1. Options versus Futures Describe the general differences between a call option

Question

1. Options versus Futures Describe the general differences between a call option and a futures contract.

2.            Speculating with Call Options How are call options used by speculators? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a call option?

3.            Speculating with Put Options How are put options used by speculators? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a put option?

4.            Selling Options Under what conditions would speculators sell a call option? What is the risk to speculators who sell put options?

7. Leverage of Options How can financial institutions with stock portfolios use stock options when they expect stock prices to rise substantially but do not yet have sufficient funds to purchase more stock?

8.            Hedging with Put Options Why would a finan- cial institution holding the stock of Hinton Co. consider buying a put option on that stock rather than simply selling it?

9.            Call Options on Futures Describe a call option on interest rate futures. How does it differ from purchasing a futures contract?

10. Put Options on Futures Describe a put option on interest rate futures. How does it differ from selling a futures contract?

11. Hedging Interest Rate Risk Assume a savings institution has a large amount of fixed-rate mortgages and obtains most of its funds from short-term deposits. How could it use options on financial futures to hedge its exposure to interest rate movements? Would futures or options on futures be more appropriate if the institution is concerned that interest rates will decline, causing a large number of mortgage prepayments?

14. Speculating with Stock Options The price of Garner stock is $40. There is a call option on Garner stock that is at the money with a premium of $2.00. There is a put option on Garner stock that is at the money with a premium of $1.80. Why would investors consider writing this call option and this put option? Why would some investors consider buying this call option and this put option?

Explanation / Answer

Answer1.

Ans 1. Difference between Call option and Futures Contract

Futures contract represents an Obligation but Call option repesents a right not an obligation.

Call option requires a premium beyond the price to be paid for any financial instruments but financial future contarct doen not contains such a premium.

Ans 2.

Call options are purchased by speculators when the price of the underlying stock is expected to increase in th future.The strategy of purchasing a call option can backfire when the stock price declines.

Call option are sold by speculators when the price of the underlying stock is expected to decrease in the future.the maximum loss to a purchaser of a call option is the premium paid for the call option.

Ans 3.

Put option is purchased by speculators when the price of undelying stock is expected to remian stable or decrese in future.the strategy of purchasing a put option would backfire when stock price increase.

Put optiona are sold by speculators when the price of underlying stock is expected to remain stable or increase in the future.if the stock price decrease the startegy of selling a put option can backfire. The maximum loss to a purchaser of a put option is the premium paid for the put option.

Ans 4.

Speculators sell call option if they expect the price of the underlying stock to remain stable or decline in the future.

The risk to speculators that sell put options is that the price of the underlying stock decline.

Ans .7.

They could purchase stock options on various stock to lock in the maximum price they will have to pay for those stock. Once they have sufficient funds to purchase stock, they can excercise their option.

Ans.8.

If a financial institution is concerned about a possible temproary decline in ABC stock but has favourable long term expectations of stock.

Ans 9.

A call option on interest rate futures provides the right to purchase a specific financial future contarct that contains a specific price.the ownership of a call option on a financial futures contatct allows one the right to purchase the underlying instrument on the settelmemt dae specific by the future contatcs.

Ans 11.

The financial institution could purchase put options on interest rate futures. if interest rates increase over time, , the reduced spread could be offset by the gain on a short position in futures.If interest rate deacrese over time, the short position in futures would result in a loss.The put option on future is intended to hedge against incresing interest rates but remain exposed to interst rates if they decline in order to benefit from the decline.

Ans14.

If the investor expected taht the stock price would remain stable, they could benefit fromselling both option.They would receive more from premiums tahn their cost of fulfilling their obligations if the stock price remain close to its prevailling value.

Some other investors may expect that the stock price will be very volatile. They do not know which direction the price will move.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.