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You have a long position in a November futures contract on soybeans at $12.25 per bushel.

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1. You have a long position in a November futures contract on soybeans at $12.25 per bushel. What have you agreed to do? Be as specific as possible using the information given.;2. A U.S. company will need 1 million Euro in three months. Explain specifically how this company could use a forward contract to eliminate exchange rate risk, and explain why it would work. Include whether the contract should be entered long or short.;3. A trader buys three Coca-Cola (KO) December call options with a strike price of $50 for a premium of $4.;a. What right does the trader have as a result of buying the option? Be as specific as possible using the information given. Note that one options contract is for 100 shares of stock.;b. If the share price is $55 at expiration, will the option be exercised? What is the profit or loss?;c. If the share price is $45 at expiration, will the option be exercised? What is the profit or loss?;No, the option will not be exercised and the loss will be $5;4. A mining company will be selling 100 ounces of gold in December, and wishes to hedge the price risk.;a. A forward contract is available for December gold for $1400. If the company is going to hedge with the forward contract, will it enter the contract long or short? How does this contract hedge price risk? (Page 12 section 1.8).;b. A put option is also available for December gold at a strike price of $1400 and a premium of $70. How does this option hedge price risk?;c. What advantage does the forward have over the option?;d. What advantage does the option have over the forward?;5. An investor enters into a short forward contract to sell 10,000 Euro for U.S. dollars at an exchange rate of $1.29 per euro.;a. How much does the investor gain or lose if the exchange rate at the end of the contract $1.20?;b. How much does the investor gain or lose if the exchange rate at the end of the contract $1.40?;6. You would like to speculate on the rise in the price of a certain stock. The current stock price is $48, and a three-month call with a strike price of $50 costs $3. You are trying to decide between buying 100 shares of the stock, or buying 16 call option contracts. Answer these questions and show work.;a. The cost of setting up the stock position is $48x100 shares = $4,800. Show the math demonstrating that the cost of setting up the option position is also $4,800.;b. If you are correct and the stock price rises to $55, what is the profit on the stock position? What is the profit on the option position?;c. If you are wrong and the stock price falls to $41, what is the loss on the stock position? What is the loss on the option position?;7. ?In terms of the largest volume of trade, most derivatives are traded on exchanges.? True or False? Explain. False, they are traded off-exchange (OTC) such as CME.

 

Paper#29576 | Written in 18-Jul-2015

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