22.Which of the following are ways to avoid losses through insuring? (a)Pay a premium for health care coverage (b)Purchase a put option on a stock you do own (c)Both a and b (d)Neither a nor b Answer:(c) Questions 23-25 refer to the following information: An old college friend of your invests in cocoa futures and options contracts.He has told you that he believes cocoa prices are escalating.You decide to go ahead and purchase a call option on cocoa with a strike price of $0.80 per pound.That way,if cocoa prices go up,you can exercise the call,buy the cocoa and sell them at a higher spot price. Assume the price of an option on fifty thousand pounds is one thousand five hundred dollars,and you purchase six options for nine thousand dollars on three hundred thousand pounds. 23.What type of transaction is this for you? (a)hedged position (b)speculative (c)insured position (d)none of the above Answer:(b) 24.Calculate the downside risk in dollars and percentage terms. (a)$1,500:+100% (b)$1,500:-100% (c)$9,000;-100% (d)$9,000;+100% Answer:(c) 25.If the price increases to $0.85 cents per pound,how much would you net after paying for the options? (a)$15,000 (b)$13,500 (c)$9,000 (d)$6,000 Answer:(d) 11-6
11-6 22. Which of the following are ways to avoid losses through insuring? (a) Pay a premium for health care coverage (b) Purchase a put option on a stock you do own (c) Both a and b (d) Neither a nor b Answer: (c) Questions 23-25 refer to the following information: An old college friend of your invests in cocoa futures and options contracts. He has told you that he believes cocoa prices are escalating. You decide to go ahead and purchase a call option on cocoa with a strike price of $0.80 per pound. That way, if cocoa prices go up, you can exercise the call, buy the cocoa and sell them at a higher spot price. Assume the price of an option on fifty thousand pounds is one thousand five hundred dollars, and you purchase six options for nine thousand dollars on three hundred thousand pounds. 23. What type of transaction is this for you? (a) hedged position (b) speculative (c) insured position (d) none of the above Answer: (b) 24. Calculate the downside risk in dollars and percentage terms. (a) $1,500; +100% (b) $1,500; –100% (c) $9,000; –100% (d) $9,000; +100% Answer: (c) 25. If the price increases to $0.85 cents per pound, how much would you net after paying for the options? (a) $15,000 (b) $13,500 (c) $9,000 (d) $6,000 Answer: (d)
26.You are interested in taking a vacation to Yemen next year,but you are worried about the price of the trip.Over the past three years,the price of a trip to Yemen has ranged between $3,500 and $4,500.The current price is $4,000.You wish to maintain the possibility of a lower price.How would you eliminate the possibility of rising prices,but still maintain the possibility of a gain from lower prices? (a)Purchase an option today from the sponsor,which would allow you to pay the lower of $4,000 or the market price at the time you take your Yemen vacation. (b)Purchase an option today from the sponsor,which would allow you to pay the higher of $4,000 or the market price at the time you take your vacation to Yemen. (c)Leave it to the market. (d)Arrange a futures contract through the newspaper. Answer:(a) Questions 27-30 refer to the following information. You are Chief Financial Officer of GreenShrimp and you purchase a large quantity of coffee each month.You are concerned about the price of coffee one month from now. You want to guarantee that you will not pay more than $1.60 per pound for fifty thousand pounds.You do not want to pay for insurance,but you do want to lock in a price of $1.60 per pound for fifty thousand pounds. 27.What is the economics of a futures transaction if the spot price on delivery date is $1.35? (a)Cost of coffee purchased from supplier=$67,500;cash flow from futures contract= $12,500 paid by GreenShrimp;total outlay =$80,000 (b)Cost of coffee purchased from supplier =$67,500;cash flow from futures contract $12,500 paid to GreenShrimp;total outlay =$55,000 (c)Cost of coffee purchased from supplier =$80,000;cash flow from futures contract= $0 paid to GreenShrimp;total $80,000 (d)Cost of coffee purchased from supplier=$80,000;cash flow from futures contract= $12,500 paid to GreenShrimp;total =$92,500 Answer:(a) 28.What is the economics of a futures transaction if the spot price on delivery date is $1.80? (a)Cost of coffee purchased from supplier =$62,500;cash flow from futures contract $12,500 paid by GreenShrimp;total outlay=$80,000 (b)Cost of coffee purchased from supplier=$80,000;cash flow from futures contract= $0 paid by GreenShrimp;total outlay =$80,000 (c)Cost of coffee purchased from supplier =$90,000;cash flow from futures contract= $10,000 paid to GreenShrimp;total outlay =$80,000 (d)Cost of coffee purchased from supplier $90,000;cash flow from futures contract $10,000 paid by GreenShrimp;total outlay=$100,000 Answer:(c) 11-7
11-7 26. You are interested in taking a vacation to Yemen next year, but you are worried about the price of the trip. Over the past three years, the price of a trip to Yemen has ranged between $3,500 and $4,500. The current price is $4,000. You wish to maintain the possibility of a lower price. How would you eliminate the possibility of rising prices, but still maintain the possibility of a gain from lower prices? (a) Purchase an option today from the sponsor, which would allow you to pay the lower of $4,000 or the market price at the time you take your Yemen vacation. (b) Purchase an option today from the sponsor, which would allow you to pay the higher of $4,000 or the market price at the time you take your vacation to Yemen. (c) Leave it to the market. (d) Arrange a futures contract through the newspaper. Answer: (a) Questions 27-30 refer to the following information. You are Chief Financial Officer of GreenShrimp and you purchase a large quantity of coffee each month. You are concerned about the price of coffee one month from now. You want to guarantee that you will not pay more than $1.60 per pound for fifty thousand pounds. You do not want to pay for insurance, but you do want to lock in a price of $1.60 per pound for fifty thousand pounds. 27. What is the economics of a futures transaction if the spot price on delivery date is $1.35? (a) Cost of coffee purchased from supplier = $67,500; cash flow from futures contract = $12,500 paid by GreenShrimp; total outlay = $80,000 (b) Cost of coffee purchased from supplier = $67,500; cash flow from futures contract = $12,500 paid to GreenShrimp; total outlay = $55,000 (c) Cost of coffee purchased from supplier = $80,000; cash flow from futures contract = $0 paid to GreenShrimp; total = $80,000 (d) Cost of coffee purchased from supplier = $80,000; cash flow from futures contract = $12,500 paid to GreenShrimp; total =$92,500 Answer: (a) 28. What is the economics of a futures transaction if the spot price on delivery date is $1.80? (a) Cost of coffee purchased from supplier = $62,500; cash flow from futures contract = $12,500 paid by GreenShrimp; total outlay = $80,000 (b) Cost of coffee purchased from supplier = $80,000; cash flow from futures contract = $0 paid by GreenShrimp; total outlay = $80,000 (c) Cost of coffee purchased from supplier = $90,000; cash flow from futures contract = $10,000 paid to GreenShrimp; total outlay = $80,000 (d) Cost of coffee purchased from supplier = $90,000; cash flow from futures contract = $10,000 paid by GreenShrimp; total outlay = $100,000 Answer: (c)