Business Administration - Financial Planning RFC125 Chapter 9: chapter 9 - csc

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greenmuskrat329

17 Nov 2016

School

Seneca College

Department

Business Administration - Financial Planning

Course

Business Administration - Financial Planning RFC125

Professor

Peter Wan

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Document Summary

Stocks cash account, must have cash in account by settlement. Long when you are owed money: long position you are holding. Short when you are selling: short position you are selling. Bonds maturity 3 years or less 2 days settlement. Broker loa(cid:374)s you (cid:858)loa(cid:374) a(cid:373)ou(cid:374)t(cid:859) of your trade a(cid:374)d you possess the (cid:858)(cid:373)argi(cid:374)(cid:859) i(cid:374) you (cid:373)o(cid:374)ey. Long margin account most common, borrow money from the firm to buy. Short margin account short selling, you have to maintain the margin (as opposed to supply it) Sell the security first and buy it back when the price goes down. The purchase when the price goes down (difference or spread) repays the debt of the short position and provides profit to the investor. Option eligible securities eligible for reduced margin. Securities that are less risky, therefore they are traded in the montreal option exchange, for this reason you can have up to 70% margin.

Related Questions

1.You buy 100 shares of Starbucks at $55. At the end of the year it is selling for $65. What is the percentage return of your investment?

2.In problem one you make the same investment. However, you do not have $5,500 to invest so you open a margin account. You are able to put up 60% per share and borrow the rest from the broker. The broker charges you brokers call (2%) plus 1. What is your return at the end of the year?

3.Redo 1 and 2 assuming that Starbucks paid a $1.50 dividend.

4.Redo 1 and 2 assuming that during the year it was announced that Starbucks is losing market share to competitors and the stock has tumbled to $45. (do not include the dividend in question 3 in this problem)

5.If the broker requires a maintenance margin of 35%, at what price will you get a margin call?

6.You sell Visa short at $70 per share. At the end of the year you close out your position when V is selling for $60 per share. You are required to put up 60% of the original stock price plus the amount you sell V for ($70). What is your percentage return? How does your return change if V pays a $2.60 dividend?

T. J. Patrick is a young, successful industrial designer in Portland, Oregon, who enjoys the excitement of commodities speculation. T. J. has been dabbling in commodities since he was a teen-ager-he was introduced to this market by his dad, who is a grain buyer for one of the leading food processors. T. J. recognizes the enormous risks involved in commodities speculating but feels that because he's young, he can afford to take a few chances. As a principal in a thriving industrial design firm, T. J. earns more than $150,000 a year. He follows a well-disciplined investment program and annually adds $15,000 to $20,000 to his portfolio.
Recently, T. J. has started playing with financial futures-interest-rate futures, to be exact. He admits he is no expert in interest rates, but he likes the price action these investments offer. This all started several months ago, when T. J. met Vinnie Banano, a broker who specializes in financial futures, at a party. T. J. liked what Vinnie had to say (mostly how you couldn't go wrong with interest-rate futures) and soon set up a trading account with Vinnie's firm, Banano's of Portland.
The other day, Vinnie called T. J. and suggested he get into 5-year Treasury note futures. He reasoned that with the Fed pushing up interest rates so aggressively, the short to intermediate sectors of the term structure would probably respond the most-with the biggest jump in yields.
Accordingly, Vinnie recommended that T. J. short sell some 5-year T-note contracts. In particular, Vinnie thinks that rates on these T-notes should go up by a full point (moving from about 5.5% to around 6.5%) and that T. J. should short 4 contracts. This would be a $5,400 investment because each contract requires an initial margin deposit of $1,350.
Questions
a. Assume T-note futures ($100,000/contract; 32's of 1%) are now being quoted at 103-16.
1. Determine the current underlying value of this T-note futures contract.
2. What would this futures contract be quoted at if Vinnie is right and the yield does go up by 1 percentage point, to 6.5%, on the date of expiration? (Hint: It'll be quoted at the same price as its underlying security, which in this case is assumed to be a 5-year, 6% semiannual-pay U.S. Treasury note. If necessary, refer to Chapter 11 and review the material on pricing semiannual-pay bonds.)
b. How much profit will T. J. make if he shorts 4 contracts at 103-16 and then covers when 5-year T-note contracts are quoted at 98-00? Also, calculate the return on invested capital from this transaction.
c. What happens if rates go down? For example, how much will T. J. make if the yield on T-note futures goes down by just 3/4 of 1%, in which case these contracts would be trading at 105-8?

d. What risks do you see in the reccommended short sale transaction? What is your assessment of TJ's new interest in financial futures? How do you think it compares to hsi established commodities investment program?

tantiger591

A call option gives the holder (Points : 4) the obligation to buy something the right to sell something the right to buy something the obligation to sell something none of the above Question 2. 2. A call option priced at $2 with a stock price of $30 and an exercise price of $35 allows the holder to buy the stock at (Points : 4) $2 $32 $33 $45 $35 Question 3. 3. A put option in which the stock price is $60 and the exercise price is $65 is said to be (Points : 4) in-the-money out-of-the-money at-the-money exercisable none of the above Question 4. 4. Organized options markets are different from over-the-counter options markets for all of the following reasons except (Points : 4) exercise terms physical trading floor regulation standardized contracts credit risk Question 5. 5. The advantages of the over-the-counter options market include all of the following except (Points : 4) customized contracts privately executed freedom from government regulation lower prices none of the above Question 6. 6. The option price is also referred to as the (Points : 4) strike spread premium fee none of the above Question 7. 7. An investor who exercises a call option on an index must (Points : 4) accept the cash difference between the index and the exercise price purchase all of the stocks in the index in their appropriate proportions from the writer immediately buy a put option to offset the call option immediately write another call option to offset none of the above Question 8. 8. What amount must a call writer pay if a cash-settled index call is exercised? (Points : 4) difference between the index level and the exercise price exercise price difference between the exercise price and the index level index level none of the above Question 9. 9. You are the purchaser of a call option with $5 premium and $145 exercise price. You bought this option when the stock price was $120. If the stock price now is $155, what is the net cash flow to you if you exercise? (Points : 4) $10 $5 $30 $35 Question 10. 10. You are the purchaser of a put option where the premium is $4 and exercise price is $52. You bought this option when the stock price was $52. If the stock price is $42 right now, what is your net cash flow? (Points : 4) negative $14 negative $6 $6 $4 Question 11. 11. You wrote a call option with premium of $5 and exercise price of $55. You sold this when the stock price was $45. If the stock price now is $65, what is your net cash flow? (Points : 4) negative $5 $25 $20 $5 negative $10 Question 12. 12. You wrote a put option with a premium of $3 and exercise price of $22. You sold this option when the stock price was $25. If the stock price is $22 now, what is your net cash flow? (Points : 4) $6 $3 negative $3 $0 negative $6 Question 13. 13. The maximum gain of the writer of a put option with a premium of $3 and an exercise price of $120 is: (Points : 4) $120 $117 $3 $123 unlimited Question 14. 14. The maximum gain of the purchaser of a put option with a premium of $3 and exercise price of $120 would be: (Points : 4) unlimited $120 $117 $3 $123 Question 15. 15. The maximum gain of the writer of a call option with a premium of $3 and an exercise price of $120 would be (Points : 4) unlimited $3 $117 $120 $123 Question 16. 16. The maximum gain of the purchaser of a call option with a premium of $3 and an exercise price of $120 would be (Points : 4) unlimited $120 $117 $123 $3 Question 17. 17. You have the following information: Put: X=$40, Premium=$4 Call: X=$50, Premium=$6 You bought the stock at $45 Scenarios: S=20, S=45, S=90 Given above information, please calculate the net payouts for a protective put strategy for each different scenario. (Points : 4) -$9, -$4, $41 $25, $0, $0 -$5, $-9, $0 $16, -$4, $45 Question 18. 18. You have the following information: Put: X=$40, Premium=$4 Call: X=$50, Premium=$6 You bought the stock at $45 Scenarios: S=20, S=45, S=90 Given above information, please calculate the net payouts for a covered call strategy for each different scenario. (Points : 4) $6, $6, $11 $6, $0, $51 -$19, $6, $11 -$19, $6, $51 -$6, -$6,$45 Question 19. 19. You have the following information: Put: X=$40, Premium=$4 Call: X=$50, Premium=$6 You bought the stock at $45 Scenarios: S=20, S=45, S=90 Given above information, please calculate the net payouts for a collar strategy for each different scenario. (Points : 4) -$3, $2, $7 -$9, $6, $11 $16, $2, $52 -$4, $0, $6 Question 20. 20. You have the following information: S=65, X=60, T=1, r=0, C=7, P=4 Evaluating the situation from a Put-Call Parity framework, what steps would you take to implement an arbitrage strategy? (Points : 4) Sell Call, Buy Put, Short Stock, Invest remainder Sell Call, Buy Put, Buy Stock, Borrow remainder Buy Call, Sell Put, Buy Stock, Borrow remainder Buy Call, Sell Put, Short Stock, Invest remainder Buy Call, Sell Put, Short Stock, Borrow remainder Question 21. 21. Given the information and the solution you found for Question #20, what is the arbitrage amount? (Points : 4) If S>X, then $6 and if SX, the arbitrage will be $4 If S>X, then $3 and if SX, then $2 and if SX, the arbitrage will be $2 Question 22. 22. You have the following information: S=26, X=20, T=2, r=3.4%, C=15, P=6 Evaluating the situation from a Put-Call Parity framework, what steps would you take to implement an arbitrage strategy? (Points : 4) Sell Call, Buy Put, Buy Stock, Borrow remainder Sell Call, Buy Put, Short Stock, Invest reaminder Buy Call, Sell Put, Buy Stock, Borrow remainder Buy Call, Sell Put, Buy Stock, Invest remainder Buy Call, Sell Put, Short Stock, Invest remainder Question 23. 23. Using the information and the solution from Question #22, what would be the final arbitrage amount? (approximately) (Points : 4) If S>X or SX then $9, if SX or SX then $3, if SX or S

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Business Administration - Financial Planning RFC125 Chapter 9: chapter 9 - csc

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