1. Details for Newcrest Mining Limited (NCM) shares on 23rd September 2013 are as follows. Code...

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1. Details for Newcrest Mining Limited (NCM) shares on 23rd September 2013 are as follows. Code Last $+/- Bid Offer Open High Low Volume NCM 12.030 -1.070 12.020 12.030 12.500 12.550 12.000 9,027,081 Details for ASX-traded NCM Call and Put Options on 23rd September, 2013 are as follows. Option Code Expiry Date Put/Call Exercise Price Last Trade(i.e. Option Premium or Option Price) NCMW87 24/10/2013 Call 11.000 1.360 NCMW97 24/10/2013 Put 11.000 0.325 NCMYN9 26/09/2013 Put 11.000 0.035 NCMLC9 26/09/2013 Call 14.000 0.020 NCMWJ9 24/10/2013 Call 15.000 0.060 (a) There are five different options listed in the table above. Of these five options, which one is the most expensive (i.e., which traded at the highest price in its last trade)? Explain why this option is the most expensive option (i.e., has the highest value). (b) Of the five options listed in the table above, which is the least expensive option (i.e., which traded at the lowest last trade price). Explain why it is the least expensive option. (c) (d) (e) Why is there a price difference between the NCMW97 and the NCMYN9 options, given that they are both put options with the same exercise price? Consider the NCMW87 option. Draw a payoff graph for the buyer of this option being careful to indicate the following on the graph: option premium, exercise price, breakeven point, and price range over which the option is exercised. What is your main risk in purchasing this option? Draw a payoff graph for the writer of this option. What risk does the writer of the option face? Is it a larger or a smaller risk than the risk faced by you (the buyer of the option)? Relate your comments to the graph. NCM shares closed on 23rd September, 2013 at $12.030. Suppose the following: You own 10,000 NCM shares; and You expect that the price of NCM shares will be very volatile over the next month, but will stay around the $12.030 price. How could you combine the use of a put and a call option to make money from that volatility? Draw a payoff graph for this option trading strategy. The following questions relate to the differences between options and warrants 2. (a) (b) (c) Explain the process of "marking-to-market". Will the buyer of an ASX-traded put (or call) option be "marked-to-market? Explain your reasoning. Will the writer of that same put (or call) option be "marked-to-market"? Will the writer of a (put or call) warrant be "marked-to-market? Relate your comments to the warrant referred to in Question 1(d) above. Why is there a difference in the "marking-to- market" of options versus warrants? 1. Details for Newcrest Mining Limited (NCM) shares on 23rd September 2013 are as follows. Code Last $+/- Bid Offer Open High Low Volume NCM 12.030 -1.070 12.020 12.030 12.500 12.550 12.000 9,027,081 Details for ASX-traded NCM Call and Put Options on 23rd September, 2013 are as follows. Option Code Expiry Date Put/Call Exercise Price Last Trade(i.e. Option Premium or Option Price) NCMW87 24/10/2013 Call 11.000 1.360 NCMW97 24/10/2013 Put 11.000 0.325 NCMYN9 26/09/2013 Put 11.000 0.035 NCMLC9 26/09/2013 Call 14.000 0.020 NCMWJ9 24/10/2013 Call 15.000 0.060 (a) There are five different options listed in the table above. Of these five options, which one is the most expensive (i.e., which traded at the highest price in its last trade)? Explain why this option is the most expensive option (i.e., has the highest value). (b) Of the five options listed in the table above, which is the least expensive option (i.e., which traded at the lowest last trade price). Explain why it is the least expensive option. (c) (d) (e) Why is there a price difference between the NCMW97 and the NCMYN9 options, given that they are both put options with the same exercise price? Consider the NCMW87 option. Draw a payoff graph for the buyer of this option being careful to indicate the following on the graph: option premium, exercise price, breakeven point, and price range over which the option is exercised. What is your main risk in purchasing this option? Draw a payoff graph for the writer of this option. What risk does the writer of the option face? Is it a larger or a smaller risk than the risk faced by you (the buyer of the option)? Relate your comments to the graph. NCM shares closed on 23rd September, 2013 at $12.030. Suppose the following: You own 10,000 NCM shares; and You expect that the price of NCM shares will be very volatile over the next month, but will stay around the $12.030 price. How could you combine the use of a put and a call option to make money from that volatility? Draw a payoff graph for this option trading strategy. The following questions relate to the differences between options and warrants 2. (a) (b) (c) Explain the process of "marking-to-market". Will the buyer of an ASX-traded put (or call) option be "marked-to-market? Explain your reasoning. Will the writer of that same put (or call) option be "marked-to-market"? Will the writer of a (put or call) warrant be "marked-to-market? Relate your comments to the warrant referred to in Question 1(d) above. Why is there a difference in the "marking-to- market" of options versus warrants?