1. You purchase one IBM July 120 put contract for a premium of $5 (per share). Y

Question

1. You purchase one IBM July 120 put contract for a premium of $5 (per share). You hold the option until the expiration date when IBM stock sells for $123 per share. You will realize a ______ on the investment. (Hint: Recall that each put covers 100 shares.)

a. $200 profit

b. $200 loss

c. $300 profit

d. $300 loss

e. $500 loss

2. You purchase one IBM July 120 call contract for a premium of $5 (per share). The stock has a 2 for 1 split prior to the expiration date. You hold the option until the expiration date when IBM stock sells for $64 per share. You will realize a ______ on the investment. (Hint: Recall that each call covers 100 pre-split shares and its exercise price is adjusted for the split.)

a. $300 profit

b. $500 loss

c. $800 loss

d. $800 profit

e. $300 loss

3. A put on Sanders stock with a strike price of $35 is priced at $2 per share while a call with a strike price of $35 is priced at $3.50.   The maximum per share loss to the writer of a put is __________ and the maximum per share gain to the writer of a call is __________.

a. $33.00,    $3.50

b. $33.00,   $31.50

c. $35.00,    $3.50

d. $37.00,   $38.50

e. $2, $3.50

4. (EC) You are considering purchasing a put option on a stock with a current price of $39. The exercise price is $35 and the price of the corresponding call option is $7. According to the put-call parity relationship, if the annual risk-free rate of interest is 4%, and there are 60 days until expiration, the value of the put should be ____________. (Hint: Use put-call parity relationship to derive a portfolio equivalent to a put and also assume there are 360 days in a year.)

a. $0.00

b. $2.77

c. $3.23

d. $4.00

e. $11.00

5. Sahali Trading Company has issued $100 million worth of long-term bonds at a fixed rate of 9%. Sahali Trading Company then enters into an interest rate swap where they will pay Libor and receive a fixed 8.00% on a notional principal of $100 million. After all these transactions are considered, Sahali Trading Company's net cost of funds is __________.

a. Libor + 9%

b. Libor + 8%

c. Libor + 1%

d. Libor

e. Libor -1%

6. An initial margin requirement of 15% on the purchase of a $115,098 value interest rate futures contract with a $100,000 underlying par value bond, will experience a change of ______ in value when the futures contract value falls to $108,000. (Hint: First find out how cash must be paid to establish the position by meeting the initial margin requirement and then calculate percentage change in margin as a result of fall of futures price. Recall a one dollar fall in futures price reduces margin in a long futures position by same amount. Percentage change = (Value of final margin

Explanation / Answer

1. E

Put contract is out of the money, so you only lose the premium: (5 * 100) = $500

2. A

[(64*2) - 120 - 5] * 100 = $300 Profit

3. A

Maximum per share loss to writer of put: 35.00 - 2.00 = $33.00 (Total Share Value - Gain from Premium)

Maximum per share gain to writer of call: Premium of $3.50

4. B

[35.00 / 1.04^(60/360)] - 32.00 = 2.77195

5. C

Sahali pays 9% fixed, pays Libor, and receives 8% fixed.

Libor + 9% - 8% = Libor + 1% (Total Cost)

6. B

[(115,098 * .15) - (115,098 - 108,000)] = 10,166.70

[10,166.70 - (115,098 * .15)] / (115,098 * .15) = -.41112

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