Question 1. � Question : � (TCO E) A stock sells for $60 and the risk-free rate of interest is 10%. A call and a put on this stock expire in one year and both options have an exercise price of $55. How would you trade to create a synthetic call option? If the put sells for $2, how much is the call option worth? (Assume annual compounding.) Question 2. � Question : � (TCO H) Explain how a put price varies with interest rates. Does the relationship vary for European and American puts? Explain. Question 3. � Question : � (TCO D, F, G) Your newest client believes that the Asian currency crisis is going to increase the volatility of earnings for firms involved in exporting, and that this earnings volatility will be translated into large stock price changes for the affected firms. Your client wants to create speculative positions using options to increase his/her exposure to the expected changes in the riskiness of exporting firms. That is, your client wants to prosper from changes in the volatility of the firm’s stock returns. Discuss which Greek your client should focus on when developing his/her options positions. Question 4. � Question : � (TCO B) Explain the distinction between a normal and an inverted market. Question 5. � Question : � (TCO C) Describe the difference between a stack hedge and a strip hedge. What are the advantages and disadvantages of each? Question 6. � Question : � (TCO H) What is the main difference in the calculation of the DJIA and the S&P 500 index? Explain. Question 7. � Question : � (TCO B) The spot value of the euro is $1.50, and the 90-day forward rate is $1.45. If the U.S. dollar interest factor to cover this period is 2%, what is the EMU rate for this period? Question 8. � Question : � (TCO K) The IMM Index stands as 93.30. What is the discount yield? If you buy a T-bill futures at that index value and the index becomes 92.90, what is your gain or loss? Question 9. � Question : � (TCO A) At a party, a man tells you that he is an introducing broker. He goes on to explain that his job is introducing prospective traders such as you to futures brokers. He also relates that he holds margin funds as a service to investors. What do you make of this explanation? Question 10. Question : � (TCO J, L) Consider a firm financed only by common stock and a convertible bond issue. When should the bondholders exercise? Explain. If the common shares pay a dividend, could it make sense for the bondholders to exercise before the bond matures? Explain by relating your answer to our discussion of the exercise of American calls on dividend-paying stocks.
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