Questions and Answers of Fundamentals Of Investments Valuation

In our previous example (Example 2.3), suppose the maintenance margin was 40 percent. At what price per share would you have been subject to a margin call?Example 2.3A year ago, you bought 300 shares
You shorted 5,000 shares of Layton Industries at a price of $30 per share. The initial margin is 50 percent, and the maintenance margin is 40 percent. What does your account balance sheet look like
Review current money market rates.
What are the major risk premiums that impact the nominal interest rate?
Suppose you purchase a $1,000 TIPS on January 1, 2024. The bond carries a fixed coupon of 1 percent. Over the first two years, semiannual inflation is 2 percent, 3 percent, 1 percent, and 2 percent,
Both Starcents and Jpod have the same return standard deviation of 20 percent, and Starcents and Jpod returns have zero correlation. What is the minimum attainable standard deviation for a portfolio
Read recent news headlines for Best Buy (BBY).
Find the beta and risk premium for the Vanguard International Value Fund (VTRIX).
The Sharpe portfolio performance measure for Portfolio Q is:a. .45.b. .89.c. .30.d. .57.A pension fund administrator wants to evaluate the performance of four portfolio managers. Each manager
A portfolio manager believes her $100 million stock portfolio will have a 10 percent return standard deviation during the coming week and that her portfolio’s returns are normally distributed. What
Using Figure 14.1, answer the following questions:a. What was the settle price for July 2022 coffee futures on this date? What is the total dollar value of this contract at the close of trading for
In Figure 14.1, locate the gold and wheat contracts. Where are they traded? What are the contract sizes for the gold and wheat contracts and how are their futures prices specified?Figure 14.1 Futures
Going back to the Ned Kelley Hedge Fund in our previous example, what loss level might we expect over six months with a probability of .17?Example 13.11The Ned Kelley Hedge Fund focuses on investing
For the Ned Kelley Hedge Fund specified in our previous examples, what is the expected loss for the coming year with a probability of 5 percent?Example 13.12Going back to the Ned Kelley Hedge Fund,
For the Ned Kelley Hedge Fund specified in our previous examples, what is the expected loss for the coming month with a 1 percent probability?Example 13.13For the Ned Kelley Hedge Fund, what is the
a. Explain what is meant by a long position in futures and what is meant by a short position in futures.b. Suppose a hedger employs a futures hedge that is two-thirds the size of the underlying
In Figure 14.1, locate the soybean contract with the greatest open interest. Explain the information provided.Figure 14.1 Futures Contracts Futures Prices (June 3, 2022) Metal & Petroleum
a. What is a forward contract?b. What is a futures contract, and why is it different from a forward contract?c. What is a futures price?
Review the list of futures contracts traded on the exchanges.
Suppose you purchase 10 orange juice contracts today at the settle price of $1 per pound. How much do these 10 contracts cost you? If the settle price is lower tomorrow by 2 cents per pound, how much
Which of the following statements is true regarding the distinction between futures contracts and forward contracts?a. Futures contracts are exchange-traded, whereas forward contracts are
Examine the current fair value of major world equity indexes.
There is a futures contract on a stock index, which is currently selling at $200 per share. The contract matures in two months; the risk-free rate is 5 percent annually. The stocks in the index do
In which of the following ways do futures contracts differ from forward contracts?I. Futures contracts are standardized.II. For futures, performance of each party is guaranteed by a
After an extensive analysis of political currents in Central and South America, you conclude that the political situation will stabilize. As a result, you believe that coffee prices in the future
Pick a commodity futures contract and identify its cheapest-to-deliver option.
a. What are the three essential things you should know about a futures trading account?b. What is meant by initial margin for a futures position? What is meant by maintenance margin for a futures
Suppose you have an inventory of 1.8 million pounds of soybean oil. Describe how you would hedge this position.
a. What is the spot price for a commodity?b. With regard to futures contracts, what is the basis?c. What is an inverted market?d. What is the spot-futures parity condition?
Initial margin for a futures contract is usually:a. Regulated by the Federal Reserve.b. Less than 2 percent of contract value.c. In the range between 2 percent and 5 percent of contract
You need to buy 360,000 pounds of orange juice concentrate in three months. How can you hedge the price risk associated with this planned purchase? One orange juice contract calls for delivery of
a. What is a cross-hedge?b. What are the basic inputs required to calculate the number of stock index futures contracts needed to hedge an equity portfolio?c. What are the basic inputs required to
Suppose your company will receive payment of £15 million in three months, at which time your company will convert the British pounds to U.S. dollars. What is the standard futures contract size for
A silver futures contract requires the seller to deliver 5,000 troy ounces of silver. An investor sells one April silver futures contract at a price of $15 per ounce, posting an $8,400 initial
Suppose we see silver spot prices are $23 per ounce. The risk-free rate is 4 percent per year. If a silver futures contract matures in three months, what should the futures price be?
Which of the following statements is false about futures account margin?a. Initial margin is higher than maintenance margin.b. A margin call results when account margin falls below maintenance
Suppose you are convinced that the Dow stocks are going to skyrocket in value. Consequently, you buy 20 Mini-DJIA futures contracts maturing in six months at a price of 32,900. Suppose that the Dow
Which of the following contract terms changes daily during the life of a futures contract?a. Futures priceb. Futures contract sizec. Futures maturity dated. Underlying commodity.
How many stock index futures contracts are required to completely hedge a $250 million stock portfolio, assuming a portfolio beta of .75 and a Mini S&P 500 index futures level of 4,200?
On the maturity date, stock index futures contracts require delivery of:a. Common stock.b. Common stock plus accrued dividends.c. Treasury bills.d. Cash.
How many futures contracts are required to hedge a $250 million bond portfolio with a portfolio duration of 5 years using 10-year U.S. Treasury note futures with a duration of 7.5 years and a futures
A Treasury note futures contract has a quoted price of 100. The underlying bond has a coupon rate of 7 percent and the current market interest rate is 7 percent. Spot-futures parity then implies a
You went long 20 July 2022 crude oil futures contracts at a price of $116.50. Looking back at Figure 14.1, if you closed your position at the settle price on this day, what was your profit?Figure
A stock index futures contract maturing in one year has a currently traded price of $1,000. The cash index has a dividend yield of 2 percent and the interest rate is 5 percent. Spot-futures parity
You are long 10 gold futures contracts, established at an initial settle price of $1,300 per ounce, where each contract represents 100 troy ounces. Your initial margin to establish the position is
A stock index futures contract matures in one year. The cash index currently has a level of $1,000 with a dividend yield of 2 percent. If the interest rate is 5 percent, then spot-futures parity
You shorted 15 June 2022 British pound futures contracts at the high price for the day. Looking back at Figure 14.1, if you closed your position at the settle price on this day, what was your
You manage a $100 million stock portfolio with a beta of .8. Given a contract size of $100,000 for a stock index futures contract, how many contracts are needed to hedge your portfolio? Assume the
You manage a $100 million bond portfolio with a duration of 9 years. You wish to hedge this portfolio against interest rate risk using T-bond futures with a contract size of $100,000 and a duration
Which of the following is not an input needed to calculate the number of stock index futures contracts required to hedge a stock portfolio?a. The value of the stock portfoliob. The beta of the
Review contract characteristics for an option of your choice on Verizon (VZ).
a. Who makes up the OCC? Who regulates the OCC?b. How does the OCC protect option traders?c. What is the OIC, and what does it do?
Stock in Bunyan Brewery is currently priced at $20 per share. A call option with a $20 strike price and 60 days to maturity is quoted at $2. Compare the percentage gains and losses from a $2,000
All of the following statements about the value of a call option at expiration are true, except that the:a. Short position in the same call option can result in a loss if the stock price exceeds the
In Example 15.1, suppose that you bought one call option contract for $200. The strike price is $50. If the stock price is $60 just before the option expires, should you exercise the option? If you
Collect a list of the most actively traded options.
a. If you buy 100 shares of stock at $10 and sell out at $12, what is your percentage return?b. If you buy one call contract with a strike price of $10 for $100 and exercise it when the stock is
A call option sells for $8. It has a strike price of $80 and six months until expiration. If the underlying stock sells for $60 per share, what is the price of a put option with an $80 strike price
Which of the following stock option strategies has the greatest potential for large losses?a. Writing a covered callb. Writing a covered putc. Writing a naked calld. Writing a naked put.
In Example 15.2, if the stock price is $40 just before the option expires, should you exercise the option? If you exercise the option, what is the percentage return on your investment? If you don’t
a. In addition to the underlying asset, what is the major difference between an ordinary stock option and a stock index option?b. In addition to the underlying index, what is the major difference
Which statement does not describe an at-the-money protective put position (comprised of owning the stock and the put)?a. It protects against loss at any stock price below the strike price of the
a. All else equal, would an in-the-money option or an out-of-the-money option have a higher price? Why?b. Does an out-of-the-money option ever have value? Why?c. What is the intrinsic value of a call
Which of the following is not included in the put-call parity condition?a. Price of the underlying stockb. Strike price of the underlying call and put option contractsc. Expiration dates of the
a. What is option writing?b. What are the payoffs and profits from writing call options?c. What are the payoffs and profits from writing put options?d. Explain how a payoff diagram that shows option
According to the put-call parity condition, a risk-free portfolio can be created by buying 100 shares of stock and:a. Writing one call option contract and buying one put option contract.b. Buying
a. What is a protective put strategy, and how does it work?b. What is a credit default swap?c. Explain how a company can use options today to protect itself from higher future input prices.
Investor A uses options for defensive and income reasons. Investor B uses options as an aggressive investment strategy. What is an appropriate use of options for investors A and B,
Suppose a call option exists with 20 days to expiration. It is selling for $1.65. The underlying stock price is $41.15. Calculate the intrinsic value and time value of (1) a call with a strike price
a. What is the difference between option spreads and option combinations?b. What is a short straddle? When might it be appropriate?
Which one of the following option combinations best describes a straddle? Buy both a call and a put on the same stock with:a. Different exercise prices and the same expiration date.b. The same
a. What is the most a European call option could be worth? How about an American call option?b. What is the most a European put option could be worth? How about an American put option?
Which of the following strategies is the riskiest options transaction if the underlying stock price is expected to increase substantially?a. Writing a naked call optionb. Writing a naked put
a. Your friend Kristen claims that forming a portfolio today of long call, short put, and short stock has a value at option expiration equal to −K. Does it?b. If a dividend payment occurs before
You create a “strap” by buying two calls and one put on ABC stock, all with a strike price of $45. The calls cost $5 each and the put costs $4. If you close your position when ABC stock is priced
Suppose a put option exists with 15 days to expiration. It is selling for $5.70. The underlying asset price is $42.35. Calculate the intrinsic value and time value of (1) a put with a strike price of
You own a share of stock worth $80. Suppose you sell a call option with a strike price of $80 and also buy a put with a strike price of $80. What is the net effect of these transactions on the risk
Miss Molly, your eccentric (and very wealthy) aunt, wants you to explain something to her. Recently, at the Stable Club, she heard something fantastic. Her friend Rita said that there is a very
If a stock is selling for $25, the exercise price of a put option on that stock is $20, and the time to expiration of the option is 90 days, what are the minimum and maximum prices for the put
Which of the following strategies is most suitable for an investor wishing to eliminate “downside” risk from a long position in stock?a. A long straddle positionb. A short straddle
A current stock price is $50, and a call option with a strike price of $55 maturing in two months has a price of $8. The stock will pay a $1 dividend in one month. If the interest rate is 6 percent,
The current price of an asset is $75. A three-month, at-the-money American call option on the asset has a current value of $5. At what value of the asset will a covered call writer break even at
Suppose you observe the following market prices:S = $40 C = $ 3 P = $ 2The strike price for the call and the put is $40. The riskless interest rate is 6 percent per year, and the options expire in
The current price of an asset is $100. An out-of-the-money American put option with an exercise price of $90 is purchased along with the asset. If the breakeven point for this hedge is at an asset
In Example 15.14, we calculated a $.42 potential arbitrage profit. How would an arbitrageur take advantage of this opportunity? How much profit will the arbitrageur make?Example 15.14Suppose you
Suppose you buy one SPX call option contract with a strike of 4200. At maturity, the S&P 500 index is at 4218. What is your net gain or loss if the premium you paid was $14?
Suppose you buy one SPX call option with a strike of 4125 and write one SPX call option with a strike of 4150. What are the payoffs at maturity to this position for S&P 500 index levels of 4050,
Suppose you buy one SPX put option with a strike of 4100 and write one SPX put option with a strike of 4125. What are the payoffs at maturity to this position for S&P 500 index levels of 4000, 4050,
Suppose you buy one SPX call option with a strike of 4100 and write one SPX put option with a strike of 4100. What are the payoffs at maturity to this position for S&P 500 index levels of 4000, 4050,
Suppose you buy one each of SPX call options with strikes of 4000 and 4200 and write two SPX call options with a strike of 4100. What are the payoffs at maturity to this position for S&P 500 index
A stock is currently selling for $25 per share. In one period, it will be worth either $20 or $30. The riskless interest rate is 5 percent per period. There are no dividends. What is today’s price
Rework the example in this section to price a call option today that expires in one year if K = $105, S = $100, r = 10%, and the stock price will be either $120 or $110 in one year.
What is the value of a call option if the underlying stock price is $100, the strike price is $90, the underlying stock volatility is 40 percent, and the risk-free rate is 4 percent? Assume the
The only variable in the Black-Scholes option pricing model that cannot be directly observed is the:a. Stock price volatility.b. Time to expiration.c. Stock price.d. Risk-free rate.
a. Suppose the stock price today is $95, not $100 as shown in Figure 16.1. Nothing else changes in the detailed example that follows Figure 16.1. Does delta still equal .67? What is the call price?b.
Calculate call and put option prices, given the following inputs to the Black-Scholes option pricing formula: Stock price Strike price Time to maturity Stock volatility Interest rate S
Explore the calculator used to price equity options.
What is the value of a put option using the assumptions from Problem 1?Problem 1What is the value of a call option if the underlying stock price is $100, the strike price is $90, the underlying stock
You purchase a call option with a delta of .34. If the stock price decreases by $2.00, the price of the option will approximately:a. Increase by $.34.b. Decrease by $.34.c. Increase by
The purpose of Example 16.2 was to show you that the Black-Scholes formula is not hard to use—even if at first it looks imposing. If you are in a hurry to price an option or if you want to verify

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