1. NuFarm, a wheat growing company, enters into a short futures contract to sell 8,000 bushels of wheat for 350 cents per bushel. The initial margin is $7,000 and the maintenance margin is $5,000. What price change would lead to a margin call? Under what circumstances could $1,500 be withdrawn from the margin account?2
2. Apple shares are traded at $144, and three-month European call options with a strike price of $150 currently sell for $4.80. Joan feels that the price of Apple shares will increase is trying to decide between buying 100 shares and buying 3,000 call options (= 30 contracts). Both strategies involve an investment of $14,400. What advice would you give? How high does the stock price have to rise for the option strategy to be more protable?
3. A bond issued by Standard Oil worked as follows. The holder received no interest. At the bonds maturity the company promised to pay $1,000 plus an additional amount based on the price of oil at that time. The additional amount was equal to the product of 170, and the excess (if any) of the price of a barrel of oil at maturity over $25. The maximum additional amount paid was $2,550 (which corresponds to a price of $40 per barrel). Show that the bond is a combination of a regular bond, a long position in call options on oil with a strike price of $25, and a short position in call options on oil with a strike price of $40.