FIN 450 Unit 1 Assignment Derivatives

1. You have a long position in a November futures contract on soybeans at $12.25 per bushel. What have you agreed to do? Be as specific as possible using the information given.2. A U.S. company will need 1 million Euro in three months. Explain specifically how this company could use a forward contract to eliminate exchange rate risk, and explain why it would work. Include whether the contract should be entered long or short.3. A trader buys three Coca-Cola (KO) December call options with a strike price of $50 for a premium of $4.a. What right does the trader have as a result of buying the option? Be as specific as possible using the information given. Note that one options contract is for 100 shares of stock.b. If the share price is $55 at expiration, will the option be exercised? What is the profit or loss?c. If the share price is $45 at expiration, will the option be exercised? What is the profit or loss?No, the option will not be exercised and the loss will be $54. A mining company will be selling 100 ounces of gold in December, and wishes to hedge the price risk.a. A forward contract is available for December gold for $1400. If the company is going to hedge with the forward contract, will it enter the contract long or short? How does this contract hedge price risk? (Page 12 section 1.8).b. A put option is also available for December gold at a strike price of $1400 and a premium of $70. How does this option hedge price risk?c. What advantage does the forward have over the option?d. What advantage does the option have over the forward?5. An investor enters into a short forward contract to sell 10,000 Euro for U.S. dollars at an exchange rate of $1.29 per euro.a. How much does the investor gain or lose if the exchange rate at the end of the contract $1.20?b. How much does the investor gain or lose if the exchange rate at the end of the contract $1.40?6. You would like to speculate on the rise in the price of a certain stock. The current stock price is $48, and a three-month call with a strike price of $50 costs $3. You are trying to decide between buying 100 shares of the stock, or buying 16 call option contracts. Answer these questions and show work.a. The cost of setting up the stock position is $48×100 shares = $4,800. Show the math demonstrating that the cost of setting up the option position is also $4,800.b. If you are correct and the stock price rises to $55, what is the profit on the stock position? What is the profit on the option position?c. If you are wrong and the stock price falls to $41, what is the loss on the stock position? What is the loss on the option position?7. “In terms of the largest volume of trade, most derivatives are traded on exchanges.” True or False? Explain. False, they are traded off-exchange (OTC) such as CME.

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