FINM1001 Lecture Notes - Lecture 18: Put Option, Option Contract, Call Option

38 views1 pages

whitegoat396

30 May 2018

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

FINM1001 Workshop 9

Option contract

● Person who buys the contract has a choice, the choice is whether they exercise the

contract and do the transaction at the predetermined price.

● The buyer is often called the holder of the contract.

● The holder of the contract is known as the long position.

● They get to transact at the exercise price

● Forwards and futures the long position shows if they are buying the contract

● Options only has to deal with the fact that you have a choice if you want to deal with the

predetermined price.

● Long position (holder or the buyer of the contract) -> have the choice to exercise the

option contract and transact at the X price

● Short position (seller of the writer of the contract) -> have to comply with the long

position

● Call option:

○ Long call -> right but not the obligation to exercise the contract and buy the

underlying asset for x

○ Short call -> if long call exercising short call has to sell the underlying asset to the

long call position for K

● Put option:

○ Long put -> choice to exercise and sell the underlying for x

○ Short put -> comply with the long position i.e. if long put exercises, they have to

buy for x

○ All one contract

○

find more resources at oneclass.com

Unlock document

This preview shows half of the first page of the document.
Unlock all 1 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Person who buys the contract has a choice, the choice is whether they exercise the contract and do the transaction at the predetermined price. The buyer is often called the holder of the contract. The holder of the contract is known as the long position. They get to transact at the exercise price. Forwards and futures the long position shows if they are buying the contract. Options only has to deal with the fact that you have a choice if you want to deal with the predetermined price. Long position (holder or the buyer of the contract) -> have the choice to exercise the option contract and transact at the x price. Short position (seller of the writer of the contract) -> have to comply with the long position. Long call -> right but not the obligation to exercise the contract and buy the underlying asset for x.

Related Questions

PLEASE SHOW WORK

1. Coke needs around GBP 100,000 in 60 days. It decides to buy 3 call options (93,750 units) for $0.05/unit with an exercise price of 1.50 USD/GBP. In 60 days the actual exchange rate is 1.75 USD/GBP. Should Coke exercise the option, and what is the potential net profit or loss?

2. In the previous example, what would be the net value of the call option if the GBP is 1.25 USD/GBP in the future?

3. You buy an American put option on GBP 31,250 with a cost of $0.04/unit and an exercise price of 1.50 USD/GBP. What is your net position of the put option if the actual market price of the GBP is 1.25 USD/GBP?

4. You write (sell) a call option on EUR 62,500 with an exercise price of 1.40 USD/EUR, at a premium of $0.02. The buyer of the option decides to exercise the option when the current exchange rate is 1.45 USD/EUR. What is the writerâs (sellerâs) net profit or loss?

5. IBM requires EUR 10,000,000 to pay for imported computer supplies in 6 months. They engage in a forward contract with Citibank at a forward rate of 1.65USD/EUR. Six months later the actual spot rate is 1.62USD/EUR. Did IBM save or lose from this deal?

6. Joe Gamble believes that the Swiss franc is going to appreciate against the dollar. He speculates by purchasing one futures contract with a price of 0.69 USD/CHF in 3 months. The current spot rate is 0.65 USD/CHF, and the actual spot rate in 3 months is 0.75 USD/CHF. Did Joe make the right decision?

7. Merck will receive GBP 500,000 in 9 months from their London subsidiary. Since they will repatriate the funds to the U.S., they engage in a forward contract with BankAmerica to sell pounds at the forward rate of 1.55 USD/GBP. In 9 months the actual spot rate is 1.60 USD/GBP. Determine Merckâs net gain or loss?

burgundylion21

2. An equity portfolio manager rarely if fully invested in thefund but will have some funds in cash. Unfortunate, this createswhat is called a cash drag on the portfolio due to the low returnon cash funds. On way to deal with this is called neutralizingcash. It involves using stock index futures to synthetically raisethe equity position of the portfolio to overcome the cash drag. Theportfolio currently has an asset value of $500 million. 95% of itis invested in a stock portfolio that has an average beta=1.0. Thereaming 5% is in a cash fun. In a six month period the broad market(s&p) rise by 11.50% while the cash fund rises by 2.5%.

a. Based on the portfolio weight, compute the portfolio weightaverage over the six month period. Compare this return to the boardmarket return. How much did the portfoliounderperform the market?

b. One way to add return is to synthetically add stock exposurewith stock index futures. We want to have a synthetically portfoliothat has 100% stock exposure so we need to add 5% of the portfoliovalue in stock index future? The current index future price is 1200and the contract size is $250 times the index. This is differentthan hedge in that we want the additional stock exposure so wewould take a long position inn future. The chosen contract willmature three months from today?

c. In three months the following changes have taken place: TheS&P 5 has gone from 1120 to 1220 and the contract matures soconvergence taken place. Based on portfolio these parameters,analyze the performance of the futures position. How much portfoliovalue did the extra equity exposure add?

sangriaskunk539

1. Options versus Futures Describe the general differences between a call option and a futures contract.

2. Speculating with Call Options How are call options used by speculators? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a call option?

3. Speculating with Put Options How are put options used by speculators? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a put option?

4. Selling Options Under what conditions would speculators sell a call option? What is the risk to speculators who sell put options?

7. Leverage of Options How can financial institutions with stock portfolios use stock options when they expect stock prices to rise substantially but do not yet have sufficient funds to purchase more stock?

8. Hedging with Put Options Why would a finan- cial institution holding the stock of Hinton Co. consider buying a put option on that stock rather than simply selling it?

9. Call Options on Futures Describe a call option on interest rate futures. How does it differ from purchasing a futures contract?

10. Put Options on Futures Describe a put option on interest rate futures. How does it differ from selling a futures contract?

11. Hedging Interest Rate Risk Assume a savings institution has a large amount of fixed-rate mortgages and obtains most of its funds from short-term deposits. How could it use options on financial futures to hedge its exposure to interest rate movements? Would futures or options on futures be more appropriate if the institution is concerned that interest rates will decline, causing a large number of mortgage prepayments?

14. Speculating with Stock Options The price of Garner stock is $40. There is a call option on Garner stock that is at the money with a premium of $2.00. There is a put option on Garner stock that is at the money with a premium of $1.80. Why would investors consider writing this call option and this put option? Why would some investors consider buying this call option and this put option?

roseelk840

FINM1001 Lecture Notes - Lecture 18: Put Option, Option Contract, Call Option

Document Summary

Get access

Related Documents

FINM1001 Lecture Notes - Lecture 19: Option Style, Call Option

FINM1001 Lecture 22: FINM1001 Week 8 Lecture A

ECON 372 Study Guide - Final Guide: Put Option, Call Option, Futures Contract

Related Questions