Hi, I need help with only Question 1, all parts. Please answer as soon as possible. Thank you. (Ideally within 1 hour)

Prof. PIRIM Spring 2016, Session II Options and Futures I (BusFin 4230 ) Problem Set 1: Forward and Call Option Contract This problem set is due at the beginning of class on Thursday, March 24th, 2016. Hand in only one solution per group. Question 1 (5 Points) Suppose DELL stock pays no dividends and has a price of $50. The forward price for delivery in 1 year is $55. Suppose the 1-year effective annual interest rate is 10%. a) Graph the payoff and profits for long forward contract on DELL stock with a forward price of $55. b) Is there any advantage to invest in stock or the forward contract? c) Suppose DELL paid a dividend of $2 per year and everything else stayed the same. Now is there any advantage to investing in the stock or the forward contract? Why? Question 2 (10 Points) Consider a corn farmer, who will harvest 20,000 bushels of corn in 3 months. Using the proceeds from the sale of his corn, he plans to pay back a loan in the amount of $140,000 that is due in 3 months. The price of corn today is $7 per bushel. Yet, the farmer receives some news indicating that the price of corn might substantially change within the next 3 months. The farmer gets nervous, as an adverse price change in corn price might render him unable to make his payments. Which of the following alternatives would you recommend to him? a) Buy futures contracts for 20,000 bushels with a futures price of $7 and delivery in 3 months. b) Sell futures contracts, as they are outlines in the previous alternative. c) Buy European put options for 20,000 bushels with a strike price of $2 per bushel. Explain your answer buy describing his profit in various states of the world. 1 Question 3 (10 Points) Consider a manager, who wants to expand his small business. The manager predicts that stock XYZ is currently overpriced and that its price will decline within the next 6 months. XYZ stock sells for $40 today and the manager believes that the stock price will be $25 in 6 months. He is wondering, whether he can use his insight on the futures price movement of company XYZ to raise some funding for his new project. While he is very much excited about the new project and thus is willing to take some risks to generate funding for it, he does not want to jeopardize his on going projects by incurring losses because of speculation on XYZ. Which of the following alternatives would you recommend to him? a) Buy European Call options with a strike price of $30 maturing in 6 months. b) Buy futures contracts written on XYZ with a futures price of $30 and delivery in 6 months. c) Buy European put options with a strike price of $30 maturing in 6 months. Explain your answer by describing his profits in various states of the world. 2