FIN36058 EXAM III NAME: PROBLEMS I. (15 points) You have purchased a call option
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Question
FIN36058 EXAM III NAME:
PROBLEMS
I. (15 points) You have purchased a call option contract on Smith & Smith common stock. The option contract is for 100 shares. The option has an exercise price of $43.00 and S & S’s stock currently trades at $40.00. The option premium is quoted at $2.00.
a. If S & S’s stock price rises to $44.00, while you exercise the option? Calculate your net profit/loss on the option contract if (5 points).
b. If S & S’s stock price rises to $48.00, while you exercise the option? Calculate your net profit/loss on the option contract if (5 points).
c. If the stock price rises to $42.00, would you exercise or not exercise the option and what would be your gain or loss (3 points)?
d. You will make a profit on the option if the S & S stock price rises above what amount (2 points)?
To earn a profit, you must recoup the price you paid for the call, plus the exercise price:
II. (13 points) Green Backs Bank wishes to take a position in Treasury bond futures contracts, which
currently have a quote of 96-240. Green Backs thinks interest rates will go down over the period of
investment.
a. Should the bank go long or short on the futures contracts (3 points)?
b. Given your answer to part (a), calculate the net profit to Tree Row Bank if the price of the futures
contracts increases to 99-160 (5 points).
c. Given your answer to part (a), calculate the net profit to Tree Row Bank if the price of the futures
contracts decreases to 94-080 (5 points).
III. (20 points) The financial statements for MHM Bank (MHM) are shown below:
a. Calculate MHM’s total operating income (3 points).
b. Calculate MHM’s asset utilization ratio (3 points).
c. Calculate MHM’s ROA (3 points).
d. Calculate the dollar value of MHM’s earning assets (3 points).
e. Calculate the dollar value of MHM’s interest-bearing liabilities (3 points).
f. Calculate MHM’s spread (3 points).
g. Calculate MHM’s net interest margin (3 points).
h. Calculate MHM’s interest expense ratio (3 points).
Balance Sheet MHM Bank
Assets
Liabilities and Equity Cash and due from banks $ 8,200 Demand deposits $ 35,600
Demand deposits at other FIs
9,100
Small time deposits
32,900 Investments 9,600 Jumbo CDs 12,000
Federal funds sold
9,400
Federal funds purchased
3,300 Loans (less reserve for loan losses of 10,400) 74,800 Other liabilities 16,200
Premises
8,900
Equity
20,000
Total assets
$
120,000
Total liabilities/equity
$
120,000
Income Items for MHM Bank
Interest income
$ 9,380 Interest expense 3,856
Provision for loan losses
7,800 Noninterest income 6,044
Noninterest expense
4,300 Taxes (credit) - 132
Explanation / Answer
I. (15 points) You have purchased a call option contract on Smith & Smith common stock. The option contract is for 100 shares. The option has an exercise price of $43.00 and S & S’s stock currently trades at $40.00. The option premium is quoted at $2.00.
a. If S & S’s stock price rises to $44.00, while you exercise the option? Calculate your net profit/loss on the option contract if (5 points).
Payoff per share= MAX{(stock price-exercise price),0}
Payoff per share=max{(44-43),0)
Payoff per share=1
Net profit/loss on the option contract=( Payoff per share - option premium)*No of Share in a contract
Net profit/loss on the option contract = (1-2)*100
Net loss on the option contract = - 100
b. If S & S’s stock price rises to $48.00, while you exercise the option? Calculate your net profit/loss on the option contract if (5 points).
Payoff per share= MAX{(stock price-exercise price),0}
Payoff per share=max{(48-43),0)
Payoff per share=5
Net profit/loss on the option contract=( Payoff per share - option premium)*No of Share in a contract
Net profit/loss on the option contract = (5-2)*100
Net Profit on the option contract = $ 300
c. If the stock price rises to $42.00, would you exercise or not exercise the option and what would be your gain or loss (3 points)?
No We would not exercise the option
Payoff per share= MAX{(stock price-exercise price),0}
Payoff per share=max{(42-43),0)
Payoff per share= 0
Net profit/loss on the option contract=( Payoff per share - option premium)*No of Share in a contract
Net profit/loss on the option contract = (0-2)*100
Net loss on the option contract = - 200
d. You will make a profit on the option if the S & S stock price rises above what amount (2 points)?
Payoff per share is greater than equal to option premium i.e $ 2 per share
S & S stock price must be required to achieve profit = Excercise Price + Payoff per share required
S & S stock price must be required to achieve profit = 43 + 2
S & S stock price must be required to achieve profit = $ 45
The S & S stock price rises above what amount = S & S stock price must be required to achieve profit - current value
The S & S stock price rises above what amount = 45-40
The S & S stock price rises above what amount = $ 5
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