Expert Answers

1. Look at the option quotes in Table 15–2.

TABLE 15–2: SINGLE Systems Prices on November 8


Option trading prices
• a. What is the closing price of the common stock of SINGLE Systems?
• b. What is the highest strike price listed?
• c. What is the price of a December 20 call option?
• d. What is the price of a January 22.50 put option?

3. Assume a stock is selling for $66.75 with options available at 60, 65, and 70 strike prices. The 65 call option price is at $4.50.
Option trading terms
• a. What is the intrinsic value of the 65 call?
• b. Is the 65 call in the money?
• c. What is the speculative premium on the 65 call option?
• d. What percentage does the speculative premium represent of common stock price?
• e. Are the 60 and 70 call options in the money?

4. Assume on May 1 you are considering a stock with three different expiration dates for the 60 call options. The percentage of the speculative premium for each date is as follows:

Each contract expires at 11:59 p.m. Eastern time on the Saturday immediately following the third Friday of the expiration month. For purposes of this problem, assume the May option has 21 days to run, the August option has 112 days, and the November option has 203 days.
• a. Compute the percentage speculative premium per day for each of the three dates.
• b. From the viewpoint of a call option purchaser, which expiration date appears most attractive (all else being equal)?
• c. From the viewpoint of a call option writer, which expiration date appears most attractive (all else being equal)?

5.) You purchase a 5,000–bushel contract for corn at $1.90 per bushel ($9,500 total). The initial margin requirement is 7 percent. The price goes up to $1.98 in one month. What is your percentage profit and the annualized gain?

6. Farmer Tom Hedges anticipates taking 100,000 bushels of oats to the market in three months. The current cash price for oats is $2.15. He can sell a three–month futures contract for oats at $2.20. He decides to sell 10 5,000–bushel futures contracts at that price. Assume that in three months when Farmer Hedges takes the oats to market and also closes out the futures contracts (buys them back), the price of oats has tumbled to $2.03

7. You purchase a futures contract in euros for $170,000. The trading unit is 125,000 euros.
• a. What is the ratio of cents to euros in this contract? (Divide the dollar contract size by the size of the trading unit.)
• b. Assume you are required to put up $4,000 in margin and the euro increases by 3¢ (per euro). What will be your return as a percentage of margin?

8. Based on the information in Table 17–1, what is the total value of an S&P 500 Index futures contract for December 2006? Use the settle price and the appropriate multiplier. Also, if the required margin is $20,000, what percent of the contract value does margin represent?

TABLE 17–1: Stock Index Futures (June 26, 2006)

9. The following problem relates to data in Table 17–6 on page 426. Assume you purchase an August 1250 (strike price) S&P 500 call option. Compute your total dollar profit or loss if the index has the following values at expiration:

S&P 500 call options
• a. 1305
• b. 1285
• c. 12300. Assume that in problem 11 the firm had purchased 80 July 1260 put option contracts on the S&P 500 Index listed in Table 17–5 instead of selling the call options. If the S&P 500 Index goes down by 14 percent (see 11 c) at expiration,

a. What will be your profit on the puts? Comparing that to your loss on the stock portfolio in problem 11 b, what is your net overall gain or loss?

b. Compare the protection afforded by the call-writing hedge in problem 11 with the protection afforded by the put purchase in this problem.

c. Suggest any modifications to the call writing or put purchase strategy that would allow you to increase your protection even more. A general statement is all that is required.