1. Suppose you own 5,000 shares that are worth $25 each. How can put options be used to provide you with insurance against a decline in the value of your holding over the next four months?

2. A stock when it is first issued provides funds for a company. Is the same true of an exchangetraded stock option? Discuss.

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

4. A cattle farmer expects to have 120,000 pounds of live cattle to sell in three months. The livecattle futures contract on the Chicago Mercantile Exchange is for the delivery of 40,000 pounds of cattle. How can the farmer use the contract for hedging? From the farmers viewpoint, what are the pros and cons of hedging?

5. It is July 2013. A mining company has just discovered a small deposit of gold. It will take six months to construct the mine. The gold will then be extracted on a more or less continuous basis for one year. Futures contracts on gold are available on the New York Mercantile Exchange. There are delivery months every two months from August 2013 to December 2014. Each contract is for the delivery of 100 ounces. Discuss how the mining company might use futures markets for hedging.

6. Suppose that a March call option on a stock with a strike price of $50 costs $2.50 and is held until March. Under what circumstances will the holder of the option make a gain? Under what circumstances will the option be exercised? Draw a diagram showing how the profit on a long position in the option depends on the stock price at the maturity of the option.

7. Suppose that a June put option on a stock with a strike price of $60 costs $4 and is held until June. Under what circumstances will the holder of the option make a gain? Under what circumstances will the option be exercised? Draw a diagram showing how the profit on a short position in the option depends on the stock price at the maturity of the option.

8. 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 investors cash flows if the option is held until September and the stock price is $25 at this time.

9. An investor writes a December put option with a strike price of $30. The price of the option is $4. Under what circumstances does the investor make a gain?