Term
Problem 17.5.
How does the put-call parity formula for a futures option differ from put-call parity for an option on a non-dividend-paying stock? |
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Definition
The put-call parity formula for futures options is the same as the put-call parity formula for stock options except that the stock price is replaced by F0erT, where F0 is the current futures price, r is the risk-free interest rate, and T is the life of the option. |
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Term
Problem 17.8.
Suppose you buy a put option contract on October gold futures with a strike price of $1200 per ounce. Each contract is for the delivery of 100 ounces. What happens if you exercise when the October futures price is $1,180? |
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Definition
K F # AMNT
An amount (1,200 - 1,180) x 100 = $2,000 is added to your margin account and you acquire a short futures position obligating you to sell 100 ounces of gold in October.
This position is marked to market in the usual way until you choose to close it out. |
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Term
Problem 17.9.
Suppose you sell a call option contract on April live cattle futures with a strike price of 90 cents per pound.
Each contract is for the delivery of 40,000 pounds.
What happens if the contract is exercised when the futures price is 95 cents? |
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Definition
F K # AMNT In this case an amount (0.95 - 0.90) x 40,000 = $2,000 is subtracted from your margin account and you acquire a short position in a live cattle futures contract to sell 40,000 pounds of cattle in April.
This position is marked to market in the usual way until you choose to close it out. |
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Term
Problem 17.22.
A futures price is currently 40. It is known that at the end of three months the price will be either 35 or 45. What is the value of a three-month European call option on the futures with a strike price of 42 if the risk-free interest rate is 7% per annum? |
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Definition
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