Futures Contract
FINE-7670 Risk Management and Applications to Energy Firms
Spring 2014
January 15, 2014
HW#1
PART I: Analytical Questions
1. The price of gold is currently $600 per ounce. The forward price for delivery in 1 year is $800. An arbitrageur can borrow money at 10% per annum. What should the arbitrageur do? Assume that the cost of storing gold is zero and that gold provides no income.
2. On September 12, 2006, an investor owns 100 Intel shares. As indicated in the table below, the share price is $19.56 and January put option with a strike price of
$17.50 costs $0.475. The investor is comparing two alternatives to limit downside risk. The first is to buy 1 January put option contract with a strike price of $17.50.
The second involves instructing a broker to sell the 100 shares as soon as Intel’s price reaches $17.50. Discuss the advantages and disadvantages of the two strategies. Strike Price
15.00
17.50
20.00
22.50
25.00
Oct Call
4.650
2.300
0.575
0.075
0.025
Jan Call
4.950
2.775
1.175
0.375
0.125
Apr Call
5.150
3.150
1.650
0.725
0.275
Oct Put
0.025
0.125
0.875
2.950
5.450
Jan Put
0.150
0.475
1.375
3.100
5.450
Apr Put
0.275
0.725
1.700
3.300
5.450
3. Suppose that in the situation of the table below about the spot and forward quotes for USD/GBP exchange rate, a corporate treasurer said: “I will have £1 million to sell in 6 months. If the exchange rate is less than 2.02, I want you to give me 2.02.
If it is greater than 2.09, I will accept 2.09. If the exchange rate is between 2.02 and 2.09, I will sell the sterling for the exchange rate.” How could you use options to satisfy the treasurer?
Spot
1-month forward
3-month forward
6-month forward
Bid
2.0558
2.0547
2.0526
2.0483
Offer
2.0562
2.0552
2.0531
2.0489
Page 1 of 4
4. A company enters into a short futures contract to sell 5,000 bushels of wheat for
450 cents per bushel. The initial margin is $3,000 and the
Spring 2014
January 15, 2014
HW#1
PART I: Analytical Questions
1. The price of gold is currently $600 per ounce. The forward price for delivery in 1 year is $800. An arbitrageur can borrow money at 10% per annum. What should the arbitrageur do? Assume that the cost of storing gold is zero and that gold provides no income.
2. On September 12, 2006, an investor owns 100 Intel shares. As indicated in the table below, the share price is $19.56 and January put option with a strike price of
$17.50 costs $0.475. The investor is comparing two alternatives to limit downside risk. The first is to buy 1 January put option contract with a strike price of $17.50.
The second involves instructing a broker to sell the 100 shares as soon as Intel’s price reaches $17.50. Discuss the advantages and disadvantages of the two strategies. Strike Price
15.00
17.50
20.00
22.50
25.00
Oct Call
4.650
2.300
0.575
0.075
0.025
Jan Call
4.950
2.775
1.175
0.375
0.125
Apr Call
5.150
3.150
1.650
0.725
0.275
Oct Put
0.025
0.125
0.875
2.950
5.450
Jan Put
0.150
0.475
1.375
3.100
5.450
Apr Put
0.275
0.725
1.700
3.300
5.450
3. Suppose that in the situation of the table below about the spot and forward quotes for USD/GBP exchange rate, a corporate treasurer said: “I will have £1 million to sell in 6 months. If the exchange rate is less than 2.02, I want you to give me 2.02.
If it is greater than 2.09, I will accept 2.09. If the exchange rate is between 2.02 and 2.09, I will sell the sterling for the exchange rate.” How could you use options to satisfy the treasurer?
Spot
1-month forward
3-month forward
6-month forward
Bid
2.0558
2.0547
2.0526
2.0483
Offer
2.0562
2.0552
2.0531
2.0489
Page 1 of 4
4. A company enters into a short futures contract to sell 5,000 bushels of wheat for
450 cents per bushel. The initial margin is $3,000 and the