Finance Homework Guide
Assignment 1
Q1: The current price of a stock is $94, and three-month European call options with a strike price of $95 currently sell for $4.70. An investor who feels that the price of the stock will increase is trying to decide between buying 100 shares and buying 2,000 call options (20 contracts). Both strategies involve an investment of $9,400. What advice would you give? How high does the stock price have to rise for the option strategy to be more profitable?
Q2: It is now October 2007. A company anticipates that it will purchase 1 million pounds of copper in each of February 2008, August 2008. February 2009, and August 2009. The company has decided to use the futures contracts traded in the COMEX division of the New York Mercantile Exchange to hedge its risk. One contract is for the delivery of 25,000 pounds of copper. The initial margin is $2,000 per contract and the maintenance margin is $1,500 per contract. The company's policy is to hedge 80% of its exposure. Contracts with maturities up to 13 months into the future are considered to have sufficient liquidity to meet the company's needs. Devise a hedging strategy for the company. (Do not make the "tailing" adjustment described in Section 3.4.) Assume the market prices (in cents per pound) today and at future dates are as follows. What is the impact of the strategy you propose on the price the company pays for copper? What is the initial margin requirement in October 2007? Is the company subject to any margin calls? Date Spot price Mar. 2008 futures price Sept. 2008 futures price Mar. 2009 futures price Sept. 2009 futures price Oct. 2007 372.00 372.30 372.80 Feb. 2008 369.00 369.10 370.20 370.70 364.80 364.30 364.20 376.70 376.50 388.20 Aug. 2008 365.00 Feb. 2009 377.00 Aug. 2009 388.00
Q3: A fund manager has a portfolio worth $50 million with a beta of 0.87. The manager is concerned about the performance of the market over the next two months and plans to use three-month futures contracts on
Q1: The current price of a stock is $94, and three-month European call options with a strike price of $95 currently sell for $4.70. An investor who feels that the price of the stock will increase is trying to decide between buying 100 shares and buying 2,000 call options (20 contracts). Both strategies involve an investment of $9,400. What advice would you give? How high does the stock price have to rise for the option strategy to be more profitable?
Q2: It is now October 2007. A company anticipates that it will purchase 1 million pounds of copper in each of February 2008, August 2008. February 2009, and August 2009. The company has decided to use the futures contracts traded in the COMEX division of the New York Mercantile Exchange to hedge its risk. One contract is for the delivery of 25,000 pounds of copper. The initial margin is $2,000 per contract and the maintenance margin is $1,500 per contract. The company's policy is to hedge 80% of its exposure. Contracts with maturities up to 13 months into the future are considered to have sufficient liquidity to meet the company's needs. Devise a hedging strategy for the company. (Do not make the "tailing" adjustment described in Section 3.4.) Assume the market prices (in cents per pound) today and at future dates are as follows. What is the impact of the strategy you propose on the price the company pays for copper? What is the initial margin requirement in October 2007? Is the company subject to any margin calls? Date Spot price Mar. 2008 futures price Sept. 2008 futures price Mar. 2009 futures price Sept. 2009 futures price Oct. 2007 372.00 372.30 372.80 Feb. 2008 369.00 369.10 370.20 370.70 364.80 364.30 364.20 376.70 376.50 388.20 Aug. 2008 365.00 Feb. 2009 377.00 Aug. 2009 388.00
Q3: A fund manager has a portfolio worth $50 million with a beta of 0.87. The manager is concerned about the performance of the market over the next two months and plans to use three-month futures contracts on