CHAPTER-10

DERIVATIVES

Scenario #1

Vinod likes to buy and sell options and has opened an account for this purchase at a major discount brokerage. Recently he bought 8 CALL contractsof Hit Mortons (HMT) Stock as per the following details.

Strike Price: $57

Call Price (Premium): $10.50

Expiry Date: Jan 18, 2020

Market Price of HMT Stock: $62.50

Answer the following questions: (1 Mark for each question)

What are the rights/obligations of Vinod in this transaction?

How many shares does Vinod control?

Is this option in-the-money or out-of-the-money?

What is the Intrinsic Value of the Options?

What is the Time Value of the Options?

What is his maximum potential loss in this transaction?

What is his maximum potential gain in this transaction?

What is Vinods expectation of the future price of HMT stock?

If the market price of HMT stock goes up, what will happen to the price of HMT Option?

If the HMT company announces dividend of $2 per share during this period, will Vinod be entitled for dividend?

Scenario #2

Vinod makes another transaction to SELL (WRITE) 9 PUT contracts of MNK Ltd stock as per the following details.

Strike Price $93

Put Price (Premium) $9

Expiry Date: Jan 18, 2020

Market Price of MNK Stock: $98

Answer the following questions: (1 Mark for each question)

What are the rights/obligations of Vinod in this transaction?

How many shares does Vinod control?

Is this option in-the-money or out-of-the-money?

What is the Intrinsic Value of the Options?

What is the Time Value of the Options?

What is his maximum potential loss in this transaction?

What is his maximum potential gain in this transaction?

What is Vinods expectation of the future price of MNK stock?

If the market price of MNK stock goes up, what will happen to the price of HMT Option?

If the MNK company announces dividend of $2 per share during this period, will Vinod be entitled for dividend?