FIN 3005 FIN3005 Week 7 Individual Work 1 (Everest University)

FIN 3005 FIN3005 Week 7 Individual Work 1 (Everest University)

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FIN3005 Week 7 Individual Work 1 (Everest University)

QUESTIONS AND APPLICATIONS

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 financial 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?

 

ADVANCED QUESTIONS

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?


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