1.You work as a commodities trader at BrockCorp. Your in-house analysts believe that

uranium prices will rise in 18 months, from $30 per pound to $90 per pound. Assuming

that your analysts are always correct, and that markets are extremely liquid, which one

of the following strategies will NOT generate positive prots?

(A) An 18-month forward contract which obliges you to purchase uranium at $61 per

pound. You can then sell the uranium on the spot market.

(B) The same as (a), but a call option with a premium of $30 per pound of uranium.

(C) An 18-month put option, with a premium of $10 per pound, to sell at $70 per

pound. This involves purchasing uranium at the current spot price, and storing it,

which costs $1 per pound of uranium, for each month of storage.

(D) Purchasing uranium at the current spot price, storing it for a monthly fee of $1

per pound, and selling it in 18 months.

The new three questions deal with the following situation.

In the lectures, we discussed the Greek philosopher Thales, who used derivatives to

generate a prot from Attica's olive orchards. Suppose that the probability of a good

harvest is 90%, while the probability of a bad harvest is 10%. In a good harvest, olives

sell for 30 drachmas per ton; in a bad harvest, they sell for 5 drachmas per ton. Thales

signs his contracts with olive farmers in the wintertime, well before the harvest. Unless

otherwise stated, Thales is risk-neutral.

2. Thales contracts with all of Attica's olive farmers for all of their olives. He agrees

to pay the farmers 10 drachmas per ton of olives upon harvesting. This is a forward

contract, with no deposit or other transaction fees. What is Thales's expected prot per

ton of olives?

(A) 18.5 drachmas.

(B) 18 drachmas.

(C) 17.5 drachmas.

(D) 17 drachmas.

3. Instead, suppose that Thales negotiates a call option with the farmers for a 1 drachma

per ton premium. Otherwise, the terms are the same as in question 2 above. What is

Thales's expected prot per ton of olives?

(A) 18 drachmas.

(B) 17.9 drachmas.

(C) 17.5 drachmas.

(D) 17 drachmas.

4. Now suppose that Thales has a forward contract to purchase from farmers at $10 per

ton, along with a put option to sell to suppliers at $20 per ton. The put option has a

premium of $3 per ton. What is Thales's expected prot per ton?

(A) 17.5 drachmas.

(B) 17 drachmas.

(C) 16.5 drachmas.

(D) 16 drachmas.

5.You currently have a variable-rate mortgage, and want a xed-rate mortgage instead.

Which derivative would you use to do this, without having to sell your home?

(A) Forward.

(B) Put option.

(C) Swap.

(D) Call option.