Shared Flashcard Set

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Example Ch 17
Examples
4
Finance
Graduate
12/06/2014

Additional Finance Flashcards

 


 

Cards

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?

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.

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?

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.

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?

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.

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?

Definition

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