Options, futures, and other derivatives

Chapter 1 - Introduction

Suppose that the British pound forward contracts maturing in 6 months are quoted at $1.4416 on the bid and $1.4422 on the offer. Draw a payoff diagram for a long forward as well as for a short position to indicate on the graph how much you would make or lose for both positions if the pound exchange rate is $1.5000 in 6 months. Write the profit/loss equation. In your answer, assume that the contract size is pound 2 million. What is the general relationship between forward and spot prices? Consider the following price quotes for stock options on Google on June 15, 2010. Assume that the stock is quoted as $497.07 on the bid, and $497.25 on the offer. Can you tell your friends about the possible profit/loss consequences of your option trading today if the stock price moves up to $550 in September? Most importantly, can you draw a net profit diagram for a long position in calls, a short position in calls, a long position in puts, a short position in puts. Difference between speculation, hedging and arbitrage Options provide insurance but at a cost. Show the payoff graphs from a long position in the protective put. Show the payoff graphs from having written a covered call. Show how one could replicate a futures position with options. Forward/Futures contracts neutralize the risk at no cost. Discuss possible enterprise risk management strategies by using forward/futures or options contracts. Consider two cases where first, the company's risk comes from the volatile output prices, and second, the risk comes from input prices