91Ó°ÊÓ

When first issued, a stock provides funds for a company, Is the same true of a stock option? Discuss.

Explain why a forward contract can be used for either speculation or hedging.

Suppose that a March call option to buy a share for \(\$ 50\) costs \(\$ 2.50\) and is held until March. Under what circumstances will the holder of the option make a profit? Under what circumstances will the option be exercised? Draw a diagram illustrating how the profit from a long position in the option depends on the stock price at maturity of the option.

Suppose that a June put option to sell a share for \(\$ 60\) costs \(\$ 4\) and is held until June. Under what circumstances will the seller of the option (i.e., the party with the short position) make a profit? Under what circumstances will the option be exercised? Draw a diagram illustrating how the profit from a short position in the option depends on the stock price at maturity of the option.

It is May and a trader writes a September call option with a strike price of \(\$ 20 .\) The stock price is \(\$ 18\) and the option price is \(\$ 2 .\) Describe the trader's cash flows if the option is held until September and the stock price is \(\$ 25\) at that time.

A trader writes a December put option with a strike price of \(\$ 30 .\) The price of the option is \(\$ 4 .\) Under what circumstances does the trader make a gain?

A company knows that it is due to receive a certain amount of a foreign currency in 4 months. What type of option contract is appropriate for hedging?

A United States company expects to have to pay 1 million Canadian dollars in 6 months. Explain how the exchange rate risk can be hedged using (a) a forward contract and (b) an option.

A United States conpany expects to have to pay 1 million Canadian dollars in 6 months. Explain how the exchange rate risk can be hedged using (a) a forward contract and (b) an option.

A trader enters into a short forward contract on 100 million yen. The forward exchange rate is \(\$ 0.0080\) per yen. How much does the trader gain or lose if the exchange rate at the end of the contract is (a) \(\$ 0.0074\) per yen and (b) \(\$ 0.0091\) per yen?