| Country : | Australia |
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Assignment Task:
Practice Questions from the Textbook.
Problem 1.1
What is the difference between a long forward position and a short forward position?
Problem 1.2.
Explain the difference between hedging, speculation, and arbitrage.
Problem 1.3.
What is the difference between entering into a long forward contract when the forward price is $50 and taking a long position in a call option with a strike price of $50?
Problem 1.4.
Explain the difference between selling a call option and buying a put option.
Problem 1.5.
An investor enters into a short forward contract to sell 100,000 British pounds for US dollars at an exchange rate of 1.4000 US dollars per pound. How much does the investor gain or lose if the exchange rate at the end of the contract is (a) 1.3900 and (b) 1.4200?
Problem 1.7.
Suppose that you write a put contract with a strike price of $40 and an expiration date in three months. The current stock price is $41 and the contract is on 100 shares. What have you committed yourself to? How much could you gain or lose?
Problem 1.8.
What is the difference between the over-the-counter market and the exchange-traded market? What are the bid and offer quotes of a market maker in the over-the-counter market?
Problem 1.17.
A company knows that it is due to receive a certain amount of a foreign currency in four months. What type of option contract is appropriate for hedging?
Problem 1.18.
A US company expects to have to pay 1 million Canadian dollars in six months. Explain how the exchange rate risk can be hedged using (a) a forward contract; (b) an option.
Case study:
Case 1: Explain why did Lehman go bankruptcy in 2008?
Case 2: Explain how did derivative markets contribute to the 2007-2008 financial crisis?
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