(a) What is the main feature of a futures contract which plays a crucial role in mitigating default risk, compared to a forward contract ? (1 mark).

(b) You own one call option contract covering 1000 shares of Fortescue Metals Group (FMG) Ltd. The strike price of the call option contract is $17.18 per share. The current FMG share price is $16.92 and the option contract is selling for $1.35 (i.e, 1.35 per share, 1000 shares results in the option premium of $1350.00).

(i) What is the moneyness of your call option contract today ? (1 mark)

(ii) Assuming that on the expiry date of your call option contract, the spot price of a FMG share is $16.56. Are you going to exercise your call option contract? (1 mark).

(iii) How much is the payoff of your call option contract on the expiry date? (1 mark).

(iv) How much is the profit (or loss) of your call option contract on the expiry date? (1 mark).

Answer rating: 100% (QA)

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