Q1. Refer to Table 10-4 form textbook. a What was the settlement price on the De
ID: 2731152 • Letter: Q
Question
Q1. Refer to Table 10-4 form textbook.
a What was the settlement price on the December 2011 Eurodollar futures contract on September 1, 2010?
b How many 5-year Treasury not futures contract traded on August 31, 2010
c What is the face value on a Swiss franc currency futures contract on September 1, 2102?
d What was the settlement price on the September 2010 DJIA futures contract on August 31, 2010
Q2. You have purchased a call option on Johnson & Johnson common stock. The option
has an exercise price of $57.50 and J & J’s stock currently trades at $58.93. The
option premium is $2.17 per contract.
a Calculate your net profit on the option if J & J’s stock price rises to $62.50 and your exercise the option.
b Calculate your net profit on the option if J & J’s stock price falls to $58.00 and you exercise the option.
c If J & J’s stock price falls to $58.00 show that it is more profitable to exercise than not exercise the option you have purchased.
Explanation / Answer
Q1. Table 10-4 from the textbook is missing in the question.
Q2. a) Net Profit = Closing Market price - Excercise Price - Option premium
= $ (62.50-57.50-2.17) = $2.83
b) Net profit = $ (58-57.50-2.17) = Net Loss of $(1.67)
c) If we exercise the option we have a net loss of $1.67 (as calculated in point 'b' above), but if we not exercise the option the overall net loss is equal to option premium paid which is $2.17. Therefore by exercising the option we can reduce our loss by $0.5 (2.17 - 1.67).
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