2. Which of the following statements represent a key difference between forward and futures contracts?

A. Forward contracts are marked to market on a daily basis, meaning that gains and losses are noted and money must be put up to cover losses.

B. Futures contracts are option contracts, while forward contracts are not option contracts.

C. Futures contracts are generally standardized instruments that are traded on exchanges, whereas forward contracts are generally tailor made, negotiated between two parties, and are not traded after they have been signed.

D. Physical delivery of the underlying asset is taken with futures contracts, while the two parties of a forward contract simply settle with cash for the difference between the contracted price and the actual price on the expiration date.

E. All of the statements above identify key differences between forward and futures contracts.

3. What will happen to the premium on the option as the stock price increases?

A. The premium on the option declines.

B. There will be no change in the premium on the option.

C. The premium on the option increases.

4. A call option on Barry Enterprises stock has a market price of $12. The stock sells for $23 a share, and the option has an exercise price of $18.50.

What is the exercise value of the option? Round your answer to the nearest cent.

5. A call option on Barry Enterprises stock has a market price of $12. The stock sells for $21 a share, and the option has an exercise price of $16.50.

What is the premium on the option? Round your answer to the nearest cent.

6. Madeline Manufacturing Inc.s current stock price is $40 per share. Call options for this stock exist that permit the holder to purchase one share at an exercise price of $35. These options will expire at the end of 1 year, at which time Madelines stock will be selling at one of two prices $20 or $50. The risk-free rate is 4.5%. Using the binomial option pricing model, create a riskless hedged investment and answer the following questions:

After the payoffs have been equalized and the riskless hedged investment is created, what is the value of the portfolio in one year? Round your answer to the nearest cent.

7. Madeline Manufacturing Inc.s current stock price is $45 per share. Call options for this stock exist that permit the holder to purchase one share at an exercise price of $40. These options will expire at the end of 1 year, at which time Madelines stock will be selling at one of two prices $25 or $55. The risk-free rate is 5%. Using the binomial option pricing model, create a riskless hedged investment and answer the following questions:

What is the cost of the stock in the riskless portfolio? Do not round intermediate calculations. Round your answer to the nearest cent.

8. Madeline Manufacturing Inc.s current stock price is $40 per share. Call options for this stock exist that permit the holder to purchase one share at an exercise price of $30. These options will expire at the end of 1 year, at which time Madelines stock will be selling at one of two prices $25 or $50. The risk-free rate is 5%. Using the binomial option pricing model, create a riskless hedged investment and answer the following questions:

What is the present value of the riskless portfolio? Do not round intermediate calculations. Round your answer to the nearest cent.

9. Madeline Manufacturing Inc.s current stock price is $40 per share. Call options for this stock exist that permit the holder to purchase one share at an exercise price of $30. These options will expire at the end of 1 year, at which time Madelines stock will be selling at one of two prices $25 or $50. The risk-free rate is 4%. Using the binomial option pricing model, create a riskless hedged investment and answer the following questions:

What is the current value of the firms call option? Do not round intermediate calculations. Round your answer to the nearest cent.