How is purchasing a forward contract on wheat different from purchasing wheat?

FIN 410 - Problem Set 3 1. How is purchasing a forward contract on wheat different from purchasing wheat? 2. What would motivate an individual to take a position in a forward contract? 3. Briefly discuss the primary differences between futures contracts and forward contracts. 4. How is margin in the futures market different from margin in the equities market? How are the two the same? 1 5. The following table presents a short time series of end-of-day prices for a futures contract on gold. Date Price 12 13 14 15 1,150 1,132 1,075 1,200 Nov Nov Nov Nov The initial margin requirement is $100, and the maintenance margin requirement is $40. You purchase one futures contract at the end of the day on 12 November and you sell the same futures contract at the end of the day on 15 November. Did you ever receive a margin call? How much was in your account at the time you closed your position? 6. What is the difference between a European-style and an American-style option? 2 7. Calculate the payoff at expiration for a put option on the S&P 100 in which the underlying is at $579.32 at expiration, the multiplier is 100, and the exercise price is 450. 8. The June price of a stock is $16.25. Which of the following options are in the money? Which are out of the money? (a) July call with $15 strike (b) July put with $15 strike (c) October call with $17.50 strike (d) October put with $17.50 strike 9. A call option with MSFT stock as the underlying has a strike price of $50. Suppose the current MSFT stock price is $49.30 and the option premium is $0.75. What is the intrinsic value of the option? What is the time value? 3 10. The following table displays prices for call options on XYZ stock on May 31. The price of XYZ stock on May 31 is $119.50. Expiration Month Strike June July August September 110 120 130 8.88 1.50 1.00 12.50 3.75 2.25 15.00 3.00 2.88 18.00 4.25 5.00 In the above table, identify the three pricing discrepancies and explain why those prices could not hold. 11. You purchased 100 shares of Bank of America (BAC) at $17.00. You also purchased a put option contract (covering 100 shares) with a strike price of $17.75. The premium on the option was $1.25 per share. At expiration of the option the price of BAC is $17.50. How much did you make/lose in total? 4 12. For each option strategy listed below, explain how the strategy is put together and why an investor might use it. (a) Covered call (b) Bull spread (c) Bear spread (d) Long straddle (e) Long strangle (f) Butterfly spread 5