Description

Chapter: 7 -Problem: 14 >> The following option prices were observed for calls and puts on a stock on July 6 of a particular year. Use this information for problems 4 through 21. The stock was priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates associated with the three expirations are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21.F
Answer Preview: A strip is a combination of two put options and one call option. If a short s…

, Chapter: 8 -Problem: 7 >> What are daily price limits, and why are they used?
Answer Preview: Daily price limits are the maximum and minimum pri…

, Chapter: 2 -Problem: 2 >> What adjustments to the contract terms of CBOE options would be made in the following situations? a. An option has an exercise price of 60. The company declares a 10 percent stock dividend. b. An option has an exercise price of 25. The company declares a two-for-one stock split. c. An option has an exercise price of 85. The company declares a four-for-three stock split. d. An option has an exercis
Answer Preview: The following adjustments would be made to the contract terms of CBOE options in each of the followi…

, Chapter: 8 -Problem: 6 >> What are the various ways in which an individual may obtain the right to go on to the floor of an exchange and trade futures?
Answer Preview: 1 . Become a member of the exchange . 2 . Become a flo…

, Chapter: 2 -Problem: 10 >> Discuss the limitations of prices obtained from newspapers such as The Wall Street Journal and the advantages of quotes obtained from Web sites of the exchanges.
Answer Preview: The main limitation of prices obtained from newspapers such as The Wall Street Journal is that they …

, Chapter: 7 -Problem: 6 >> The following option prices were observed for calls and puts on a stock on July 6 of a particular year. Use this information for problems. The stock was priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates associated with the three expirations are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21.For problems,
Answer Preview: ANSWER To construct a collar, we will buy a put option and sell a call option with the same expiration date and underlying asset, in order to limit ou…

, Chapter: 8 -Problem: 14 >> What are the objectives of federal regulation of future markets?
Answer Preview: The objectives of federal regulation of future markets include : 1 . …

, Chapter: 7 -Problem: 22 >> Professors Don Chance of Louisiana State University and Michael Hemler of the University of Notre Dame have authored an options trading case that corresponds with the material in Chapters 6 and 7. Go to the Cengage web site, http://www.cengage.com/finance/chance and download the Second City Options case.
Answer Preview: Derivative securities are financial instruments whose value is derived from an underlying asset or a set of assets. They are called "derivatives" beca…

, Chapter: 7 -Problem: 10 >> The following option prices were observed for calls and puts on a stock on July 6 of a particular year. Use this information for problems. The stock was priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates associated with the three expirations are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21.For problems,
Answer Preview: The riskless spread involves a long position in the August 160 call and a short position in the October 160 call. The strike price is 160, and the opt…

, Chapter: 7 -Problem: 7 >> The following option prices were observed for calls and puts on a stock on July 6 of a particular year. Use this information for problems. The stock was priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates associated with the three expirations are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21.For problems,
Answer Preview: ANSWER. To calculate the profits for different stock prices at the end of the holding period, we need to determine the payoff for each option and comb…

, Chapter: 9 -Problem: 11 >> The following information was available: Spot rate for Japanese yen: $0.009313 730-day forward rate for Japanese yen: $0.010475 (assume a 365-day year)U.S. risk-free rate: 7.0 percent Japanese risk-free rate: 1.0 percent a. Assuming annual compounding, determine whether interest rate parity holds and, if not, suggest a strategy. b. Assuming continuous compounding, determine whether interest rate p
Answer Preview: a . Interest rate parity does not hold , as the 7 30 - day forward rate for Japanese yen ($ 0 . 01 0…

, Chapter: 7 -Problem: 8 >> The following option prices were observed for calls and puts on a stock on July 6 of a particular year. Use this information for problems. The stock was priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates associated with the three expirations are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21.For problems,
Answer Preview: To construct a calendar spread using the August and October 170 calls, we will buy the August 170 ca…

, Chapter: 2 -Problem: 15 >> Explain the major difference between the regulation of exchange-traded options and over-the-counter options.
Answer Preview: The major difference between the regulation of exchange-traded options and …

, Chapter: 6 -Problem: 10 >> The following option prices were observed for a stock for July 6 of a particular year. Use this information in problems. Ignore dividends on the stock. The stock is priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21. Assume that the options are European.In
Answer Preview: ANSWER To determine the profit for the October 165 put option, we need to calculate the payoff at ex…

, Chapter: 2 -Problem: 13 >> Explain how real options are similar to, but different from, ordinary options.
Answer Preview: Real options are similar to ordinary options in that they both involve …

, Chapter: 7 -Problem: 4 >> The following option prices were observed for calls and puts on a stock on July 6 of a particular year. Use this information for problems. The stock was priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates associated with the three expirations are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21.For problems,
Answer Preview: ANSWER To construct a bear money spread using the October 165 and 170 calls, we will sell the 165 ca…

, Chapter: 7 -Problem: 12 >> The following option prices were observed for calls and puts on a stock on July 6 of a particular year. Use this information for problems. The stock was priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates associated with the three expirations are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21.For problems,
Answer Preview: ANSWER To close the positions on September 20, we need to use the August 21 expiration options. We c…

, Chapter: 8 -Problem: 1 >> How do locals differ from commission brokers? How do the latter differ from futures commission merchants?
Answer Preview: Loc als are professional traders who buy and sell futures contracts for their …

, Chapter: 8 -Problem: 9 >> Explain how the clearinghouse operates to protect the futures market.
Answer Preview: The clearing house operates to protect the futures market by acting as a middle …

, Chapter: 2 -Problem: 1 >> Explain each of the terms in the following description of an option: AT&T January 65 call.
Answer Preview: AT & T : AT & T is the name of the underlying security ( …

, Chapter: 8 -Problem: 3 >> What factors would determine whether a particular strategy is a hedge or a speculative strategy?
Answer Preview: The main factors that determine whether a particular strategy is a hedge or a specu…

, Chapter: 8 -Problem: 8 >> What are circuit breakers? What are their advantages and disadvantages?
Answer Preview: Circ uit break ers are devices that are used to protect electrical systems from over loading a…

, Chapter: 6 -Problem: 9 >> The following option prices were observed for a stock for July 6 of a particular year. Use this information in problems. Ignore dividends on the stock. The stock is priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21. Assume that the options are European.In
Answer Preview: To solve this problem, we need to use the Black-Scholes-Merton option pricing model to calculate the …

, Chapter: 2 -Problem: 7 >> Contrast the market maker system of the CBOE with the specialist system of the AMEX and Philadelphia Stock Exchange. What advantages and disadvantages do you see in each system?
Answer Preview: The market maker system of the CBO E is an automated system in which market makers provide liquidity …

, Chapter: 6 -Problem: 13 >> The following option prices were observed for a stock for July 6 of a particular year. Use this information in problems. Ignore dividends on the stock. The stock is priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21. Assume that the options are European.In
Answer Preview: ANSWER To determine the profits for possible stock prices of 150, 160, 170, and 180, we need to calc…

, Chapter: 6 -Problem: 11 >> The following option prices were observed for a stock for July 6 of a particular year. Use this information in problems. Ignore dividends on the stock. The stock is priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21. Assume that the options are European.In
Answer Preview: ANSWER To determine the profit for each possible stock price, we need to calculate the payoff for the stock and the call option at expiration and then …

, Chapter: 12 -Problem: 17 >> An asset management firm has a $300 million portfolio consisting of all stock. It would like to divest 10 percent of its stock and invest in bonds. It considers the possibility of synthetically selling some stock using equity swaps. It does not, however, want to receive a fixed or floating rate. If it actually sold the stock, it would invest in a broadly diversified portfolio of bonds. In fact, th
Answer Preview: The asset management firm can achieve its objective of divesting 10 percent of its stock and investi…

, Chapter: 6 -Problem: 12 >> The following option prices were observed for a stock for July 6 of a particular year. Use this information in problems. Ignore dividends on the stock. The stock is priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21. Assume that the options are European.In
Answer Preview: To solve this problem, we first need to calculate the profits for the given stock prices using the o…

, Chapter: 7 -Problem: 5 >> The following option prices were observed for calls and puts on a stock on July 6 of a particular year. Use this information for problems. The stock was priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates associated with the three expirations are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21.For problems,
Answer Preview: ANSWER To solve the problems, we will use the Black-Scholes-Merton (BSM) option pricing model. Problem 4: We will consider holding the options until e…

, Chapter: 9 -Problem: 19 >> Identify and define three versions of put-call parity.
Answer Preview: 1 . The basic version of put - call parity states that the intrinsic value of a put option plus the …

, Chapter: 2 -Problem: 11 >> Discuss the three possible ways in which an open option position can be terminated. Is your answer different if the option is created in the over-the-counter market?
Answer Preview: The three possible ways in which an open option position can be t…

, Chapter: 2 -Problem: 12 >> Name and briefly describe at least two other instruments that are very similar to options.
Answer Preview: 1 . Fut ures : A futures contract is a standardized agreement to buy or sell …

, Chapter: 7 -Problem: 11 >> The following option prices were observed for calls and puts on a stock on July 6 of a particular year. Use this information for problems. The stock was priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates associated with the three expirations are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21.For problems,
Answer Preview: ANSWER To construct a long straddle, we need to buy a call option and a put option with the same str…

, Chapter: 8 -Problem: 16 >> Compare and contrast three types of futures trading costs.
Answer Preview: F ut ures trading costs can include commissions , exchange fees , and overnight financing . Comm iss…

, Chapter: 6 -Problem: 8 >> The following option prices were observed for a stock for July 6 of a particular year. Use this information in problems. Ignore dividends on the stock. The stock is priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21. Assume that the options are European.In
Answer Preview: The purchase price of one August 165 call contract is 5 25. To determine the profits at expiration, …

, Chapter: 8 -Problem: 19 >> Identify the typical characteristics of a forward market trader.
Answer Preview: 1 . Knowledge of financial markets and instruments 2 …

, Chapter: 8 -Problem: 18 >> U.S. federal law regulates some futures market participants, even though they do not directly participate in trading. Explain the difference between an introducing broker, a commodity trading advisor, a commodity pool operator, and an associated person.
Answer Preview: Introdu cing broker : An introducing broker is a person or firm that solic its or accepts orders to …

, Chapter: 12 -Problem: 18 >> Consider a currency swap with but two payment dates, which are one year apart, and no exchange of notional principals. On the first date, the party pays U.S. dollars at a rate of 4 percent and receives British pounds at a rate of 3.5 percent. Since the payments are annual, no adjustment, such as days/360, is necessary. The notional principals are $10 million and £6.25 million. Explain from an Amer
Answer Preview: The currency swap with two payment dates can be viewed as a series of forward contracts on the p…

, Chapter: 2 -Problem: 5 >> Compare and contrast the roles of market maker and floor broker. Why do you think an individual cannot generally be both?
Answer Preview: A market maker is an individual or institution that actively creates liquidity in a particular asset by buying and selling at different prices on an e…

, Chapter: 2 -Problem: 9 >> Compare and contrast the exercise procedure for stock options with that for index options. What major advantage does exercising an index option have over exercising a stock option?
Answer Preview: Stock options are contracts that give the holder the right to purchase a specific number of shares o…

, Chapter: 2 -Problem: 6 >> Explain how the CBOE’s order book official (OBO) handles public limit orders.
Answer Preview: The CBO E 's Order Book Official ( O BO ) handles public limi…

, Chapter: 8 -Problem: 13 >> Explain the difference between hedge funds and futures funds.
Answer Preview: H edge funds are private investment vehicles that use a variety of strategies to generate ret…

, Chapter: 7 -Problem: 13 >> The following option prices were observed for calls and puts on a stock on July 6 of a particular year. Use this information for problems. The stock was priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates associated with the three expirations are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21.For problems,
Answer Preview: To construct a long strap using the October 165 options, we would buy two October 165 calls and one …

, Chapter: 7 -Problem: 9 >> The following option prices were observed for calls and puts on a stock on July 6 of a particular year. Use this information for problems. The stock was priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates associated with the three expirations are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21.For problems,
Answer Preview: ANSWER To calculate the profits for the holding period indicated for possible stock prices of 150, 155, 160, 165, 170, 175, and 180 at the end of the …

, Chapter: 8 -Problem: 5 >> What are the differences among scalpers, day traders, and position traders?
Answer Preview: Sc al pers are short - term traders who take advantage of small price movements in a stock or asset …

, Chapter: 2 -Problem: 4 >> Why are short puts and long calls grouped together when considering position limits?
Answer Preview: Short puts and long calls are grouped together when considering position limits because th…

, Chapter: 1 -Problem: 4 >> What is storage? Why is it risky? What role does it play in the economy?
Answer Preview: Storage refers to the process of storing goods , services , or …

, Chapter: 2 -Problem: 3 >> Consider the January, February, and March stock option exercise cycles discussed in the chapter. For each of the following dates, indicate which expirations in each cycle would be listed for trading in stock options. a. February 1 b. July 1 c. December 1
Answer Preview: The January, February, and March stock option exercise cycles are a series of expiration dates for l…

, Chapter: 2 -Problem: 14 >> Identify and briefly discuss the various types of option transaction costs. How do these costs differ for market makers, floor brokers, and firms trading in the over-the-counter market?
Answer Preview: Option transaction costs include commissions , fees , and other charges for buying and selling optio…

, Chapter: 8 -Problem: 15 >> What is the objective of an industry self-regulatory organization?
Answer Preview: The objective of an industry self - reg ulatory organization is to create and enfo…

, Chapter: 8 -Problem: 4 >> How are spread and arbitrage strategies forms of speculation? How can they be interpreted as hedges?
Answer Preview: Spread and arbit rage strategies are forms of speculation because they involve taking advanta…

Additional Information

12 Reviews for Introduction To Derivatives And Risk Management Textbook Questions And Answers