True or False; Explain A. An investor with a long position in fixed-rate governm

Question

True or False; Explain

A. An investor with a long position in fixed-rate government bonds could hedge her risk by buying bond futures?

B. An investor with a large portfolio of fixed-rate bonds could hedge her interest rate risk by entering into a fixed for floating rate swap?

C. Suppose as an investor you hold a share of stock and a put option on that share. If the stock price is below the exercise price when the option expires the value of your position is the value of the stock?

D. Suppose as an investor you own the 600 March put and have sold the 600 March call, both options on the same underlying stock. If the stock price at the expiration date = 580, what is your payoff? Show all work

A. -20

B. 0

C. 20

D. 600

E. none of the above

A. -20

B. 0

C. 20

D. 600

E. none of the above

Explanation / Answer

A. An investor with a long position in fixed-rate government bonds could hedge her risk by buying bond futures? False..Because she should sell bond futures instead of buying otherwise both the long position and bond futures position will move in the same direction

B. An investor with a large portfolio of fixed-rate bonds could hedge her interest rate risk by entering into a fixed for floating rate swap? True

C. Suppose as an investor you hold a share of stock and a put option on that share. If the stock price is below the exercise price when the option expires the value of your position is the value of the stock? False..As stock price is below exercise price, put will be exercised and put payoff will be X-S hence Value of position=X-S+S=X or exercise price

D. Suppose as an investor you own the 600 March put and have sold the 600 March call, both options on the same underlying stock. If the stock price at the expiration date = 580, what is your payoff? Show all work As stock price is less than the exercise price, put will be exercised and call will not be exercised hence payoff=600-580=20

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